Regulation Committee of the Homes and Communities Agency

Written evidence from Luminus Group (HCA 14)

EXECUTIVE SUMMARY

1. There is a clear business case for streamlining, not increasing, the burden and scope of social housing regulation, with benefits to the taxpayer, the activities of social landlords and the communities they serve.

2. The existing regulatory burden will be exacerbated by the new proposals. The proposals for ring-fencing social housing assets and "living wills", will constrain innovation and harm local people (most especially vulnerable ones), as socially responsible businesses are restricted in their aspirations to meet community needs.

3. There already is ample regulation of the social housing sector through numerous bodies, including the Health and Safety Executive, Housing Ombudsman, Companies House, Charity Commission, the stringent demands of funders, the detailed requirements of external auditors, review by local authorities, buttressed by accountability to local councillors and Members of Parliament.

4. Social landlords and tenants feel that the nature of social housing regulation, both current and proposed, seriously threatens their effectiveness in their mission as community anchors and their foundational role in supporting a lively economic recovery. Many believe, but for obvious reasons are apprehensive about stating publicly, that the existing framework generates unnecessary interference and excessive bureaucracy.

5. Some, like Luminus, have achieved privately funded house building programmes, with minimal public grant being accessed. Luminus has sustained the highest levels of customer approval and employee engagement in this and other business sectors, and has established a track record of excellence with a strong national brand.

6. These successes have been delivered in a context of burdensome regulation, that often has felt disproportionate. It routinely interferes with the effective running of the business and seriously diverts management time and effort. In that regard, the process of regulation has, in itself, generated business risks, with Board and senior management being frequently drawn into lengthy and time consuming "regulatory engagement".

7. The argument for increased regulation appears not to have been made with proper consideration for the impact on social landlord businesses and the communities they seek to serve, but appears to have sprung from a distant, desk-top assessment of forms, ratios and knee-jerk assumptions, fuelled by a single problem in the sector (Cosmopolitan). Tenants have expressed surprise that a government department is being increased in size and cost during a time of public austerity. They cannot understand how such public expenditure will enhance the quality of their lives when their own social landlord experience is already positive and meeting their requirements.

8. The new proposals fail to grasp that, for many Registered Providers, the wider role of social and economic wellbeing of communities is their core business. While there is an important moral dimension to this, effective social landlords also clearly understand the commercial imperative underlying this aspiration: where communities thrive, neighbourhoods are desirable, homes are in good order and thus property assets continue to appreciate in value.

9. For successful social landlords who do not rely on government grant, and where tenants are in favour, there is a strong case for deregulation of the sector. Former arguments that regulation provided better financial terms for social landlords no longer apply.

10. The Committee is asked to consider whether there continues to be a need for a specific regulator for the sector, when there already exists an extensive framework for regulation of social landlords.

11. If regulation is thought to be necessary by a specific social housing regulator then it should be co-regulatory, proportionate and "light-touch" in approach, with an emphasis on minimising interference. It should be based on an annual self-certification by the Board that it has assessed and managed risk.

12. Any additional regulation over and above self-certification should be focused only on for-profit providers and those not-for-profit registered providers that are very high risk.

13. There should be no ring-fencing that will fetter not-for-profit providers.

INTRODUCTION

14. Luminus aims to be an example of the social housing sector’s Premium Brand, serving some 45,000 customers across Cambridgeshire. With an undergirding sense of social responsibility, Luminus has succeeded in inspiring employees and customers to coalesce around our "2020 Vision: the Road to Renewal", a programme to rejuvenate communities and transform society so that towns and neighbourhoods are places of achievement and self-determination, with low crime rates and high indicators of quality of life.

15. Since March 2000, we have successfully developed a business model that is built upon cooperation, understanding and a celebratory approach to life and work. Although our access to social housing grant has been extremely limited during that time, we have still managed to develop several hundred much need new homes in the East of England that are recognised for their contemporary design and high quality. We add to this a hands-on, down to earth local management approach, drawing on our staff skills and commitment and energising local support from tenants and street representatives across tenures.

16. Many of our business outcomes that have changed the lives of people and their communities are not measureable by metrics of social housing regulation. Yet, from the perspective of government and taxpayer, our daily interaction in communities - for example, preventing abuse of vulnerable people, undertaking mediation, tackling homelessness and worklessness’, encouraging a joined-up approach among public agencies, stimulating co-operation from private businesses, encouraging social enterprises – are the heart of a strategy enabling UK plc to remain buoyant during the current economic malaise.

17. The Company and its tenants feel that the nature of social housing regulation, both current and proposed, seriously threatens the effectiveness of social landlords in their mission as community anchors and their foundational role in supporting a lively economic recovery.

THE BUSINESS CASE FOR STREAMLINING REGULATION

18. There is a clear business case for streamlining, not increasing, the burden and scope of social housing regulation, with benefits to the taxpayer, the activities of social landlords and the communities they serve.

19. Most social landlords’ experience of social housing regulation is that it is burdensome and disconnected from the real world in which they operate, where our focus is on helping and supporting communities, tackling anti-social behaviour, encouraging self-determination and being financially prudent in maintaining homes, while also seeking to build much needed new ones.

20. The Luminus business commenced in 2000, by acquiring 7,000 council homes in a poor state of repair. Since that time we have invested over £150,000,000 in improving tenants’ homes and neighbourhoods. The Company has also maintained a privately funded house building programme, with minimal public grant being accessed. Luminus has sustained the highest levels of customer approval and employee engagement in this and other business sectors, and has established a track record of excellence with a strong national brand.

21. However, these successes have been delivered in a context of burdensome regulation that has repeatedly interfered with the effective running of the business and seriously diverted management time and effort.

22. In that regard, the process of regulation has, in itself, generated business risks, with Board and senior management being frequently drawn into lengthy and time consuming "regulatory engagement". These extensive discussions with, and explanations to, the regulator have grown in frequency and volume as the regulator has morphed from The Housing Corporation to the TSA (2008) and then the HCA (2011). They have had to be repeated as regulatory staff were made redundant or left. The regulator’s demands are resource-hungry, with extensive information previously provided having to be sent again. The substantial amount of repeat information the Social Housing Regulator deems necessary to perform its function appears disproportionate to the value of collecting that data.

23. Many social landlords believe, but for obvious reasons are apprehensive about stating publicly, that the existing framework generates unnecessary interference and excessive bureaucracy. A government enquiry in 2007 recommended that this burden of regulation be removed, becoming risk based and "light touch". The opposite has occurred and many professionals and tenants find it difficult to assess how social housing regulation delivers value for money to the tax payer. Social housing regulation appears to have become an end in itself, not a contributor to improving the effectiveness of social housing. Moreover, the current predicted growth of the regulator’s manpower and activities adds to these concerns.

24. The argument for increased regulation has not been made with proper consideration for the impact on social landlord businesses and the communities they seek to serve, but appears to have sprung from a distant, desk-top assessment of forms, ratios and knee-jerk assumptions due to a single problem in the sector (Cosmopolitan). Tenants have expressed surprise that a government department is being increased in size and cost during a time of public austerity. They cannot understand how such public expenditure will enhance the quality of their lives when their own social landlord experience is already positive and meeting their requirements. They would be furious if they knew that, additional to their taxes, their rents payments might be diverted to pay for the regulator’s increased expenditure.

25. The existing regulatory burden (which includes frequent contact from regulation staff by email, telephone and in person; financial questionnaires; statistical data returns; annual accounts; fraud returns etc) will be exacerbated by the new proposals. We are concerned that the proposals for ring-fencing social housing assets and "living wills", will constrain innovation and harm local people (most especially vulnerable ones), as socially responsible businesses are fettered in their aspirations to meet community needs.

26. There already is ample regulation of the social housing sector through numerous bodies, including the following:

· Health and Safety Executive

· OFCOM

· Charity Commission

· Companies House

· Financial Services Authority

· HMRC

· Equality Commission

· Information Commission

· Housing Ombudsman

· Fire Service

· Trading Standards

· Environmental Health

· Pensions Regulator

· External Audit

· Banks and other private funding institutions

· Local authorities

· Local authority councillors

· Members of Parliament

27. These bodies, groups and individuals cover a wide range of activities, interests and statutory requirements. Their detailed systems and processes focus on the performance, viability, legal compliance, good governance and responsible operation of social landlords. Funders, for example, engage very robustly with social landlords, requiring Boards and senior management to maintain effective, viable business plans and strategies. This is mirrored in the regulatory, monitoring and scrutiny by the many others referred to above. In this way, social landlords are continuously held to account and challenged.

28. In addition to these statutory processes, social landlords voluntarily submit to a wide range of independent sources of scrutiny, including Investors in People, ISO 9000 Standards, RoSPA and numerous external assessors that measure the business effectiveness against a range of metrics applicable within the best-run commercial organisations. Ultimately, social landlords are regulated by the strength of public opinion – their tenants and the wider community – that is monitored by independent press and media who take considerable interest in failure. Finally, courts have substantial powers to enforce the rights of all stakeholders. All of these are strong incentives for Boards and senior management to strive for success.

29. Many social housing businesses have developed robust business models, are acknowledged for excellent customer service and have a strong community presence. They draw on the capacity of their Board and senior management team to anticipate and respond to the numerous challenges encountered in a rapidly changing social and economic environment.

30. By contrast, the system of social housing regulation is based upon an approach developed in the 1980s that itself has not matured sufficiently to understand the sector’s capacity for business excellence. Regulatory principles appear to be grounded in prior judgements, sometimes evidencing political standpoints. While the sector has continuously challenged itself to be self-critical and to improve, there no obvious evidence that the regulatory system has mirrored this.

31. We share the National Housing Federation’s (NHF) concerns, expressed in its document "Protecting social housing assets in a more diverse sector, June 2013" that there is a considerable risk of "mission creep". An experienced and diverse Board and senior management, and not additional regulation, is the key to meeting the challenges of the external operating environment. Our engagement with the regulator demonstrates no added value to the business, and in fact has diverted the Board and senior management from the essential task of running the business and developing creative solutions to the challenges presented by the economic downturn and the social problems that are being generated in its wake.

COMMENTS ON THE NEW PROPOSALS

32. The emerging proposals as published by the HCA give cause for concern. We concur with the NHF’s comment that "there is no need to regulate the flow of funds within the group by means of controls such as ring-fences".

33. The new proposals fail to grasp that, for many Registered Providers, the wider role of social and economic wellbeing of communities is their core business. While there is an important moral dimension to this, effective social landlords also clearly understand the commercial imperative underlying this aspiration: where communities thrive, neighbourhoods are desirable, homes are in good order and thus property assets continue to appreciate in value.

34. As an example of adding value to communities that then benefits both the taxpayer as well as the citizen, Luminus has successfully developed a business model that engages communities in volunteering, training, education and employment. Recent research from the Housing Associations Charitable Trust (HACT) states that every volunteer is worth upwards of £11,000 to the local economy; placing people in employment is valued at £8,500. For Luminus that is an investment of £660,000 in the local economy in 2012-13. The proposals of the HCA will have a detrimental impact on the social value of our activities, and our ability to innovate.

35. In addition, there is little recognition in the proposals that, within an increasingly restricted grant regime, the need to cross-subsidise the funding of new social homes through other activities is not merely desirable, but vital.

36. The proposals to ring-fence such activities also fail to recognise that the sector’s increasing focus on mixed tenure developments is not purely driven by financial considerations. It is well understood throughout the sector and by our local authority partners in particular that mixed tenure developments are vital in creating balanced and vibrant communities.

37. The regulator should focus its attentions on for-profit providers and those engaged in high-risk activities, such as those whose business plans are predicated on the need to sell affordable homes.

38. The new proposals, partly a response to the problems experienced at Cosmopolitan, are an over-reaction, and wrongly imply a failing sector in need of intervention. This isolated incident should not be used to straitjacket the sector. Indeed, for successful social landlords who do not rely on government grant, and where tenants are in favour, there is a strong case for deregulation of the sector.

39. Former arguments that regulation provided better financial terms for social landlords no longer apply. There is now ample evidence that funders devise their own credit rating of each organisation and do not rely on a sector wide rating. In cases of repricing by lenders, the margin proposed is similar to that offered to private development companies. Indeed, funders are now taking every opportunity to reprice loans in the sector simply to bolster their own balance sheets with no reference to risk. Also see attached article by Derek Joseph, in Social Housing March 2013.

40. We support many of the comments put forward by the NHF, including "…in the spirit of co regulation, it should be for the board to decide what form of risk management strategy provides the necessary assurance." There is also the risk that the regulator will seek to acquire commercially sensitive information through its insistence on being provided with "living wills", whereas all it should need is an externally audited statement that such a document exists and is fit for purpose.

CONCLUSION AND RECOMMENDATIONS

41. In discussions with others in the sector, it is clear that the diversion of resources created by the current regulatory framework will be exacerbated the new proposals. Moreover, they fail to address the concerns of social landlords about the burdensome and intrusive nature of regulatory practices. Furthemore, the new proposals distance the HCA even further from earlier promises and expectations of a lighter touch, co-regulatory approach that arose from government research and public consultation.

42. In light of this, and having consulted others, our recommendations are as follows:

a. The Committee is asked to consider whether there continues to a need for a specific regulator for the sector, when there already exists an extensive framework for regulation of social landlords.

b. If regulation is thought to be necessary by a specific social housing regulator then it should be co-regulatory, proportionate and "light-touch" in approach, with an emphasis on minimising interference. It should be based on an annual self certification by the Board that it has assessed and managed risk.

c. Any additional regulation over and above self certification should be focused only on for-profit providers and those not-for-profit registered providers that are very high risk.

d. There should be no ring-fencing that will fetter not-for-profit providers.

June 2013