Examination of Witnesses (Questions 180-199)
MR JULIAN
ASHBY, MR
PETER WILLIAMS
AND MR
ANDREW HEYWOOD
30 MARCH 2004
Q180 Mr O'Brien: Regulation is always
an issue we have to address and you all agree that the transfer
of inspection from the Housing Corporation to the Audit Commission
is the best way forward. Are there not problems with implementing
the results of inspections as the Audit Commission has to rely
on the Housing Corporation taking any action anyway?
Mr Heywood: I think there are
challenges which are posed by breaking the co-location of inspection
and regulation, but I do not think they are impossible to overcome.
In a sense, I guess, what has been done is to trade the convenience
and the values of co-location for the ability to draw on the experience
of the Housing Inspectorate of the Audit Commission. I think so
far that experience has been reasonably positive. We have raised
questions, as have others, as to whether co-ordination is always
as good as it could be, but I think that, by and large, we have
been satisfied with the answers actually. That is not to say that
everything in the inspection and regulation world and their relationship
is always going to be perfect. I think that there have been questions
recently about the timeliness of some inspection reports and I
think it is important that the inspection reports do reflect the
position of an association at the point at which they are published
rather than several months ago, and I am sure that those particular
issues will be addressed. In general, I think we would say that
in degree to which we have been involved, it has evolved in the
right direction.
Q181 Mr O'Brien: So you are saying then
that there really is satisfaction within the CML with the current
regulations and the way they are carried out?
Mr Williams: There have been some
concerns about the quality of some of the reports, but again I
suspect that has always been the case.
Q182 Mr O'Brien: What was wrong then
with the reports?
Mr Williams: These are comments
received from lenders in terms of the quality of some reports.
The issue for them is understanding the nuances in the report
and how they should, as lenders, react to them. Again I think
it is one of the learning processes that we go through. We have
got a new regime, new people, well, not new people, but existing
Housing Corporation people doing it now under the guise of the
Inspectorate, so I think people are looking at it afresh and perhaps
looking at it rather more critically than they might have done
before because they are assuming there will be a difference.
Q183 Mr O'Brien: In your evidence you
say that the regulation process is "over detailed".
How can it be simplified bearing in mind the complex activities
that housing associations are now involved in?
Mr Heywood: The Housing Corporation
has made moves towards what it describes as a "light touch"
for those who are performing better and we would support that.
Clearly regulation needs to follow risk ultimately and, therefore,
should not simply be a straightforward, evenly applied regime.
At the same time we have to recognise, certainly from a lender's
perspective, that lenders are exposed across a very wide range
of associations. Moving towards performance-driven regulations
and developing further the moves already made towards risk assessment
will, in fact, itself create a nuanced regulatory regime that
will move towards what we are looking for.
Q184 Mr O'Brien: What forms of regulation
are now required as housing associations become involved in a
wide range of activities alongside housing management? What forms
of regulation are you looking for there?
Mr Heywood: I think the whole
issue of the widening role of housing associations is quite a
complex one and is something the Housing Corporation has recently
been consulting on. The issue of what is usually known as "diverse
activities" for the housing association does raise directly
questions of risk, because I think it would generally be accepted
by lenders that once you move beyond core competence then you
are moving into a more risky area. That does not mean to say that
you do not do it; and it does not mean that you do not lend on
it; but it does mean that the regulatory regime needs to follow
the risk profile. It means from the lender's perspective that
risk and return needs to have a realistic relationship. It means
that in terms of investment there has to be a really hard-headed
look at whether something is actually a goer in terms of its ability
to create a situation that sustains an organisation rather than
undermine either its asset base or demand for its properties in
the longer-term.
Q185 Mr O'Brien: Would a regional housing
board be better?
Mr Williams: No, I do not think
so. There is certainly an issue there which links back to earlier
questions about, this is where the Corporation needs to have an
understanding of the markets into which some of the associations
might wish to move. It also has to have the skills to be able
to regulate those activities properly. I personally would say
that we are better off having a central regulator who can do that,
than an array of regional housing boards who at the moment are
unproven anyway—but an array of regional housing boards
who may not those skills. Having it all in one place does make
a lot of sense.
Q186 Mr O'Brien: Who would that regulator
be?
Mr Williams: The Corporation.
Q187 Andrew Bennett: This question of
risk—I can see why you want the regulation to emphasise
risk, but should it not be more emphasising value for money for
the tenants and the quality of the management of waiting lists
and things like that?
Mr Williams: The emphasis on risk
is not ours—that is the emphasis put on it by the Housing
Corporation. We are simply saying we like that approach, albeit
it does have certain caveats attached to it because, as Andrew
said, we have lent to associations that may be relatively inactive
and, therefore, not high on the risk agenda as far as the Corporation
is concerned but where there would still be a lender interest
sitting there.
Q188 Andrew Bennett: You have never lost
any money, or your lenders have never lost any money?
Mr Williams: There have been losses,
marginal losses. The claim has always been no losses, but there
have been some small losses but very small in relation to the
amount of money lent, about £35 billion. Clearly there have
been moments where there has been rescheduling of debt; there
have been measures where lenders have had to reorganise debt completely
to allow the association to trade out.
Q189 Chris Mole: Mr Heywood was talking
about your inspection. The Commission says it plans to raise the
floor level at which housing association inspection starts from
250 to 500 units of accommodation. Is this the wrong way to go?
Mr Williams: The Audit Commission
put that in the context of developing the concept of inspection
and risk being more closely linked, and that concept we would
support. However, I think we would argue that simply putting a
floor level in a sense disguises that, because it is not necessarily
true that in particular cases below a certain floor level there
is no risk or there is no exposure. We would suggest they ought
to take that further, which would mean setting up a matrix of
risk that can be used for assessment across the range of housing
associations that would probably in practice mean that larger
associations with more diverse activities would get inspected
more often, and that is as it should be.
Mr Ashby: The task of using scarce
regulatory resources and focussing appropriately is quite a difficult
one. The Housing Corporation adopt a similar principle of having
an almost invisibly light touch on associations of smaller than
250 homes. There is a relatively small proportion of the total
social housing stock in the 250-400 homes category. I think it
is entirely reasonable that the focus is on the larger providers.
Yes, in that sense I agree with the principle. It is something
that has to be taken quite a lot further. I think the focus has
to be on where the largest risks arise—which include the
risks of providing a poor service, or of not actually maintaining
the stock to the required standard, both of which tenants have
a very clear interest in.
Q190 Chris Mole: One of the things which
really challenged the management abilities of housing associations
was taking on large transfers of stock and some diverse activities.
How likely is it that one of the big organisations will go bust
as a result of this?
Mr Ashby: It does remain one of
the risks. Just to say a little bit about diverse activities.
Taking a transfer of social housing would not be seen as diversifying,
because it would be seen as core business anyway. A number of
associations undertake substantial provision of housing with care.
Again, if you are talking about trying to build sustainable communities,
it is extremely important that associations do not just look at
standard rented housing. It is very important that they look at
the other needs of the communities they are serving. Although
it makes regulation more complex, I think it is that widening
of the scope of housing associations that can contribute more
to regeneration of an area. This is actually extremely positive.
It is not as easy to regulate. The narrower you can get an organisation
to focus its activities, clearly the easier it is to regulate.
Q191 Chris Mole: It is not just the diversity,
in stock transfers the lender is trying to maximise its receipts
and the association may overstretch itself in what it is prepared
to pay for that?
Mr Ashby: That is where I think
the regulation of the financial management and financial capacity
of the associations is an absolutely crucial regulatory function.
With associations, many of which span regional boundaries, a regional
housing board would not have a cat in hell's chance of being able
to regulate that. It would not be able to get off first base.
You have to have a body that is capable and which has a very long
track record in actually assessing financial capacity, undertaking
financial regulation, and that has to be free of artificial boundaries.
Q192 Chris Mole: Should the Corporation
play a stronger role in supervising large scale stock transfers?
Mr Ashby: It has a very active
role at the moment. Most transfers require the establishment of
a new housing association; and the registration of that body is
something the Housing Corporation takes a very close interest
in. It is on a bit of a hiding-to-nothing, in the sense that it
is exercising a gatekeeper role in a situation where it has to
register a new body which does not, at that point, have any track
record. It can do the best it can, but there is a lot of pressure
for the transfer to happen. It is actually the after-care aspects
of regulation which become more important.
Mr Williams: From my experience
as a Board member of the Corporation, I served on the committee
that actually approved stock transfers and it is subject to detailed
scrutiny by the Corporation. Subsequently, the ODPM and the Corporation
have done some work looking at the transfer process and that has
been enquired into as well to try and tighten it up; because there
was a danger that each party assumed the other had done something
in terms of checking or validating and there were occasions with
some of the stock transfers where, in the final analysis, we would
have said, "We should have made that a bit tighter".
There have been some difficulties with some stock transfers over
the long-run. However, I think, generally, the process has worked
very, very smoothly. By and large, the stock transfers have gone
out and worked well; the process has worked reasonably well; there
has been a reasonable level of scrutiny by the Corporation; and
what you have now got is a series of organisations that are delivering
a great deal to their tenants and, indeed, satisfactorily employing
their staff.
Q193 Chairman: Could you give the Committee
one or two examples of where there have been problems?
Mr Williams: No, I would not want
to. I can think of instances where there was a debate right towards
the end about the valuation or the business plan which should
have been picked up earlier; and it was because there were several
parties involved and everybody assumed somebody else was looking
at it.
Mr Ashby: I can give a couple
of examples. There have been transfers that took place at times
of relatively high interest rates and the new associations decided
to borrow on a fixed interest basis and then, when rates came
tumbling down, were left high and dry with an extremely expensive
loan. There have been some which have transferred on the basis
of rent increases of RPI plus 2 or 3% and, shortly after transfer,
the rent control regime came in and they could no longer increase
their rents at that rate. The income on which their business plans
were founded proved unsustainable. Changes like that can make
a very dramatic difference to the business plan of a transfer
association, because it is set up to be finely balanced. If it
was not set up to be finely balanced somebody would be paying
too much or too little. Predicting the economic future remains
hard.
Q194 Mr Sanders: Going back to inspections—would
you be raising the floor level of inspection if the charge of
inspection were met by the housing associations you were inspecting,
rather than by the Housing Corporation?
Mr Heywood: On the face of it,
that ought to be the key criterion.
Mr Ashby: There has been a time
when the Housing Corporation used to charge for its regulation
but I cannot remember what the percentage was. One way or another,
actually who pays or contributes what is probably not so crucial
as to how it is done.
Q195 Mr Sanders: Presumably the overall
cost is one of the reasons why you were trying to reduce the numbers
of associations that would be inspected, therefore cost was fairly
important. If local authorities pay to be inspected, why not housing
associations?
Mr Williams: Lenders pay to be
inspected as well. Yes, that is quite right, there is a tension.
Clearly what we have had in recent years is a significant growth
in larger more complex associations that require a lot of inspection
and regulatory effort. The Corporation has always suffered this
tension that there is no charge levied and, at the same time,
its resource base is relatively restricted in undertaking the
function it has to undertake. It does clearly need to be resourced
appropriately. I think we have always taken the view that there
is a strong ground for charging, but obviously there are others
who would take a different view.
Mr Ashby: The only point I would
add to that, is that it represents an exceptionally good deal
from the government's point of view, because the cost of regulation
is probably somewhere less than £20 million a year, in terms
of at least the Housing Corporation's part of it, and for that
the interest saving for housing associations (which feeds straight
back through to the level of grant you would need for any given
output of housing) is enormously more than that. Whether it is
£250 million a year or £300 million is a matter of some
debate, but it is a tenfold return on something you would have
to do anyway. It is a pretty good deal.
Q196 Mr Sanders: Is there not a principle
that every housing association ought to be inspected? With the
smaller association probably working with specialist client groups,
they should not be exempt from the inspection process?
Mr Williams: I agree.
Q197 Mr Clelland: Could you tell us what
risks there are for associations and their lenders now that the
government seems intent on increasing the number of homes built
every year by housing associations?
Mr Williams: I do not think that
is a risk, it is an opportunity in lending terms. Obviously there
is the point we touched on earlier about making sure that investment
is soundly based. There is, however, the issue of the use of modern
manufacturing techniques which is central to that investment process.
Mr Heywood: One area where I think
there is a risk is in the Housing Corporation target to build
50% of its stock in 2004-06 using modern methods of construction.
That is not a risk because modern methods of construction are
good or bad per se; but we have got a situation where there
is a large unresolved issue with the previous generations of modern
methods; there are something over a million houses out there;
about 800 different designs, 300-400 of which are unmortgagable
due to defects of one sort or another; significant association
between previous generation of MMC and low demand; and, therefore,
as lenders we would very much like to see coming in with the commitment
to use modern methods (which is clearly sensible, there has to
be innovation and there should be innovation) proper standards,
possibly through certification which is something we have ourselves
been working on with the Building Research Establishment to ensure
that we do not repeat mistakes of the past. What we want to see
is the next generation being successful. Houses that in 30, 40
and 50 years people will want to live in. The lender interest,
in that sense, very much ties in with the consumer, because the
lender's ultimate interest is: "Will this property stand
as security for a mortgage loan of up to 30 years?" meaning,
in effect, "Is it going to last for 60?" That is very
much a consumer perspective.
Q198 Mr Clelland: What should be the
Housing Corporation's role be in ensuring that quality is maintained?
Mr Heywood: We feel the Housing
Corporation could have and could still take a stronger view in
terms of working with housing associations to make sure they have
looked at issues such as longevity, whole life cost, repairability,
adaptability—can this building actually be adapted over
the course of its life to meet changing requirements—insurability,
another major issue. It could also have and it could still work
with external bodies such as the BRE, to make sure there is certification
which addresses those particular issues that relate to modern
methods, which do tend to be longevity, long-term demand, repairability
and whole-life cost.
Q199 Mr O'Brien: The Housing Corporation
is now beginning to target their funds towards larger associations.
Will that bring value for money and an improved service for tenants?
Mr Ashby: The Housing Corporation
has for most of its investment life invited proposals for bids
for grant from housing associations. It has been a very competitive
environment and it continues to be so. The issue of whether doing
that on a larger scale with a smaller number of partners will
actually produce significant economies of scale actually is unproven:
it may; it may not. There is still evidence that a lot of the
smaller schemes are amongst the most competitive.
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