In the fourth part of our series on contract management pitfalls, we look at the risks arising out of varying the terms of construction contracts.
The key revised changes are:
- Robust and effective risk management approaches built around "multi-variate" stress testing that should be live tools for RPs as they pursue their businesses. Boards will need to decide explicitly the acceptable levels of risk for their business and have mitigation strategies for what to do if unacceptable levels of risk emerge in key activities.
- The need for enhanced and comprehensive RP asset registers which identify all liabilities associated with the related assets and activities. Much of this work is already required for an effective asset management strategy that delivers the VFM standard, but will also be needed in the future as a tool to help mitigate risk. Therefore, while the explicit living will proposals have been set to one side, much of the same work will be needed to make sure that, in a rescue situation, there can be immediate access to accurate data on assets, liabilities and funding for potential disposals etc. Do see the separate article on asset registers.
- The need for RPs within wider unregulated groups to comply with enhanced requirements that fall short of the previous ringfencing proposals (details below).
- The introduction of the HCA's first ever Code of Practice (“the Code”) that sets out what compliance with the new Governance and Financial Viability Standard (“the Standard”) looks like, while leaving some flexibility for RPs to comply with the Standard in innovative ways in the future.
Further details of the HCA’s proposals, are set out below.
1. Protection of social housing assets
- The revised Standard includes, as a specific required outcome of the Governance element, the need to protect social housing assets.
- A requirement similar to that already imposed on charities will be included within the Standard so that arrangements with third parties cannot “inappropriately advance” their interests (for example, by paying an unreasonably high price for services received). However, the Code clarifies that transactions intended to promote charitable or social objectives will not be caught.
- The inclusion of new explicit expectations which reflect the Regulator’s desired focus on risk management as a core business activity. This includes a requirement for all RPs to have an asset register which meets specified requirements and to undertake stress-testing as a living exercise, with resultant mitigating strategies being put in place (for example, planning at what point an RP should stop developing). This proposal is not unexpected, and we have recently run workshops for over 50 RPs on asset registers and recovery plans, including discussion over what needs to go into comprehensive asset registers, and how they can be used to inform a well thought out risk management strategy with identified mitigation approaches.
- The condition on category 6 of the General Consent for disposals (which places restrictions on intragroup on-lending of facilities secured on social housing assets) will be extended to provide that on-lending to for-profit RPs or unregistered organisations must be for social housing purposes and to organisations operating in England only.
- There are specific requirements included for RPs with non-registered parents. These include the arrangements which must be in place to ensure that a subsidiary RP’s regulated activities are not jeopardised and that agreements are not entered into with the parent which could have a material negative impact on the RP’s social housing assets. These reflect the arrangements which have already been put in place in some groups with non-registered parents to date to meet the requirements of paragraph 1.4 of the current standard. RPs with non-registered parents will also lose the right to use category 6 of the General Consent for disposals (specific consent will be needed).
- New restrictions are also proposed for profit-making RPs, requiring them to undertake social housing activities in a separate legal entity from other activities (up to a de minimis level where those other activities represent 5% of capital or turnover). Profit-making RPs will also be subject to new restrictions on the use of disposal proceeds, in relation to proceeds arising from social housing stock acquired from a local authority or non-profit RP.
2. The need for strengthened governance requirements and greater regulatory interaction
- A new specific expectation on every Board having appropriate skills to effectively manage the range of activities carried out by their RP. This could have a particular impact for traditional LSVT RPs which retain the “third-third-third” Board model or tenant-led or fully mutual RPs, which carry out diversified activities. The message from the HCA here is that if Boards do not have appropriate skills to carry out a particular activity then they shouldn’t be doing it. There is also a renewed emphasis on ensuring there are an appropriate number of independent board members on every RP’s Board, although this is stated not to undermine current co-terminous Board arrangements.
- The new Code on the Standard, which is intended to be illustrative of best practice for RPs, although the Regulator has stated it will have regard to the Code when assessing compliance.
- Strengthened requirements (that RPs will “communicate with the Regulator in a timely and accurate manner”) on reporting and transparency, including a requirement for Boards to certify on an annual basis that they continue to meet the Standard.
3. Registration criteria
- At present, applicants for registration are required to comply with the Financial Viability elements of the standard and demonstrate a reasonable path to compliance with the Governance elements. This will be amended so that applicants will need to demonstrate compliance with both elements of the Standard at the point of registration. The Regulator has indicated that assessment of an applicant’s compliance with the Standard will be on the basis of the stage their business is at when it registers which suggests there may be some flexibility around this.
- There are proposed changes to constitutional requirements for RPs, as well as proposals to permit the relatively new corporate vehicle of charitable incorporated organisations (“CIOs”) to register. This is a fairly unexpected development bearing in mind the perceived reluctance of lenders to lend to CIOs.
4. Changes to the rent standard (following DCLG’s Summary of Responses to its consultation on ‘Rents for Social Housing from 2015-2016’, together with a revised Direction and Guidance, as incorporated into the consultation)
- Social rents should continue to be set on the current basis and should increase by no more than CPI + 1% a year; this will be the policy for the next 10 years.
- The +£2 addition to support convergence to target rents will end. Some waivers will be available where this change would threaten the financial viability of individual RPs – the detail of that is still to be finalised, but seems to acknowledge the current financial issues facing some RPs where this change materially undermines established business plans.
- The tolerances (5% for general needs and 10% for supported housing) will be maintained.
- Rent caps will be maintained: the caps will be reviewed annually by CPI + 1.5%.
- Affordable rents should continue to be set on the current basis and will increase by no more than CPI + 1% a year.
- “Stay to pay” proposals – RPs will be able to charge up to market rent levels to those tenants earning high incomes specified as more than £60,000 per household income (although charitable RPs should consider the extent to which this is the best use of their charitable assets).
The Regulator has expressed a continuing commitment to co-regulation and seems keen not to undermine the principle. Given events in the last two years within the sector, namely the Cosmopolitan situation and recent downgrades over failure to comply with the VFM Standard, it is not surprising that the Regulator is taking the opportunity to “amplify” a number of areas within the current Regulatory Framework. It will be interesting to see how a more prescriptive approach will sit with the principle of co-regulation. It appears that sacrifices to the freedom of co-regulation will be needed from RPs in order to ensure the ultimate goal of ensuring tenants’ homes are protected.
For more information
You can find a link to the consultation here. Responses to the consultation questions posed are required by 19 August 2014.
Please feel free to circulate this briefing internally within your organisation, including to your Board Members. We would also be happy to facilitate Executive team or Board discussions on the consultation document and future proposals for regulation – to discuss this or any queries arising in connection with the proposed changes please contact one of the following:
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