The use of large up-front fees and disproportionate deposits has already resulted in significant cost consequences for one care provider.
A consultation on the revised VFM Standard was issued last week, which will inform revisions on the Standard which it is proposed will come into force from April 2018. The draft Standard demonstrates a significant shift in focus, echoing previous statements from the Regulator regarding the importance of embedding VFM within business planning and assessing whether structures are “fit for the future”.
The new VFM Standard has been trailed for a number of months by the Regulator and will, under the proposals, follow the expected path of replacing the current narrative self-assessment model with a more structured mechanism including performance against VFM Metrics proposed by the Regulator.
These proposed performance Metrics, which are contained in a separate technical note, were drawn from the Sector Scorecard pilot and would include:
- Reinvestment (%);
- New supply delivered (%);
- EBITDA MRI;
- Headline social housing cost per unit;
- Operating margin; and
- Return on capital employed.
The draft revised VFM Standard has clearly stated aims of encouraging investment in existing homes and the delivery of new homes, ensuring consideration of VFM is built into strategic planning and providing methods of greater comparability across the sector in relation to VFM. Key points to note within the draft VFM Standard are:
- There are strengthened requirements for Board accountability in relation to VFM - Boards must show that they have created ‘robust’ procedures for decision making and the review of any potential option which would improve the VFM of the business;
- The requirements go beyond just operational issues and to strategic decision-making – RPs will be required to clearly articulate their medium to long-term strategic objectives, and set measurable targets to show how VFM will be achieved in meeting those objectives. Through the objectives RPs will be required to articulate their strategy for delivering homes that meet a range of needs;
- Boards will be required to regularly consider potential VFM gains, including full consideration of whether their current corporate structure, procurement arrangements, diversification of business and geographic areas of operation remain fit for purpose;
- Boards will be expected to fully understand the return they achieve on assets and to ensure they maximise financial return from resources and assets, in so far as this is consistent with the RP’s delivery of its wider purpose – for example, charitable RPs would need to consider how diversification would fit with their charitable purposes;
- Consideration of VFM will be across entire group structures, not just the RPs within them, and should include whether investment in non-social housing activity is delivering an appropriate level of reward when balanced with risk; and
- There will be a requirement for RPs to publish annually in their accounts evidence on performance against targets, how this compares to peers and measurable plans to address areas of underperformance.
As expected, the consultation confirms the introduction of a Code of Practice to complement the Standard and provide clarity on what is expected of RPs under the VFM Standard (although, as with the Governance and Financial Viability Standard Code of Practice, the Code is for illustrative purposes only). The draft VFM Code of Practice is included in the consultation paper.
For many, and particularly in light of the previous spate of downgrades in relation to VFM reporting the moves towards greater clarity in relation to reporting and requirements of the Standard will be welcomed. However, the draft Standard does demonstrate an interesting move towards potential greater scrutiny of diversified activities, particularly with the requirement to assess VFM across the entirety of group structures. We anticipate we will see an even greater drive across the sector to reduce “wastage” in corporate structures and to consider consolidation.
The consultation, which remains open until 20 December 2017, can be found here.
The Regulator is also seeking feedback on the proposed Metrics, to be submitted by 22 November 2017.
For more information
Please contact Gemma Bell.
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