Regulation Committee of the Homes and Communities Agency

Written evidence from Home Group (HCA 01)

Introduction

1. The Communities and Local Government Committee has recently launched an inquiry into the economic and consumer regulation carried out by the Homes and Communities Agency (HCA) Regulation Committee.

2. This note provides Home Group’s (Home) contribution to the debate and puts forward a range of recommendations, which focus on the proposed changes recently set out in the HCA consultation document "Protecting Social Housing Assets in a More Diverse Sector: A Discussion Paper on the Principles for Amending the Regulatory Framework for Social Housing in England".

3. Home, a social enterprise and a charity with a turnover of over £300m is one of the UK’s largest providers of high quality housing and supported housing services and products. We house over 120,000 people a year in 55,000 homes in 115 local authority areas in England, Scotland and Wales. We are committed to building 7,000 new homes and bedspaces between 2013 and 2018.

Executive summary

4. We believe that the HCA’s consultation on "Protecting Social Housing Assets in a More Diverse Sector: A Discussion Paper on the Principles for Amending the Regulatory Framework for Social Housing in England" is timely in the context of the changing and more challenging environment within which Registered Providers are now working.

5. However, we do feel that there are a number of proposals in the consultation document which, as they stand, could have a significant adverse impact on the ability of providers to develop social housing - particularly in terms of ring-fencing.

6. This note outlines our views on the proposals in relation to:

· Ring-fencing of social housing assets

· Recovery planning

· Protecting public value on disposal

Ring-fencing of social housing assets

7. In terms of principle, the rationale for ring-fencing is that in the event of a fundamental failure in non-core business activity the ring-fence will prevent social housing assets from being put at risk – effectively, the non-core entity is allowed to collapse without causing contagion to the social housing business. This may work conceptually, but overlooks the practical consequences of allowing a subsidiary to fail – for example, potential job loss, impact on customers, contractors, suppliers and the local economy – which would inevitably impact adversely on the registered provider reputationally. There might also be significant issues in relation to lender confidence and loan covenant compliance.

8. In a challenging environment, with major pressures on income from diminishing grant and changes in the welfare benefits system, it is critical for providers to be able to cross-subsidise social housing development by ancillary non-core activity – e.g. by offering homes for market sale. We are seriously concerned that the blanket requirement for this non-core activity to be capped at a de minimis level in the region of 2.5 – 5% of turnover would have a significant detrimental impact on the ability of providers to deliver on development programmes across the sector.

9. Furthermore, it is unclear from the consultation document what activities fall within the scope of "social housing" and which do not. For example, does social housing encompass care, and if so to what extent? To what extent do other socially important activities such as community regeneration, property management and, in particular, mixed use development (e.g. social renting and market sale) fall within the social housing envelope? Without clarity on this, it will be impossible for providers to identify what activities would be within a social housing ring fence and what would be outside – a major issue in terms of strategy and business planning.

10. In view of these difficulties, and given the diverse range of business plans and capacity across the sector, we would submit that the focus of the regulator should be on ensuring that providers have put in place robust measures for the prevention of business failure, rather than the implementation of a restrictive one-size fits all approach through ring-fencing. We strongly recommend that the ring-fencing proposals be dropped from the review of the Regulatory Framework.

Recovery planning

11. Clearly, it is an overarching imperative for the HCA to ensure the financial viability of registered providers, and as a matter of principle we would obviously support the regulator in considering measures which could enhance the financial viability of registered providers, such as through recovery planning. We submit that the main focus for the regulator is to develop a system that is proportionate, balanced, represents value for money and which acknowledges the pre-eminent role of the boards of providers to co-ordinate recovery planning (rather than the regulator). The sector would not benefit from the introduction of an arbitrary and prescriptive system of recovery planning, which would run contrary to the principle of co-regulation underpinning the Regulatory Framework.

12. We therefore agree that the Governance & Financial Viability Standard should require all providers to have knowledge, oversight and understanding of their assets, liabilities and business operations in a possible failure scenario. This is existing good practice, which most providers already operate.

13. Whilst we agree that the boards of ‘designated providers’ should consider a regularly updated recovery plan aimed at specifying core information in the event of failure, we would be concerned if any code of practice would require the provision of the kind of extensive information and data normally seen in a due diligence exercise. We do not believe that this would be cost-effective, proportionate or meaningful.

14. We also believe that it is important to introduce clear criteria as to what constitutes a ‘designated provider’, required to provide more detailed information under the proposed code of practice. The suggested criteria of size, complexity and exposure to sector risks are nebulous terms, capable of inconsistent interpretation and application.

15. Inevitably, the increased level of information and data trail which providers will be required to maintain as part of the recovery planning process will not only require additional resourcing by providers but – critically – additional resourcing on the part of the HCA itself. Not only will the regulator need to recruit additional regulatory staff to support a significantly increased workload, but they will need to employ staff with a much more extensive skill set than is required at present. We are concerned that this capacity does not currently exist. Its development must be a fundamental pre-requisite to the successful implementation of any change.

Protecting public value on disposal

16. Given that the regulator is under a statutory obligation to ensure that value for money is obtained from public investment in social housing, we understand the desire to regulate against the possibility of asset stripping by for profit providers who – unlike ‘not for profit’ providers – are not subject to a constitutional restriction on the distribution of profits.

17. We are therefore supportive of the principle that the Regulatory Framework should be developed to ensure that the Public Benefit Value (PBV) attributable to a property is retained and used for social housing purposes on the property’s disposal outside the social housing sector. As non-profit providers are required to utilise gain for social housing activities, this places ‘for profit’ providers on a similar footing and would prevent any risk of asset-stripping of publicly funded properties.

18. However, there needs to be greater clarity on what constitutes public expenditure and on how retained PBV funds should be utilised in the sector.

Conclusions / recommendations

19. Home has serious concerns over the ring-fencing proposals outlined in the HCA’s consultation document and urges that they should be dropped. We believe that they are flawed and would have a major detrimental impact on social housing provision. The focus should be on ensuring that Boards of providers have in place considered and robust measures to prevent business failure.

20. In terms of enhancing the financial viability of providers, Home supports the principle of recovery planning, but is concerned that this should be proportionate and cost-effective and led by boards of providers, rather than the regulator. We are concerned that the regulator does not currently have the capacity to support the increased workload that implementing recovery planning would entail.

21. We agree that the Regulatory Framework should be developed so that if a ‘for profit’ provider sells a property outside the sector, any PBV attributable to it should be retained and used for social housing purposes. Greater clarity is needed on what constitutes public expenditure, and on how retained PBV funds should be utilised in the sector.

June 2013