Communities and Local Government CommitteeWritten evidence from the Council of Mortgage Lenders (HCA 04)
Introduction
1. The CML is the representative trade body for the UK residential mortgage lending industry. Our 110 members currently hold around 95% of the assets of the UK mortgage market. In addition to lending for home ownership, the CML’s members also lend to support the private rental market and social housing.
2. Over £60 billion has been lent by CML members to housing associations UK-wide for new-build, repair and improvements to social housing. This has enabled significant improvement in the condition of existing homes and communities as well as delivering new affordable homes without increasing the use of public money.
3. We welcome the opportunity to provide written evidence to the Communities and Local Government Committee on the regulation of social housing in England. The Committee’s oral evidence session with the chair of the HCA’s independent regulation committee is particularly timely, as the regulator and the sector address the challenges arising from the recent rescue of the Cosmopolitan Housing Group.
4. We have already responded to the HCA’s discussion paper on proposed changes to the core regulatory framework which are intended to ensure effective regulation of registered providers and the protection of social housing assets in a more complex and risky operating environment. Our responses to that paper are pertinent to the committee’s consideration of some of the areas highlighted in its call for evidence. In responding to the Committee, we have re-stated some of the key points we made earlier to the HCA.
Impact of the Regulation Committee
5. Although the challenges for the HCA’s regulation committee at the time it was established were considerable (and still are), we believe that it has had a strong positive impact to date. This is evidenced by predominately strong regulatory judgements on financial viability and governance which most providers enjoy. Lenders and investors place great reliance on these. The effectiveness and impact of the regulator has supported a continuing healthy appetite in private investment in the sector at favourable rates. There is currently no sign of that appetite diminishing.
6. Individual providers and the sector as a whole still enjoy strong credit ratings. We believe that recent downgrades by some ratings agencies should not be taken out of context as they reflect the wider sovereign downgrade. Although the Cosmopolitan case was cited by Moody’s, we believe that the regulation committee’s actions at the time secured a successful resolution which avoided loss and a moratorium. The regulator has since embarked on an exercise which should strengthen the sector for the future. The regulation committee has not been caught “off guard” to date, and we believe the regulator has a sound and comprehensive understanding of where the key risks lie in the providers it regulates.
Risks for Providers and the Sector
7. The risks which the sector faces, individually and collectively, are well documented and understood. The HCA’s 2012 Sector Risk Profile sets these out in more detail; these continue to represent the key risks for the sector. From the CML’s perspective, our members who commercially fund housing associations, continue to be concerned about the potential consequences for landlords’ income and financial viability of key aspects of the welfare reform changes which are now being implemented. In particular, we are concerned by the potential to disrupt landlords’ income through:
Rent direct, and any delay in switching benefit payments back to the landlord instead of the tenant when there are ongoing rent arrears or persistent underpayment of rent.
The under-occupancy deduction (“bedroom tax”) where tenants will face benefit deductions if they are deemed to be under-occupying their home
The benefit cap under universal credit
8. We continue to be concerned that the Department of Work and Pensions is implementing these changes with an uncertain IT system, and an incomplete understanding of their impact not only on tenants but also on landlords, the credit strength of the sector and funders’ appetite to invest in it. Already we are seeing mounting arrears in some of the direct payment demonstration project areas, and some tenants/tenant groups struggling with the under-occupancy deduction. This all increases strain on landlords not only in terms of mounting arrears but also increasing resource costs for tenant support. We would like to see the regulator take greater account, through data collection and analysis, of the impact of these changes on registered providers as they are rolled-out.
9. Another key risk for the sector is the possibility that changes to banks’ capital cover requirements being considered by the Prudential Regulation Authority could substantially increase the cost of existing and new lending to the sector at a time when there is increasing pressure to attract favourably priced investment for new affordable housing development. We are engaging with the PRA on this issue, along with DCLG, HCA and HM Treasury.
Resources and Powers of the Committee
10. We are encouraged that the regulation committee has been able to recruit new members and now enjoys a good blend of skills and expertise which it can call upon. We believe that the proposals in the recent discussion paper, if translated into changes to the regulatory framework and approach to regulation, should provide the powers needed to tackle the challenges of for-profit providers, within the existing legislation.
Proposals to Protect Social Housing Assets in a More Diverse Sector
11. The discussion paper proposals are needed because of the increasing participation of for-profit providers in the sector and the need to sufficiently protect social housing assets and their associated “public value”. The increasingly complex group structures being adopted by some providers, which could see social housing assets exposed to risks and liabilities from non-regulated, non-core activity underline the need to strengthen the protection the regulator is able to provide. We believe the changes proposed, particularly around ringfencing, asset disposals and recovery planning should adequately provide the required additional regulatory protection. We recognise that there will always inevitably be tension between securing the required protection and allowing freedom to diversify into non-core activity. The issue is essentially about striking the right balance. The discussion paper has already stimulated debate in the sector as to what that balance should be. The CML is engaged in that debate, which will inform the next iteration of the HCA’s proposals in a formal consultation later this year.
Independence of the Committee
12. At the time it was established, we were concerned that it might be possible for conflict of interest situations to arise in the composition and work of the committee. We are comforted that the potential for conflict has been well managed and has not materialised, to date. Currently, we are satisfied that the arrangements in place to maintain independence are sufficiently robust and appear to be working. The independence of the committee, in the context of its relationship with the wider HCA as the government’s funding body for the sector, appears not to have been fully tested yet.
June 2013