Communities and Local Government Committee - Minutes of EvidenceHC 310

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Oral Evidence

Taken before the Communities and Local Government Committee

on Monday 15 July 2013

Members present:

Mr Clive Betts (Chair)

Simon Danczuk

Mrs Mary Glindon

James Morris

Mark Pawsey

John Pugh

Andy Sawford


Examination of Witness

Witness: Julian Ashby, Chair, Regulation Committee, Homes and Communities Agency, gave evidence.

Q1 Chair: Good afternoon, and welcome to this evidence session on the regulation of social housing in England. For our records, could you introduce yourself and indicate your position as well.

Julian Ashby: I am Julian Ashby, the Chair of the Regulation Committee of the HCA.

Q2 Chair: Thank you very much for coming to be with us this afternoon to talk about some quite important and challenging issues. Can I begin with one that I think slightly surprised many of us who think of housing associations as pretty firmrooted organisations? Moody’s downgraded 26 of them, citing a weaker regulatory framework. Do you think that downgrading was a problem for you to deal with or a problem that you created?

Julian Ashby: I certainly do not think it was a problem we created. Moody’s has basically downgraded most of the providers in the sector on two occasions over the last six months. The first one-notch downgrade was at the same time as UK sovereign debt lost its AAA rating and was a direct consequence of that. At that point, they put the sector on negative watch, primarily driven by their perception of the level of Government support for the sector. They then reflected on that, and during that period the Cosmopolitan case, which you may or may not come on to, was resolved satisfactorily. They eventually settled on a further one-notch downgrade for the majority of associations that they rated, but that was done with the removal of the negative watch, which had potentially threatened multiple-notch downgrades. From that perspective they moved to a position that brings them broadly in line with the other main rating agency, Standard & Poor’s, and provides stability for the sector going forward.

In that period, there was no loss of appetite by investors to invest in housing associations, nor have those two single-notch downgrades affected the margins at which such investment takes place. From our perspective, they are entitled to come to the conclusions they have come to. We are comfortable with the action they have taken and the response of the investment community to it.

Q3 Chair: Did they not cite your discussion document as one of the reasons for the downgrade? Is that true?

Julian Ashby: The view they have taken of that is one that would seem to be at odds with the view taken by the Council of Mortgage Lenders in their submission to you. It is not for us to arbitrate what the rating agencies and other lenders think about these issues.

Q4 Chair: It might be for you to be a bit more careful about how you phrase things in future, to make sure the rating agencies do not get so upset.

Julian Ashby: They were among those consulted about our proposals. We are in regular touch with the rating agencies, with CML and others on these kinds of development. As I say, that phrase was a part of the explanation they gave, but they also went on at some length in their explanation about their perception of the level of Government support for the sector.

Q5 Chair: Are there other issues around that you would have concerns about now in terms of the risk for the sector as a whole?

Julian Ashby: Specifically in relation to the downgrading issue or more generally?

Q6 Chair: More generally. Maybe the rating agencies have not caught up with reality yet and maybe there should be more downgrades on the way.

Julian Ashby: I think they have caught up with reality, but there was some catching up to do. Since the credit crunch, there have been perhaps three major issues that would have been of interest to them. The first is that inevitably, with less grant, new social housing is undertaken with higher levels of debt. That is inevitable, and to some degree riskier.

It is also apparent that some £40 billion of bank debt to the sector is underwater; i.e. the cost of providing that funding is less than the banks get in return. They are unhappy with that situation and they seek re-pricing opportunities. That adds a degree of risk in the sector.

The final area that affects most associations is welfare reform, which again can have an impact both on the level of arrears and on the costs of collection. There is a range of factors in play that make the sector riskier than it was in the high grant rate, pre-welfare reform environment that applied up to 2008. That is reflected now in the appraisal they have of the sector.

Q7 Chair: Very simply, then, given all this change of plan and slight worsening of climate, do you expect to see another Cosmopolitan in the next 24 months?

Julian Ashby: We continue to get a small but steady flow of problem cases coming to our attention. They are not on the scale of Cosmopolitan. Some can nevertheless be on a quite substantial scale, but they are usually more manageable. There were particular features of the Cosmopolitan case that made it very difficult to resolve. I can go into those now if you like, or wait until there is other questioning.

Q8 Simon Danczuk: All but one registered provider is in the top two viability ratings, V1 or V2. Could you explain why we should trust that assessment? How does it work? Why should we trust that assessment that they are all doing relatively well except for one?

Julian Ashby: There is more than one that is graded below 2.

Q9 Simon Danczuk: How many are there below 2?

Julian Ashby: I could not give an answer off the top of my head.

Q10 Simon Danczuk: How many providers are there altogether?

Julian Ashby: We only rate the 280 largest providers and we work through a programme of reassessing them. We have changed the grading system to one that has four levels, of which the top two are compliant, albeit that level 2 is compliant with issues that we wish to see addressed. The bottom two are non-compliant ratings.

Q11 Simon Danczuk: How many are in the non-compliant?

Julian Ashby: We have those ratings both for governance and for financial viability.

Q12 Simon Danczuk: On financial aspects, how many are noncompliant?

Julian Ashby: That will be a very small number and it will be very small for a specific reason, which is-

Q13 Simon Danczuk: I am just trying to get to the number. You say it is a small number. Is it 50 or 20?

Julian Ashby: It would be a handful.

Simon Danczuk: Five?

Julian Ashby: It would not be more than that. It is a very small number. It would be a small number primarily because non-compliance with the viability standard would almost certainly trigger a potential breach in covenant. We are very wary of making a situation worse by doing something that would trigger a covenant breach.

Q14 Simon Danczuk: So we should trust the assessment that is used.

Julian Ashby: Behind them is a lot of financial analysis and interrogation of business plans and strategies. We put a lot of effort into those and they can be relied on.

Q15 Simon Danczuk: Hyde Housing Association made a loss of more than £38 million, 24% of its turnover and 69% of its operating income. South Anglia Housing has more liabilities due to be paid in the coming year than the total value of its assets. There are a number of examples where there are failings in terms of financial viability. Are the two that I have just mentioned not in the top two?

Julian Ashby: I do not have information to give an answer on a specific case. I am concerned about the figures you have quoted because they do not strike me as being consistent with the view we have of those organisations. I would want to get to understand the information you have, and I would be very happy to give a written response to that.

Q16 Simon Danczuk: Thanks, Julian. Let me ask the question in a different way. In the executive summary of the 2012 global accounts you state that "performance of individual providers varies significantly". I am trying to understand: if the financial performance of individual providers varies significantly, why are the vast majority of providers in the position of being at an acceptable level?

Julian Ashby: I understand the thrust of that question, but I have to take a step back. There is enormous diversity within the sector. Of the 1,700 associations on the register, an overwhelming majority own less than 1,000 homes and we scrutinise their accounts but do relatively little else. We focus our attention particularly on the 280 associations and groups that-

Q17 Simon Danczuk: Let me repeat the question, Julian. You said that "performance of individual providers varies significantly". The financial performance varies significantly, yet the vast majority of providers are said to be in a good, healthy state of finances. Doesn’t that seem a contradiction?

Julian Ashby: If you look at performance as profitability it varies enormously. It does not mean, because an association makes modest surpluses, that it is poorly run. For example, in the case of a typical local authority stock transfer association, it will be expected to make a deficit probably in its first up-to-10 years of operation. As it invests very heavily in stock condition, it is doing that not out of surpluses but out of further borrowing. It eventually completes its work, rents continue to rise, it hits peak debt, and then eventually it moves into surplus and pays down that debt.

That is the profile of a typical group of associations that comprise quite a lot of the sector. The fact that they make no surpluses for a period is not, in our view, a reflection that they are poorly run or financially not being run adequately. They are not in that sense breaching our financial viability standard. They are operating their business plan as we expected it to operate, but it is different from a London & Quadrant or an Affinity, who may be making very substantial surpluses.

Q18 Simon Danczuk: Let me be honest, Julian. You are not providing me with a lot of comfort, but let me ask you the question in a different way. Hyde Housing Association made a loss of more than £38 million. South Anglia Housing has more liabilities due to be paid in the coming year than the total value of its assets. You cannot tell me what their grading is. That sounds to me like they are at risk, but you do not know as chair of that committee whether these organisations are rated fairly, poorly or where they are rated. They are just not on your radar.

Julian Ashby: If I had notice of that question, I would be able to give you our analysis of the financial strength of both those organisations, and the reasons. If it is the organisation I am thinking of, Anglia is part of the Circle Group, which is a substantial group making large surpluses overall. I am not aware of a specific problem with one of its subsidiaries. You are giving me information that is news to me. I would want to be satisfied that I had a full picture of that association before making a response to you as to whether our grading of them is adequate.

Q19 Simon Danczuk: Finally, in terms of Cosmopolitan Housing Association, it took until December 2012 before your organisation did anything about them or registered them as a concern. There had been coverage in the media well before that, in October if not before. Why were you so behind the curve?

Julian Ashby: We were not behind the curve. We started picking up concerns about them in May of that year, and the action that we took-in fact, particularly the action in insisting that they got in additional support-was what uncovered further problems and then ultimately led to them being resolved. If you are looking simply at the change in the rating, that was because the situation was moving so fast we were not quite sure where we would place them. Most of our focus at that time was in getting the problems resolved, not on the issue of what the rating should be. We suspended the rating and then eventually-

Q20 Simon Danczuk: When did you suspend it? In May?

Julian Ashby: It would not have been as early as that. It would have been at a later stage, when the severity of the problems became much more apparent.

Q21 Simon Danczuk: But well before December.

Julian Ashby: As far as I am aware, before December.

Q22 Chair: I want to pick up on one point. You said in response to my earlier question about whether there would be another Cosmopolitan that there is a small number of problem cases that you are aware of. When I look at the ratings that Simon has just been referring to, there is a rating of V3: "The provider’s financial viability is of concern and in agreement with the regulator it is working to improve its position". That sounds like a problem case to me, yet not a single association is rated in that category.

Julian Ashby: We tend to use the governance rating as the way of signalling our concerns about an association, because it is the Board that is responsible for both the financial viability and-

Q23 Chair: Why do you have a financial viability rating if you do not use it in those circumstances, then?

Julian Ashby: We do use it, but the circumstances-

Q24 Chair: It is not used for anybody here. Apart from Cosmopolitan, which is obviously in the bottom section, there is not a single organisation rated in V3. Everyone else is basically good or very good.

Julian Ashby: I see the point you are making.

Q25 Chair: It is quite an important point, isn’t it?

Julian Ashby: It is. A conclusion, though, that an association is not viable is a very serious conclusion to come to, because it is not simply saying that there are issues to address.

Q26 Chair: The wording is not "not viable". It says, "Financial viability is of concern". Not a single association in the country concerns you with regard to their financial viability.

Julian Ashby: The issue that highlights is the difficulty of giving a grading that could trigger a re-pricing.

Q27 Chair: So is it not worth the paper it is written on.

Julian Ashby: The issues that you are referring to are ones that we will need to think about further and, indeed, are thinking about further. It highlights the issue that plays out. It is the reason why I gave the debt of the sector being underwater as one of the major risks to the sector, with the re-pricing risk that can flow from that. If we use any of our statutory powers, we are potentially putting lenders in a position where they can re-price, so we tend to be very careful about how we approach those situations. We do not wish to make a difficult problem worse by triggering a re-pricing. That is one of the constraints under which we are operating at the moment, and we have to be extremely careful about it.

We tend to say to associations that are getting into that territory, "We wish you to do the following things to get yourselves sorted out. If you do not do those things, we will take statutory action." They generally see that if we are forced to take statutory action, it will put them in a worse position, so they tend to respond positively to the suggestions we make for improving their situation.

Q28 Andy Sawford: In how many cases have you done that, in the past 12 months?

Julian Ashby: I am just trying to think of the total number. There are probably at least 20 cases where we have been giving associations a pretty strong steer on the actions we expect them to take to resolve what we see as significant problems.

Q29 Andy Sawford: So there are 20 cases that really should be in V3.

Julian Ashby: They are not necessarily issues. It is because they cover both viability and governance concerns.

Q30 Andy Sawford: How many are on financial concerns? Half?

Julian Ashby: I would say significantly less than half.

Q31 Andy Sawford: Are we back to the handful?

Julian Ashby: We are back to the handful.

Q32 Andy Sawford: Why is the handful not in here?

Julian Ashby: I am not sure which document you are looking at.

Q33 Andy Sawford: Following the Chair’s question, we are looking at the number of providers where financial viability is of concern, and in agreement with the regulator it is working to improve its position. You have clearly described that that is the case and yet they are not reflected in the figures. What confidence can the public, the Government and stakeholders have in all of your figures given that you are clearly sitting here telling us that you cannot publish the accurate figures?

Julian Ashby: We are talking about an area where our main concern will be governance, and if the board of the association does not get a grip quickly on its situation, then what is currently a V2 judgment would turn into a V3. We would approach that through the governance route, because it is the board’s responsibility to resolve potential financial failings first. That is the route that we are taking, but I understand the point you are making and we will reflect on it.

Q34 Simon Danczuk: The first question I asked you was whether we should trust the assessment that is used. Bearing in mind the last 15 minutes of dialogue, I am now asking you: should we trust the assessment that is used-yes or no?

Julian Ashby: You can still place reliance on the assessment that is used. You have put to me two cases that, on the face of it, sound in a very precarious-

Q35 Simon Danczuk: You have admitted that there are providers who should be in V3. You have said that to the Committee.

Julian Ashby: I said they are on the boundary of V2 and V3.

Chair: That is a slightly different form of words from what we have heard in the last 15 minutes.

Q36 Andy Sawford: There are only 25 in V2. You already classify a range where it is about governance, particularly in V2. The V3 is about financial viability. You acknowledge that there are serious issues out there for housing associations at the moment in terms of the market they are operating in and financial viability. You are telling us that we can trust a figure that indicates you have concern about no providers, yet you are also really telling us there are about 20 where you have had those conversations about financial concern.

Julian Ashby: I took your question to be about the number where we have discussions along the lines of, "We wish you to take action to address problems", not as narrowly as addressing financial problems, but problems in the round. That includes a range of issues in governance that could ultimately impact on financial viability at the point we begin to tackle them.

There are cases, for example, where five years ago we might have moved fairly quickly to make statutory appointments to a board. We do not do that now because if we did so, it would trigger the potential of re-pricing for that association. In a number of cases, we have gone to that board and said, "We are not satisfied with the skills you have available to tackle this set of issues, and we require you to get some additional board members with the necessary skills." They have invariably done that to our satisfaction. If they refused pointblank, we would make the appointments and take the consequences.

Q37 Mrs Glindon: Moving on to governance, six of the providers have had a G3 rating, and you touched on what you would do if there were concerns. What specific concerns are there with the governance of those six providers?

Julian Ashby: I could not answer that off the top of my head, because each of them will be a different set of issues. Generally speaking, it is if we have concerns about the competence with which they are managing their providers’ affairs. It may be issues of treasury management; it may be a range of different issues. It may be problems in their longterm financial forecasting. There can be quite a wide range of things that could trigger us having concerns about their governance. Usually, if it is graded G3, it is because they are being slow to correct the problem.

Usually we find if we identify an issue with an association it moves very quickly to address that. If it does not seem to understand the problem or seems to be very slow in doing so, we will move to a G3 judgment where we are basically saying: "You aren’t compliant with the governance standard and you are in danger of further intervention". Indeed, there will be pretty close engagement on a regular basis with all the associations in that category.

Q38 Mrs Glindon: Would you say that the sector is complacent about its governance, or would you speak more highly of it?

Julian Ashby: The sector as a whole is aware that it is operating in a significantly riskier environment than it was five years ago. Our standards place very robust requirements on boards to govern their associations under those circumstances. They are aware of that for the most part; they find it quite challenging. I have talked to a lot of boards and they tell me they find it quite challenging. I do not think it would be fair to categorise them as complacent. Most of them are taking proper steps to work with their executives to address the particular issues that they have. Not all of them are successful at that, and we obviously take an interest in those in particular.

Q39 Mrs Glindon: Do you think that the registered provider boards have the skills and personnel to direct and manage their businesses through what the HCA has called "profound change" in the traditional social housing model?

Julian Ashby: It is a challenging time for boards. Some will struggle with that change, which is something we remain concerned about and why we attach a great deal of importance to governance and to our continuing engagement with the larger providers of their governance. It is an area which will continue to be tested over the next few years as these various changes work through, but that is the nature of the beast. All associations have boards. Some are paid; some are not. They all have to comply with the governance standard. Indeed, as I am sure you are coming on to, we intend to strengthen the governance standard, particularly in relation to protecting social housing assets. That will be a further issue that they have to grapple with. It is right that the responsibility for managing competently independent organisations rests with their boards. It is not the duty of the regulator to be second-guessing boards. They have that responsibility; we are seeking assurance from them that they are discharging it competently. That is the route we follow.

Q40 Mrs Glindon: Do you think the main role of the regulator on governance would, in future, be to toughen the standards, as you said? If it is found that the sector itself does not have the skills and personnel to meet the standards, how can they be found? Where can they go to raise their standards and find the right personnel and people to do that?

Julian Ashby: At a sector level, the sector appreciates the degree of change it is going through and what that means for its boards. They put quite a lot of effort into strengthening their governance. One of the things that we most commonly request associations that are struggling in some respect to meet the standards to do is to commission an independent review of their governance. This is not something we carry out ourselves. We tell them to go to an independent firm and get external advice on how to strengthen their governance. If they are a problem case, we will have an interest in both the brief for that exercise and the output from it, but ultimately the sector has responsibility for its own governance and must step up to the mark in terms of doing that.

I cannot over-emphasise the extent to which associations differ very widely in their size, scale and range of activities-some are very specialist; some are very localist-and it is right that the skills the board has around its table reflect those differences. It is not that a London & Quadrant is looking for the same skills as a smaller, more local association, a specialist provider of housing for the elderly or one that does care and support on a large scale. They are very different and have different needs. It does not make it easier to regulate, but those are differences that we have to recognise in the arrangements we make to monitor and regulate them.

Q41 Andy Sawford: Your submission suggests your powers are not fit for purpose in the current economic climate, and you have repeatedly talked about the risk of repricing. The fear of causing providers to breach loan covenants is something you have raised. This clearly ties your hands, and it has come out in the questioning. Exactly which of your powers are not now available to you?

Julian Ashby: All the powers are there and are available to us. The issue is whether it would be prudent to use them.

Q42 Andy Sawford: Let me rephrase the question, then you can answer it. Which of your powers do you not use?

Julian Ashby: As far as possible, our approach has been modified to achieve the changes we expect to see in those who are underperforming without use of statutory powers. We are no less robust in our analysis and identification of issues. We will raise those issues with the executives and/or boards depending on the nature of the problem. We will be very demanding of them making changes and improvements, but we will seek to do that in effect by agreement, rather than by saying, "We’re going to issue an enforcement notice" or "We are not interested in your plans; we’re going to put three people on your board". We are engaging with them without use of powers.

Q43 Andy Sawford: I think it is fair to say the Committee has an understanding of how you are approaching this. Two things arise from that. The first is: do you accept that whilst this may in your view be the intelligent way of using the powers currently, there is an impact on how relevant and easy to understand your role is to the outside world and the ratings that you use?

Julian Ashby: I can see that it is potentially an issue.

Q44 Andy Sawford: Do you think there is a way you could overcome that? For example, could you make viability ratings internal only?

Julian Ashby: They would be pretty pointless if they were internal only.

Q45 Andy Sawford: Are they not pretty pointless at the moment, in truth? They are not used, so they are pointless in that respect.

Julian Ashby: The 1s and 2s are used extensively. It is the 3s that give us the area of concern that you very rightly hit on as an issue. That is an area that we will think more about. It is a problem for us.

Q46 Andy Sawford: If you were separated from the HCA and were independent, would you be able to give a much fuller picture of financial viability?

Julian Ashby: I think it would make no difference on this issue. It is not about the location of the regulation function. It is about how we deal with cases in a way that does not make them worse by triggering a re-pricing, which could see an association with some financial difficulties become an association with very serious financial difficulties. It is a dilemma for us, which I think you appreciate.

Q47 Andy Sawford: Have you conducted any research into how this dilemma is overcome in other sectors? For example, listed companies forced to give profit warnings or the IMF publicly commenting on Governments’ fiscal policies that then has an impact on countries’ credit ratings. This is not a unique dilemma. Have you looked at how others are overcoming it?

Julian Ashby: We have an unusual regulatory structure in terms of operating not through a licensing arrangement like most regulators, but through a set of standards that we then have various powers to enforce. It is a different architecture. We do find ways of signalling our concerns and we have particularly used the governance rating for that purpose because that does not have the same re-pricing trigger impact that a V3 or V4 would have. That is understood, and the messages that we have put out through that, if you have read some of them, are pretty strong.

Q48 Andy Sawford: Do you think that is fair to lenders, banks or tenants?

Julian Ashby: That situation is well known to lenders, and I would say look at the CML submission to this inquiry in terms of whether they are broadly satisfied with the line we are taking on that.

Q49 Andy Sawford: Actually, most people seem satisfied, but that seems to be because they all have a vested interest in maintaining what seems to be a bit of a farce, to put it bluntly.

Julian Ashby: I do not think it would be fair to categorise CML in that way, but I do not deny the strength of the point you are making on the use of ratings that can trigger that kind of problem.

Q50 James Morris: Listening to this, I am slightly bemused. If I were a member of the public, would I not think "I have absolutely no confidence whatsoever in the regulatory environment that you are presiding over"?

Julian Ashby: Is that a question or statement?

James Morris: It is a question.

Julian Ashby: Could you repeat it?

Q51 James Morris: If I were a member of the public listening to this discussion, I would probably draw a conclusion that you are not an independent regulator, you are not having any effect in positively regulating the market that you are meant to regulate and you have failed to answer the question of how to resolve the dilemma that you have accepted as part of this discussion.

Julian Ashby: The first thing I would say is that the rating of associations is a part of what we do, but the principal focus of our engagement is to identify issues with providers and get them resolved. In the main, we undertake that work on a basis that is not greatly in the public view; it is direct engagement between regulatory staff and the providers. In an overwhelming majority of cases, it leads quite swiftly to a resolution of the problem that has been identified.

Q52 James Morris: The consequences of failure, though, could be quite devastating for tenants, communities-

Simon Danczuk: Taxpayers.

James Morris: It is not just a cosy little conversation.

Julian Ashby: If we did not do that job competently, then it would have the consequences you describe. I would argue that it is not leading to those situations because we are being successful in getting those problems resolved. At any one time, we have a significant case load that varies from those with whom we have minor concerns through to those about which we have serious concerns. We have regulatory staff engaging with those organisations on a very regular basis depending on the severity of the issues that we are dealing with. In all those cases, we track them through until, from our point of view, the issues are resolved and they drop back to being those that we will monitor on a regular basis, but not be engaged with on a much more intensive basis. That is a process that continues, and I would argue that we have become more effective in doing that over the last year, not less effective.

Q53 Andy Sawford: I am just thinking ahead to a few years’ time. Let’s hope that you are successful, but we have seen significant failures of regulation in this country in recent years, and there is a duty on us as Members of Parliament to look at this situation. If you are not successful and a number of housing associations fall in the next few years, what do you think the verdict would be on the approach you are taking right now to not be publicly transparent about the financial viability of housing associations? What would the verdict be on this Committee if we failed to properly address that?

Julian Ashby: The issue does depend very much on what triggered the collapses. We certainly take the potential for an association to get into serious trouble extremely seriously. That is one of the reasons why we published a discussion document about potential strengthening of the framework. We take extremely seriously our ability to tackle those problems.

If there were a series of failures of providers, they would have dire consequences for the tenants of those providers. If lenders ever get to the point where they have to enforce their security, it ceases to be social housing. The protection that tenants have then relies on their tenancy agreements and not on the protection of their being within a regulated sector. We are very, very concerned about that, to the point that we have put forward ideas for strengthening the regulation which, as I am sure you are aware, have been of concern to a number of providers. We steer a course here-

Andy Sawford: I think you are restating your position, and there are other questions.

Q54 John Pugh: You have led us very nicely into the next round of questions. Having spent half an hour being attacked for not doing nearly enough, you are now going to be criticised for doing far too much. You talked about your proposals, which have been described as naïve in some provider circles. What is the effect of your proposals or the consultation document on co-regulation or the principle thereof?

Julian Ashby: I think it has no impact on that. As far as we are concerned, it remains that boards have the overriding responsibility to meet our standards. If we amend the standard to require boards, for example, to be satisfied, in undertaking any non-social housing activity, that if that activity goes wrong it will not bring down the social housing side, that responsibility would be for the boards of those associations to manage through. There is no change in the core principle that it is for boards to manage risks and to meet our standards.

The question of how the standard is best amended and the role that ring-fencing could play is very much up for debate. This was a discussion document, not a set of proposals. We put forward a number of ideas and some of those, particularly around recovery plans and amendments to consent disposals, have been quite positively received. The proposals we put forward on ring-fencing have been fairly well received by lenders and not at all well received by providers.

Q55 John Pugh: One provider said you have failed to recognise "the sector’s capacity for business excellence". From what you have said so far today, I think you are aware that you are dealing with a mixed sector.

Julian Ashby: We are dealing with a very mixed sector, and there are issues that have perhaps not been expressed sufficiently clearly in the discussion document. For example, we have never had a wish to inhibit the range of activities that associations carry out in support of their communities. Nor have we any intention of inhibiting associations from developing multi-tenure or mixed-tenure schemes, because that is the way of development in the future. However, we remain concerned about the use of social housing assets to undertake commercial activities.

Q56 John Pugh: On that, do you think greater regulation should apply to for-profit providers, who presumably have a better motive to do that than a not-for-profit provider?

Julian Ashby: In principle, ring-fencing is a more appropriate tool for forprofit providers because they are almost invariably subsidiaries of other for-profit organisations. Therefore, to preserve public value within a new for-profit provider, you would have a ring-fence, so it is appropriate under those circumstances. There is another group of associations where it is appropriate, which are those that choose to have a parent that is not registered with us. In those situations, if we do not regulate the parent company we have no means of knowing what is happening to surpluses across the group. There is a strong case for ring-fencing in those two circumstances, but we recognise that in relation to the rest of the sector, ring-fencing would be extremely difficult to operate because it would be difficult to know what should be inside it and outside it.

From our perspective, it is more important that associations manage all their risks than that they manage risks inside a ring-fence and we take no interest in what happens outside it. Our experience of associations using subsidiaries as a way of managing risk, which many of them do, is that they are not always successful in isolating the risk to a subsidiary. If we relied exclusively on a ring-fence, we would have to be certain and satisfied that that ring-fence was effective. There is too much evidence that, in a range of circumstances, the risk bridges across from the subsidiary to the parent and it would not be wise to rely on that as the only mechanism for protecting social assets.

Q57 John Pugh: If your proposals, including ring-fencing and other things, are carried through, how do you expect the sector to change?

Julian Ashby: I expect that the sector will become more diverse over the next five years. We are not looking at a one or two year issue; we are looking at how the sector will develop over the next five to 10 years.

Q58 John Pugh: Would your changes facilitate that?

Julian Ashby: We expect the sector to become more diverse, not because we are desiring it or willing it. We think it is an inevitable response by the sector to the circumstances they now find themselves in that they will diversify their activities. We see our role, as the social housing regulator, being at heart to protect the social housing investment.

Q59 John Pugh: So yours is a response to the diversity.

Julian Ashby: It is in anticipation of further diversification. We feel that we want to put in place steps to enable that to take place without undue threat to the social housing assets.

Q60 John Pugh: Given that for some providers, this may not be wholly welcome, who actually decides at the end of the day what happens?

Julian Ashby: We decide at the end of the day. We will put forward proposals for formal consultation. We are some way away from that stage as yet.

Q61 John Pugh: When will you be at that stage?

Julian Ashby: We hope to be in a position to put forward proposals for consultation by the end of this year, but depending on other issues that may blow up that may not be the time scale. Our hope would be to do it this year. That would lead to strengthened standards. It is then the responsibility of associations to meet those standards.

Q62 John Pugh: In a sense, it is a unilateral decision on your behalf. No?

Julian Ashby: It is our role to set the standards, but we only do that after proper consultation. The reason we have done it in two stages, first with a discussion document, is that we wanted to flush out exactly the issues that have been flushed out. We will now approach the next stage of formulating our proposals significantly better informed as a result of that discussion process we have had, and indeed, as a result of a number of providers who have for the most part accepted the diagnosis of the need for change, some of them have also risen to the challenge, saying, "We do not particularly like this aspect of the proposals, but have you thought of approaching it in a different way?"

We have had some quite useful ideas coming out of this. We are reflecting on it all. The committee meets on Thursday, as it happens, to look at our next stage of drawing up proposals, but this will be an iterative process through the autumn as we discuss what we might do with the normal stakeholders that we engage with on a regular basis. That includes both providers and lenders.

Q63 Chair: You obviously have concerns and you have told us about a number of things coming together: lower rates of grant, more borrowing, more fluctuations in borrowing, more associations going for market-rented properties and various other commercial activities, and then the potential for arrears to grow as well due to some of the welfare reform measures. Is it the fact that all of these things coming together to give you concerns about housing associations as a whole is driving your demand for a new regulatory framework?

Julian Ashby: Yes.

Q64 Chair: Isn’t your proposal to bring in a new set of arrangements to cover all housing associations actually doing what we were trying to suggest earlier, which is trying to focus and identify associations where there are problems, and to flag those up, make them transparent and deal with them? Instead, every association in the country, however viable and however well run, is now going to be hit by a new set of regulatory measures.

Julian Ashby: The regulatory architecture we have to work with is one that sets standards, and then we have a set of powers that we can use to make sure those standards are met. That is the way the regulatory system has been set up. It is not a system we have devised. That is the statutory arrangement. We only have powers to enforce standards that have been set. In this situation, we need to set standards-

Q65 Chair: Would it not be helpful if you actually dealt with the powers you have and enforced them properly rather than going on to all the new powers?

Julian Ashby: There is considerable evidence that we are successful in getting providers to achieve the standards that we have set. We think that the standards do not address sufficiently the new trends and risks in the sector towards both diversification on the one hand and different types of risk on the other. We are not talking about wholesale changes to the standards, but refinements to the governance and viability standards in particular to reflect a riskier external environment. It is not our intention to have a series of prescriptions that everybody has to do this and that.

Q66 Chair: I do not know what a ring-fence is but a prescription that everyone has to do this and that.

Julian Ashby: If you have, as was part of that discussion document, a comply or explain basis, it is hard to say this is requiring everybody to do something if one of their options is to say it is not appropriate to their business model, and therefore explaining that they are going down a different route. I would take issue with that diagnosis. We are being much more flexible than it implies.

Q67 James Morris: Could you explain the rationale behind ringfencing and tell us a little bit more about how it would work?

Julian Ashby: As I say, I am not convinced that ring-fencing is necessarily the most appropriate tool for the majority of associations.

Q68 James Morris: Why have you floated it at all?

Julian Ashby: We floated it as one of the suggestions in a discussion document while acknowledging that a number of difficulties are attached to it.

Q69 James Morris: What is the rationale for having it in the consultation document?

Julian Ashby: The rationale for having it in the consultation document is to get providers thinking about the extent to which it is reasonable to use social housing assets, in which the taxpayer has put significant investment, to support commercial operations. That remains a valid issue. You would expect us as the regulator to be safeguarding the public investment that has already been made in social housing. Looking to a period ahead when associations are likely to undertake significantly more commercial activity, you would expect us to have a view about how, in that context, we propose to safeguard the taxpayer interest.

Q70 James Morris: But it might not be a ring fence.

Julian Ashby: It might not be a ring fence. It is likely to be, perhaps, a ring fence for a small group of providers and other mechanisms that will have to some extent a similar impact for other groups of providers. We are not seeking a one-size-fits-all solution.

Q71 Chair: Are you saying it is a principle that no association should be able to raise investment resources for market-rented housing on the back of social housing?

Julian Ashby: We have not taken that view. We have expressed a view that the extent to which public and social housing is used for security for commercial activities should be limited to the extent that if those commercial activities fail, it should not cause the lenders to social housing to have to foreclose on their security. It is about managing the risk of commercial activities and setting plans for what they would do. For example, if these commercial plans did not come to fruition in the way they hoped, how would the association manage its way through that process? Those are the sorts of lines we are taking and they are very consistent with the recovery plan approach that has been broadly welcomed by providers in the same discussion document.

Q72 Chair: I am going on to what is called a living will, about how you get out of a problem if one occurs. Can you have a realistic living will that everyone can have some faith in as the plan that would be delivered if things got tough?

Julian Ashby: This is an idea that, in embryo and at its most basic level, would require providers to know about all their social housing in terms of how it is charged, what restrictions there are in title, to which lenders they have pledged it as security and how much free security they have. Those are very basic issues about the management of assets that become crucial in the context of a rescue. I would argue, and you would probably share the view, that it is information that any well run association ought to have at its fingertips anyway.

Q73 Chair: Would it be made public?

Julian Ashby: No, because it is commercial information. I would not expect it to be made public. Then building from that, once they have that database about their assets and liabilities, for those who are undertaking riskier activities, the onus will be on them to demonstrate how they will manage it through, if they run into difficulties with those activities. In the event that they ran into problems with their social housing, what routes would there be to help manage through that process? Traditionally, the sector has coped with those problems by seeking another provider to take over full responsibility for all assets.

Q74 Chair: That information would be available to you and you would have to be confident it has been made available to the board of the association as well.

Julian Ashby: We would expect it to be driven by the board, hence my reiteration that this would not be cutting across the co-regulation principle. It would be the board’s responsibility to put these arrangements in place, and we would be seeking assurance from boards about the effectiveness with which they have done that.

Q75 Mrs Glindon: Do you think you have the capacity to deliver your existing system, let alone take on a more proactive regulatory role?

Julian Ashby: We have resources that I think are sufficient in financial terms at present, but the main force of that question is in terms of the level of expertise we need to regulate an environment that is getting riskier, in which the largest providers are diversifying and running more complex businesses. We have taken the view as a committee that we need to significantly enhance our capacity to make high level judgments about providers. We are doing that by reorganising within the obvious financial constraints that apply to us. I would hope by the end of this year that we will have approximately three times as many senior managers in the regulation division as there were at the point when I took on responsibility. That is being done within existing resources.

Once we have those arrangements in place, I expect them to make it possible for us to do the kinds of things we are envisaging, but that is something we keep under very close review as a committee. Without those arrangements in place, and at the time when we were dealing with Cosmopolitan, we had to pull in resources from everywhere to focus on that. A number of other projects that we were trying to take forward had to take the back seat until we had Cosmopolitan resolved. It stretched our resources very thin. I am hopeful that the steps we are now taking will enable us to cope with that kind of problem without having adverse consequences on other projects.

Q76 Mrs Glindon: Do you consider that you have sufficient resources to carry out the recruitment that the Department says you are carrying out now?

Julian Ashby: Yes. That recruitment is the final stage of bringing in additional outside expertise to strengthen the senior management of the regulation division. We see that as a crucial step in strengthening the regulatory function.

Q77 Mrs Glindon: Can you say that the Department has met your requests for resources?

Julian Ashby: Our requests for resources in effect are routed in the first instance to the HCA, and then on to the Department. We live, as far as we can, clearly within very tight financial constraints that apply to the Department and to all of the HCA. We have taken the view that the first thing we should do is try to make the very best use of those resources, which is what we are doing through the strengthening of senior management capacity. We believe that will be sufficient, but it is a situation that we are watching very closely. If two or three cases came bubbling up that were of a very serious nature, we might revise that view, but, at the present time, we think the steps we are taking to strengthen our capacity are appropriate.

Q78 Mrs Glindon: So the statement that the Regulation Committee’s own public minutes recorded, that "Members remained concerned that the regulator did not have enough resources in the right place in order to deliver all the outputs expected of it", will not hold.

Julian Ashby: That is a legitimate concern for other parties to have. Regulation is in a transition from a previous era in which problems were less complex and in which regulation was less outcome-driven and more prescriptive. We now need people who are capable of making quite complex business judgments. That is what we are seeking to recruit. When we have those people in place, I am confident it will greatly strengthen our capacity. Time will tell whether it is sufficient, but if we begin to get concerns that it is not sufficient, then we will take further steps.

As you know, we have already begun to discuss the possibility of charging fees as a way of strengthening our resources. That is something that we continue to have discussions about. No decisions have been taken, but we have the power, subject to various consultations and Secretary of State consent, to charge fees. That is an avenue that is potentially open to us to enhance the resources available. Both as a regulator and as a part of Government, we understand the constraints that there are on public expenditure. Therefore, we do our very best to operate within those constraints.

Q79 Mark Pawsey: Mr Ashby, I want to ask you a couple of quick questions about your committee’s role as a regulator of consumer standards. Tenants are looking to you and your committee to defend their interests. When you were put under pressure about whether or not there are housing authorities where there is any financial viability concern, you conceded that the picture perhaps was not quite as rosy as the figure of zero for V3 was showing. Yet there have been over 400 complaints about consumer standards and not one was judged to be a case of serious detriment. Are you just as complacent looking after the interests of tenants as you are in managing the financial viability of housing associations?

Julian Ashby: I would take a step back, if I may. We now have a very different role in relation to consumer regulation from our predecessor body, the Tenant Services Authority.

Q80 Mark Pawsey: People will find it hard to understand that there have been 400 cases brought to the attention of your committee, but you have not found any where there has been a matter of serious detriment. Is that right? Is it just that everything is uniformly excellent or are your own standards too low?

Julian Ashby: There are four consumer standards, three of which are the direct result of directions from the Secretary of State. Although we "set" the consumer standards, in three of them they are the substantial result of Government directions. The policing of those standards is not something that is primarily done by us.

Q81 Mark Pawsey: But you would accept that somebody looking in from outside might take the view: "Hold on, here’s a body which is simply rubberstamping and saying that everything is okay".

Julian Ashby: No. The power to collect information about performance was revoked as part of the abolition of the TSA. There is no proactive monitoring against the consumer standards because the Localism Act determined that that is not the role of the regulator.

Q82 Mark Pawsey: I must ask you then: to whom should tenants look for somebody to protect their interests in this sector?

Julian Ashby: The Act envisages that complaints by tenants should in the first instance go to their landlords, that they should be supported in that by tenant panels-

Q83 Mark Pawsey: We do not know whether or not the landlords are providing the right data to their tenants for the tenants to be able to do that scrutiny themselves.

Julian Ashby: I understand the point you are making, but our power to monitor the effectiveness with which landlords are undertaking the consumer standards was removed by the Localism Act. It has left us with two specific roles: one to set standards and the other, which is described as a backstop role, to take action where there may be systemic breaches leading to serious detriment.

Q84 Mark Pawsey: Has it led to a situation where tenants are in a substantially weaker position than they were previously?

Julian Ashby: That is primarily for others to answer. We operate a system whereby tenants continue to make complaints to us even though we are not the body to whom it is appropriate to make complaints. Roughly three quarters of those complaints do not relate to breaches of the standards and therefore are not within our remit. In those cases, we point them in the right direction to get them resolved. The way they should be resolved is by the landlords with the intercession of the tenant panel-

Q85 Mark Pawsey: You are saying it is nothing to do with your committee.

Julian Ashby: If it is not resolved they should then go on to the Housing Ombudsman. That is what the Housing Ombudsman Service exists for. We have a role, but it is not that role.

Chair: Mr Ashby, thank you very much for coming to give evidence this afternoon.

Prepared 9th September 2013