Regulation Committee of the Homes and Communities Agency

Written evidence from the National Housing Federation (HCA 11)

1.0 Introduction

1.1 The National Housing Federation is the voice of affordable housing in England. Our members, housing associations, provide two and a half million homes for more than five million people.

1.2 Regulation is very important to the success of the social housing sector. The fact that the sector is regulated provides assurance to tenants, to lenders and to key partners such as central and local government. The current regulatory settlement, based on the Housing and Regeneration Act 2008 as substantially amended by the Localism Act 2011, has markedly shifted the balance of regulation so that it is higher-level and more strategic than previously.

1.3 The Federation’s approach has always been to argue for a strategic approach to regulation that avoids the focus on operational details that was the hallmark of previous regimes. This does not amount to "deregulation" as such, nor to "self-regulation"; but it does mean recognising that housing associations are autonomous, self-governing bodies and that the primary responsibility for them rests with their boards. The role of the regulator is not to supervise the board, still less to oversee or second-guess its decisions, but to satisfy itself that the board is competent to direct the association’s business. This approach has come to be known as "coregulation".

2.0 Effectiveness of the HCA Regulatory Committee

2.1 It is very soon to assess the effectiveness of the HCA Regulatory Committee, which undertook its formal duties only in April 2012 when the Tenant Services Authority was formally abolished. The Federation regretted the loss of a separate agency because the role of regulation needs to be kept separate from that of investment.

2.2 We are, however, pleased to acknowledge that the record of the Regulatory Committee to date has been encouraging. It has maintained a clear focus on governance and finance and has avoided getting drawn into operational issues. Moreover, it has successfully managed the serious financial difficulty of Cosmopolitan Housing Group. This was resolved when Cosmopolitan was taken over by a larger association, ensuring that the position of tenants was protected and that lenders incurred no financial loss. The episode was an example of the way the sector works together with the regulator to safeguard tenants’ interests and head off any possibility of a default.

3.0 HCA consultation document

3.1 The Regulation Committee of the HCA has recognised that the operating environment is becoming more difficult and that, partly in response to this, associations are becoming involved in a broader range of activities. In addition, because of the lack of affordable, long-term bank finance as a result of lenders’ response to the financial crisis, housing associations have had to pursue more complex and innovative ways of accessing cheap, long-term funds.

3.2 We agree that this raises issues about effective risk management and that the regulator should expect providers to satisfy themselves, in a demonstrable way, that any risks are well understood and can be mitigated if necessary in order to protect social housing assets. Ring-fencing social housing, so that it is insulated from any failure elsewhere in the business, is an important way of achieving this. However, it is not necessarily suitable in all cases.

3.3 The regulator stresses that registered providers should be able to diversify their activities and undertake a wider range of socially beneficial activities (and indeed they are often encouraged to do so by central and local government), and we argue that the need for this freedom and flexibility means that the regulator should acknowledge the value of other approaches to risk management besides ring-fencing. This will include, for example, the holding of sufficient reserves or unencumbered assets to ensure that the organisation is in a position to mitigate risk.

3.4 This more flexible approach recognises one of the sector’s greatest strengths: its ability to augment public grant with funds raised privately. Since the introduction of the modern funding regime following the Housing Act 1988 and up until to 31 March 2012, housing associations have received some £37bn of capital grants. At the same point in time they had total debt facilities (i.e. private finance) of just under £63bn. [1] This mix is likely to change going forward as private finance becomes even more prominent. In addition, since 2008, more and more private finance has been raised by housing associations selling bonds on the capital markets – in 2012 alone, about £4bn out of a total of £5.4bn was raised in bond finance.

3.5 The Comprehensive Spending Review in 2010 saw capital investment in housing cut by 63% in real terms – the biggest single cut to any capital budget across government. Despite this, housing associations have committed to deliver 170,000 new affordable homes over the period 2011 to 2015, and remain on track to do so.

3.6 This results, in part, from the affordable rent regime, which means that developing associations derive increased revenues by charging higher rents on new homes and a proportion of re-let properties. More significantly, associations have accessed greater levels of private finance and taken on much higher levels of debt. For every £1 the Government has invested in affordable housing during the current spending period, housing associations invested £6 of their own money.

3.7 These figures dramatically illustrate the ability of associations to raise private funds substantially exceeding their level of state support. This is possible because the Office for National Statistics recognises associations as non-state bodies, meaning that their borrowings do not count as public debt (i.e. that they are "off-book" from the Treasury point of view).

3.8 A problem with the regulator’s discussion paper is it treats "diversification" as if it were a single issue, and fails to distinguish the separate questions raised by the registration of for-profit providers [1] . A few of these bodies have begun to register (having become eligible to do so under the Housing and Regeneration Act 2008) but as yet they account for a tiny proportion of the sector (24 registered providers out of 1784 in all). Clearly they present a challenge requiring a regulatory response. However, the issues they raise are about regulating the shifting of funds derived from social housing into a profit-distributing arm of the business. This has nothing to do with whether social housing assets are at risk, and it needs a distinct regulatory response.

4.0 HCA regulatory powers and resources

4.1 On the whole, the regulator’s existing powers should be adequate for its purposes, but there is one relatively technical change that would be helpful. The 2008 Act required all new registered providers to hold stock, a departure from the previous arrangement in which non-stockholding group parents of social landlords could register. Existing non-stockholding parents were allowed a period of grace during which they could remain on the register, and this has now been extended indefinitely. The effect is to create an anomalous position that needs to be resolved; particularly since the HCA has identified regulatory benefits where a group parent is registered. We therefore suggest an amendment to the 2008 Act to give the HCA power to register a non-stockholding body that is a group parent of one or more registered providers.

4.2 The regulator’s resources are another matter. It is currently funded by government, although powers have existed since 2008 for fees to be levied on regulated bodies. Concern has been expressed in the sector about the regulator’s capacity to deal with the more complex issues arising in the current environment, and there have been some suggestions that it would be better resourced if registered providers were required to pay fees. The Federation has reservations about this: there is a risk that the Treasury would simply reduce its contribution by a corresponding account; and the difficulties should not be underestimated of devising a fee-collecting formula that strikes an equitable balance between different sizes and types of provider. It may be more productive to look at ways in which registered bodies may provide themselves, at their own expense, with more robust assurance, available to the regulator, that risks are well managed.

5.0 Consumer regulation

5.1 We think the current approach to consumer regulation strikes the right balance. The fact that the regulator’s powers are available only in cases of "serious detriment" means that it is able to act in the event of really serious or systemic shortcomings on the part of a registered provider. But the "serious detriment" test means that the regulator no longer gets involved in trying to define in detail the relationship between social landlords and their tenants. This leaves space for landlords to engage with their tenants to identify the right approach for each organisation, a process that could not have taken place when a standard set of requirements was imposed centrally. Tenants meanwhile retain access to landlords’ complaints procedures and if necessary to the Ombudsman, in addition to legal remedies.

6.0 Risks to the sector

6.1 Welfare reform poses a number of challenges for the sector. The Federation strongly opposes the social sector size criteria (the so-called ‘Bedroom Tax’). We have long argued that penalising social tenants because they are deemed to have a ‘spare’ bedroom will force thousands into hardship. With so few smaller homes for people to downsize into many will be forced to absorb the cut. Arrears will rise as tenants struggle to pay their rent. This will be compounded by other changes such as the removal, under Universal Credit, of tenants’ option to have their rent paid direct to their landlord.

6.2 The cumulative impact of these changes will reduce the already stretched incomes of households across the country. They will also have a significant impact on housing associations’ operating costs and will pose a strategic risk that will play out over time. Universal Credit, for instance, will not be fully implemented until 2017. Associations are investing significant sums to manage the long-term financial impact of welfare reform. The effect of this will be to reduce the resources that would otherwise have been available to meet housing need.

7.0 EU Procurement rules

7.1 The CLG Select Committee has raised a specific question about the requirement for housing associations to follow EU procurement rules and whether this has any effect on their viability. The answer is that the EU rules, which were (wrongly, we believe) extended to associations in 2002, have made procurement slower, costlier and more bureaucratic and therefore divert resources that could otherwise be applied to meeting housing need. But these additional costs, although unnecessary and unwelcome, can be allowed for in business planning and are therefore unlikely to have a direct impact on viability.

8.0 Conclusion

8.1 We are encouraged by the performance of the HCA Regulation Committee since it assumed its responsibilities in April 2012. However, we stress that it is not possible to arrive at a definitive judgment after such a short time. We agree that the sector is becoming more diverse in several respects and that regulation needs to evolve to take account of this. An important part of this is the management of risk to ensure that social housing assets are protected, but we do not agree with the regulator’s suggested reliance on ring-fencing to the exclusion of other ways of managing risk. A more flexible regulatory approach will still protect existing social housing, but will also allow the sector to continue to bring together public and private resources to meet housing need.

June 2013