The work of the Regulation Committee of the Homes and Communities Agency: the Regulation Committee's Response to the Committee's Second Report of Session 2013-14 - Communities and Local Government Committee Contents


Appendix: Homes and Communities Agency response


Introduction and summary

The Regulation Committee welcomes the Select Committee's interest in social housing regulation. The credit crunch has increased the financial pressure and risks for the sector and we expect those we regulate to make significant improvements to their governance and risk management to respond to this new reality.

We recognise that we too need to make changes to strengthen our regulation. We are at the midpoint of our own programme of transformational change. In essence this comprises three key strands:

  • increasing our capacity, through investing in training and development and recruiting more senior staff with the skills needed to regulate an increasingly complex sector;
  • operational improvements. This includes restructuring the HCA's Regulation Directorate to help ensure we have a rounded view of the assurance we can have for each provider. We shall further target our resources based on a risk based assessment of providers; and
  • changing our Regulatory Framework so it more effectively facilitates new sources of housing supply and funding and deals robustly with the risks posed to social housing assets by providers increasingly diversifying their activities.

The Regulatory Committee welcomes the Select Committee's perspective and constructive criticism. It has highlighted a number of areas where we can improve transparency and make other changes.

We have been considering the report's findings and recommendations since its publication and have agreed this detailed response.

We have taken, or are in the process of taking, the following significant steps in the light of the Select Committee's recommendations.

·  We have instituted a 'watch list' on our website of providers whose grading are under review and at risk of a downgrade.

·  We intend to clarify the description of the grades within our grading system so that these are more transparent. Details of the new straplines will be published in November.

·  We have instituted a system of Regulatory Notices to bring greater transparency to issues of wider concern that might not be included in our published Regulatory Judgements. The link for the first of these is http://www.homesandcommunities.co.uk/sites/default/files/our-work/gallions_regulatory_notice_-_20131015_legal_amends.pdf

Our plans also include actions that are relevant to the questions raised by the Select Committee. For example, we will shortly publish a review of the first 12 months of the new consumer regulation regime, we have recently commissioned an independent review of the Cosmopolitan case, and we have existing arrangements for liaising with regulators in the Devolved Administrations to ensure lessons are learnt and best practice is shared.

A more detailed response to the various recommendations made by the Select Committee is set out below.

Financial Viability Ratings

THE COMMITTEE'S COMMENTS AND RECOMMENDATIONS:

·  We conclude that the failure of the Regulator's published financial assessment to reflect the serious weakening in the financial viability of the Cosmopolitan Housing Association raises questions about the operation and usefulness of the Regulator's financial viability ratings. In this case the assessment of financial viability was neither timely nor useful. The eventual downgrading of Cosmopolitan to the lowest grade amounted to a futile exercise in locking the stable door long after the horse had bolted. We are not surprised that Moody's paid such close attention to the episode. (Paragraph 19)

·  Ratings published by the Regulator should be reliable and capable of being understood at face value. The practice of using governance ratings to signal concerns about financial viability lacks openness and is confusing. It is misleading to the taxpayer and tenants, and potentially also to lenders who, it appears, are expected to understand the coded message from the Regulator. We conclude that the practice should cease. We recommend that the Regulator publish accurate financial viability ratings. (Paragraph 22)

·  Poor governance can undoubtedly undermine the financial viability of a provider but we are not persuaded by the argument that it is "almost inevitably" the cause of financial failures in general. Financial viability and governance ratings serve different purposes and assess the providers against different standards. The distinction between governance and financial viability must be maintained. (Paragraph 23)

THE REGULATION COMMITTEE'S RESPONSE:

We agree that our published ratings must be reliable and capable of being understood at face value. This is the basis of our approach and internal assurance processes. We consider that our financial viability ratings are robust and accurate.

We understand why the Select Committee had questions about the fact that we have issued very few non-compliant viability judgements. There are very good reasons why failure to meet the regulator's viability standard should be a rare event. The social housing sector has a strong balance sheet and predictable revenues. Managed well, social housing businesses should not get into financial difficulties, and this should remain the case notwithstanding the evolving risk profile of the sector. Furthermore, we regularly review the financial viability of providers. If we have concerns we will intervene with the aim of preventing the problems becoming serious enough to represent a breach of the standard.

As regulator we make it clear in our standards, wider communications and in routine engagement that we expect Boards to have an iron grip on viability issues and risk management.

We issue separate judgements on governance and financial viability. We agree with the Select Committee that our respective gradings serve different purposes. If we have concerns over compliance with our viability standard that will be reflected in the grading we award on viability. But as the Select Committee acknowledges, poor governance can undermine the financial viability, which reinforces the importance of spotting governance problems early and preventing them developing to the point where they have an impact on viability.

We have a duty to be proportionate, consistent, transparent and accountable[1]. Where we think we will need to revise a judgement we will aim to do so as soon as possible, accepting that this can on occasions take time (particularly where we are awaiting further evidence).

When we believe there is a material risk that a provider will breach either (or both) the governance or the viability standard, the current judgement is removed from the HCA website. Since the Select Committee report we have introduced a system of indicating on our website that our judgement is under review to improve transparency.

In the light of the Select Committee's recommendations, we have also reviewed the straplines we use for non-compliant judgements on our viability standard. In future these will make it absolutely clear that V3 and V4 straplines indicate non-compliance with the viability standard. Revised straplines will be published in November, following discussions with key stakeholders such as lenders and Credit Rating Agencies.

We believe these straplines are clearer and better reflect that a breach of our viability standard is a very serious matter.

Communication with the sector and the use of statutory powers

THE COMMITTEE'S COMMENTS AND RECOMMENDATIONS:

·  It is reasonable, and to be expected, that the Regulator is in regular communication with the sector and on occasion an informal approach will be sufficient. We are concerned when the informal approach becomes a Regulator's exclusive method of operation. First, it is inconsistent with transparency. Lack of transparency makes it difficult for lenders, tenants and taxpayers to see how much and what action the Regulator is taking. Second, there is a risk that this approach may lead to too close a relationship with providers thus compromising the independence or judgment of the Regulator. Third, if the sector knows that that the Regulator cannot, and will not, use his formal powers, that must undermine his position and effectiveness. (Paragraph 26)

·  We conclude that the Regulator's relationship with providers has to have a greater element of transparency. In addition, the Regulator should have available powers which he can use when a social housing provider fails to meet the required standards. We make two recommendations. First, that the Regulator work with other regulators to examine whether they have addressed his concerns that use of statutory powers may be counter-productive. Second, although the new regulatory regime is still at a relatively early stage, an experienced former regulator in another sector should review the operation of social housing regulation. The review's report, conclusions and recommendations should be published. (Paragraph 27)

THE REGULATION COMMITTEE'S RESPONSE:

We consider that our regulatory approach is consistent with our statutory objectives, including our objective to ensure that providers are financially viable, and the duties placed upon us, including our duty to minimise interference and (so far as is possible) exercise our functions in a way that is proportionate, consistent, transparent and accountable.

It is the responsibility of providers to ensure they comply with our economic standards. Where we have concerns about a provider's compliance we expect the provider to remedy the problems identified in a timely manner.

Typically, we will have a dialogue with the provider about its concerns and how they might be addressed. If this relatively informal approach was our exclusive method of dealing with an issue we would share the Select Committee's concerns. However, dialogue with providers is part of an approach that also includes publication of a full and frank judgement where we think our concerns merit a downgrade. Our strategy can also include the provider commissioning an external review—with terms of reference agreed by us—to assess potential weaknesses and identify a way forward. On occasion, providers codify their proposed action plan to address concerns in a Voluntary Undertaking. If a provider fails to deliver the terms of a Voluntary Undertaking it is open to the regulator to use its enforcement powers.

If providers are willing and able quickly to remedy problems themselves us using statutory powers would usually be disproportionate. However, we have always made clear that a failure by a provider to respond well to our concerns will lead to statutory action where this is required. Based on our engagement with the sector we are persuaded this is well understood.

We agree with the Select Committee that it is important to understand how other regulators work and to learn from them. We have three Regulation Committee members with experience of other regulatory environments and we regularly look at how other regulators address common problems. We also have periodic meetings with the devolved administrations' housing regulators.

We agree with the Select Committee that now is a good time to reflect on how regulators are grappling with issues similar to those we face, in particular in terms of dealing with financial viability of regulated entities. This is something that our predecessors did from time to time, and we are keen to do on a regular basis. We judge that it is a good time to start another review of this type, so we are proposing to review the work of other relevant regulators and other bodies (for example credit rating agencies) that undertake similar work to our own. This will report back to Regulation Committee on key differences and make recommendations on how we can develop our approach. We will update the Select Committee on this when the review is complete.

We are however conscious that the last review of regulation concluded three years ago, and the current legislative settlement that reflects this review took effect in April 2012. Many of the changes now affecting the market, for example welfare reform and the affordable rent regime, are also relatively new. We are therefore concerned that a further external review now could cause market uncertainty and come at a stage before recent changes have bedded in to be properly evaluated.

Review of the protection of social housing assets

THE COMMITTEE'S COMMENTS AND RECOMMENDATIONS:

·  We commend the Regulator for seeking to update the regulatory regime as the sector changes. We also welcome the fact that the Regulator is considering the need to protect social housing assets.(Paragraph 29)

·  We support the aim of protecting social housing assets and tenants from the risks associated with non-social housing activity by providers but the current proposals lack flexibility and appear to cut across the system of co-regulation which gives providers' boards the responsibility to assess and mitigate risk. We welcome the decision of the Regulator to revise his proposals and to consult again. (Paragraph 33)

THE REGULATION COMMITTEE'S RESPONSE:

We welcome the Select Committee's conclusions.

The Regulator's resources

THE COMMITTEE'S COMMENTS AND RECOMMENDATIONS:

·  The providers' submissions about the resourcing, capacity and capability of the Regulator gives us grounds for concern. It appears that the current arrangements may not be adequate and need improvement. The fact that the Regulator himself has identified a need to increase significantly his capacity to make high level business judgments about providers appears to confirm the providers' views. The re-organisation will have to be carried out without any additional resources and without a hiatus diminishing the Regulator's scrutiny. We request that, once the re-organisation has been completed, the Regulator provides us with a report on the Regulation Committee's capacity and capability to carry out its work. (Paragraph 37)

THE REGULATION COMMITTEE'S RESPONSE:

The social housing market is changing and it is important that the regulator has the capacity to deal with a market that is growing more complex.

The proposed restructure of the Regulation Directorate within the HCA, which includes a number of new senior roles, will help ensure that we have a suitable level of capacity. However, the market is evolving quickly and we will keep our resourcing requirements under regular review.

We will provide a report to the Select Committee on our capacity and capability once our planned reorganisation has bedded in and by September 2014 at the latest.

Consumer regulation

THE COMMITTEE'S COMMENTS AND RECOMMENDATIONS:

·  Having reviewed the evidence we are not completely assured that the Regulator is discharging his responsibilities as we would expect. First, he has interpreted his remit as narrowly as possible. In responding to our report we request that he explain and justify his application of a test that breaches of standards should be systemic when he assesses serious detriment caused to tenants by a breach of consumer standards. Second, we formed the impression that the Regulator has treated consumer regulation as a distraction from his main job, economic regulation. (Paragraph 42)

·  We recommend that the Regulator, working with a body such as the British and Irish Ombudsman Association, bring forward arrangements for an annual evaluation of the Regulator's handling of consumer complaints by an external, independent reviewer to ensure that it meets the criteria of independence, fairness, effectiveness, openness and transparency and accountability. The reviewer should be appointed by the end of this year and complete the first evaluation in time to publish it no later than Easter 2014. (Paragraph 42)

·  In the first year of operation, 310 complaints were wrongly directed to the Regulator, who then advised tenants of the correct channel. This is not only a waste of the Regulator's time and resources, but frustrating for tenants. We recommend that the Government, working with the sector and the Regulator, should clearly publicise the correct complaints procedure regarding consumer standards to avoid misdirected complaints.(Paragraph 43)

THE REGULATION COMMITTEE'S RESPONSE:

We are concerned that the Committee formed the view that consumer regulation was a 'distraction' from economic regulation. We are fully committed to carrying out our role in consumer regulation. We have undertaken and will shortly publish a detailed review of the first year of operation of our role.

We draw the Committee's attention to the fact that the Localism Act made substantial changes to our consumer regulation remit, in line with the DCLG review of regulation. We retained powers to set consumer standards, but our power to collect data on performance relating to these standards was removed, and as a result we can no longer proactively seek assurance that our consumer standards are being met. Furthermore, the Localism Act means that we can only use statutory powers where there has been a breach of a consumer standard and this breach has given rise to serious detriment or is likely (without our intervention) to give rise to serious detriment in the future.

These legislative changes, and the subsequent DCLG Direction to the Regulator on tenant involvement and empowerment, were designed to create a system in which problems are resolved locally, for example through Tenant Panels and local councillors.

When dealing with any complaint, we examine the materiality of the presenting issues before determining that a standard is breached, in line with our statutory duty to exercise our functions in a way that is proportionate. As a result, we judge that in most consumer cases where we have the power to intervene the issues are likely to be systemic. However, this will not always be the case. We published details of the first "serious detriment" case on 17 October. This was a case where a provider failed to conduct gas servicing in line with its statutory obligations. Although the issue was confined to one property, the gravity of the issue was such that we felt the test outlined above was satisfied. In that case the provider took action to address the problem before there was actual harm to tenants.

As noted above, we will shortly publish a detailed review setting out our experience of the new system. This will explain how the regulator makes its judgements, and provide examples of cases we have dealt with. We are confident that this review will help stakeholders understand the role of the regulator under the new legislation. We would welcome a dialogue with the Select Committee if it has further questions in the light of this work.

We agree with the Select Committee that there is some confusion about the role of the Regulator and the separate process of dealing with complaints, which is a matter for providers, local scrutiny and the Ombudsman. Our role is to establish whether there have been material failures such that a provider has breached a standard, and to establish whether those failures have or could give rise to serious detriment. Although it is possible that complaints could provide evidence of such a failure (per the example above), resolution of the complaint itself is ultimately a matter for the Ombudsman. We shall work with DCLG and the Ombudsman to help clarify the position.

November 2013


1   Section 92k (5)(b) HRA08 as amended by the Localism Act 2011 Back


 
previous page contents


© Parliamentary copyright 2013
Prepared 28 November 2013