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Lessons learned for RPs from recent regulatory downgrades

Posted: 26/03/2021

The recent slew of regulatory judgements issued by the Regulator of Social Housing (the Regulator) contains some interesting learning points for the sector. Most of the recent regulatory judgements were strapline judgements, confirming existing gradings. However, there have been a number of more detailed narrative judgements published coming out of in-depth assessments or reactive engagement carried out by the Regulator.

Some of the emerging narrative and trends we can see from these recent regulatory judgements clearly reflect the difficult operating environment registered providers of social housing (RPs) are currently grappling with. Our colleague’s, Ellen Damlica’s, recent article discusses the difficult balancing act facing RPs as they consider their strategic choices against a backdrop of various political, economic and social upheavals.

A number of recent regulatory judgements highlight the difficulties RPs are facing when assessing and prioritising their activities. Below, we discuss some key themes and lessons arising out of them.

Importance of good quality data and governance

The Regulator has continued to emphasise the need for good quality data to aid robust and effective decision making within organisations. Recent regulatory judgements have criticised RPs where “decision-making has not been consistently supported by accurate data”. Inadequacies in data quality can impact a board’s ability to effectively manage risk and be indicative of having poor control and assurance frameworks. Without effective and robust systems in place within organisations, a board’s ability to effectively control and oversee its organisation is completely undermined. In certain circumstances this has led to the Regulator downgrading organisations.

As the Regulator discussed in its most recent Sector Risk Profile, having accurate and up-to-date data is fundamental for a board to be able to monitor compliance and performance in areas such as rent setting, stock condition, health and safety, financial management and loan covenant monitoring and meeting consumer standards in general.

Care and support

The care and support sector continues be under particular strain, not least due to the inherently low operating margins for those operating within the sector. This has been further exacerbated by the impact of the COVID19 pandemic.

We have seen a number of care and support providers exiting arrangements recently where they are no longer viable. RPs operating in the sector are increasingly having to make difficult strategic decisions over the future of their care and support activities, including how they can ring-fence risks and shelter any losses from the core social housing business. This can include critically assessing the viability of existing contracts and whether it’s possible to terminate contracts that are no longer sustainable.

Calls for care staff, alongside NHS staff, to receive a pay rise have been widespread. However, in a sector where margins are minimal, even offering the living wage to care staff may be unviable for some providers. These difficult decisions may, at times, feel like they are at odds with the housing sector’s social purpose. However, the Regulator has continued to warn that boards should regularly appraise the performance of their diversified activities, including considering difficult decisions regarding whether to continue with activities where losses are being incurred.

Development activity and market sales

The Regulator continues to caution RPs on the risks associated with development and market sales activities and organisations’ reliance on income generated from this activity, as discussed in the narratives provided for various viability gradings. RPs play a key role in expanding the nation’s housing supply.

However, the housing market continues to be somewhat uncertain. The pre-pandemic slowdown was felt in some parts of London and the pandemic-related significant economic uncertainty is creating further development risks. Further disruption is expected as we feel the true impact of Brexit and the pandemic. These changes in the market could have wider implications for RPs’ development funding models and business cases as well as requiring regular re-running of stress-testing to ensure risks are appropriately monitored and managed.

RPs need to carefully manage their exposure to risks, particularly those associated with diversified activities including development for sale activities. Boards must be suitably skilled to oversee these activities and ensure that any diversified activities have a clear strategic role in meeting your organisation’s purposes. The Regulator will seek assurances from organisations that the risks associated with the diversified activities must be commensurate to the rewards achieved and the RP’s purpose.

Regular critical assessment of how these activities are reviewed and managed should be supported by robust governance arrangements and structures to ensure that proper control frameworks are in place.

Building safety and fire safety

Building safety and fire safety remain high on, if not at the top of, RPs’ list of priorities. In relation to building safety in particular, there continues to be little certainty over measures to be adopted or how any remediation works will be funded. Fourteen of the largest landlords in the UK have recently revealed that they were anticipating spending approximately £1.19 billion over the next five years on building safety.

Our article here sets out further detail of Robert Jenrick’s recent announcement regarding the new building safety regime. However, recent commentary in the sector agrees that the announcement falls far short of what is required to fix this crisis. In the meantime RPs are faced with mounting interim fire safety costs including increases in insurance premiums, interim costs of remediation works, waking watch costs, costs of building checks and carrying out fire safety assessments.

We discuss below how the Regulator is taking this into account when assessing RPs’ viability gradings. However, it is clear that investments relating to fire safety and remediation work will continue to have a significant financial impact on RPs going forwards.

Viability ‘regrades’

A number of gradings have been published that have moved organisations from a V1 grading to V2. Often these ‘regradings’ are accompanied by commentary discussing organisations’ increasing investment in short- and medium-term stock investment commitments including fire safety work for existing stock that could weaken organisations’ financial performance in the coming few years. It may be that we continue to see this type of commentary as providers begin to assess the level of investment they will be required to make in their existing stock, including the need to remediate historic fire safety defects and how this investment will be funded.

Commentary has also discussed the reliance on income generated from sales to meet interest costs. There is a risk that the increased investment required in existing homes in combination with the need to manage the exposures associated with the organisation’s development programme reduces its capacity to respond to adverse events.

Rent compliance

Compliance with the Rent Standard continues to be an issue within the sector and within some recent high profile regulatory judgements. Rent setting was listed as one of the key risks within the latest Sector Risk Profile published by the Regulator in November 2020. We have published an article explaining some of the common issues, risks and key considerations when exploring rent setting compliance in further detail.

Sign of the times

It is clear that recent regulatory judgements reflect the challenging operating environment that RPs are currently navigating and how organisations are coping and responding. The housing sector’s list of priorities has never been more demanding and must be balanced against tenant and other stakeholder expectations. RPs must remain alert to the range of risks and critically assess their own areas of weakness.

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