Conclusions and recommendations

The work of the Regulation Committee of the Homes and Communities Agency

Assessment of financial viability

1. In this report we have not set out to examine the basis for, or quantify, the risks identified by the Regulator as facing the sector. But it must be part of the Regulator's job to be alert to the risks and the perception of risks which could affect the financial viability of social housing providers. From the evidence we received we are satisfied that he is. (Paragraph 10)

2. We note that Moody's, in downgrading its ratings for all but one of the English housing associations in May 2013, cited the Cosmopolitan episode as showing the difficulties in ensuring a satisfactory outcome when a housing association encountered financial distress and the challenges the Regulator would face if it had to step in and protect entities and their creditors in extreme situations. We welcome the Regulator's intention to review lessons from the Cosmopolitan episode and ask for a copy of the review when it is completed. We are therefore concerned by press reports that DCLG has blocked the commissioning of a review. In responding to our report we ask the Government to explain whether it has blocked the review and, if it has, why and how it assessed the consequences of its decision for the independence of the Regulator and the regulation of the social housing sector. (Paragraph 14)

Financial viability ratings

3. We conclude that the failure of the Regulator's published financial assessment to reflect the serious weakening in the financial viability of the Cosmopolitan Housing Association raises questions about the operation and usefulness of the Regulator's financial viability ratings. In this case the assessment of financial viability was neither timely nor useful. The eventual downgrading of Cosmopolitan to the lowest grade amounted to a futile exercise in locking the stable door long after the horse had bolted. We are not surprised that Moody's paid such close attention to the episode. (Paragraph 19)

4. Ratings published by the Regulator should be reliable and capable of being understood at face value. The practice of using governance ratings to signal concerns about financial viability lacks openness and is confusing. It is misleading to the taxpayer and tenants, and potentially also to lenders who, it appears, are expected to understand the coded message from the Regulator. We conclude that the practice should cease. We recommend that the Regulator publish accurate financial viability ratings. (Paragraph 22)

5. Poor governance can undoubtedly undermine the financial viability of a provider but we are not persuaded by the argument that it is "almost inevitably" the cause of financial failures in general. Financial viability and governance ratings serve different purposes and assess the providers against different standards. The distinction between governance and financial viability must be maintained. (Paragraph 23)

Communication with the sector and use of statutory powers

6. It is reasonable, and to be expected, that the Regulator is in regular communication with the sector and on occasion an informal approach will be sufficient. We are concerned when the informal approach becomes a Regulator's exclusive method of operation. First, it is inconsistent with transparency. Lack of transparency makes it difficult for lenders, tenants and taxpayers to see how much and what action the Regulator is taking. Second, there is a risk that this approach may lead to too close a relationship with providers thus compromising the independence or judgment of the Regulator. Third, if the sector knows that that the Regulator cannot, and will not, use his formal powers, that must undermine his position and effectiveness. (Paragraph 26)

7. We conclude that the Regulator's relationship with providers has to have a greater element of transparency. In addition, the Regulator should have available powers which he can use when a social housing provider fails to meet the required standards. We make two recommendations. First, that the Regulator work with other regulators to examine whether they have addressed his concerns that use of statutory powers may be counter-productive. Second, although the new regulatory regime is still at a relatively early stage, an experienced former regulator in another sector should review the operation of social housing regulation. The review's report, conclusions and recommendations should be published.(Paragraph 27)

Review of the protection of social housing assets

8. We commend the Regulator for seeking to update the regulatory regime as the sector changes. We also welcome the fact that the Regulator is considering the need to protect social housing assets.(Paragraph 29)

9. We support the aim of protecting social housing assets and tenants from the risks associated with non-social housing activity by providers but the current proposals lack flexibility and appear to cut across the system of co-regulation which gives providers' boards the responsibility to assess and mitigate risk. We welcome the decision of the Regulator to revise his proposals and to consult again. (Paragraph 33)

The Regulator's resources

10. The providers' submissions about the resourcing, capacity and capability of the Regulator gives us grounds for concern. It appears that the current arrangements may not be adequate and need improvement. The fact that the Regulator himself has identified a need to increase significantly his capacity to make high level business judgments about providers appears to confirm the providers' views. The reorganisation will have to be carried out without any additional resources and without a hiatus diminishing the Regulator's scrutiny. We request that, once the reorganisation has been completed, the Regulator provides us with a report on the Regulation Committee's capacity and capability to carry out its work. (Paragraph 37)

Consumer regulation

11. Having reviewed the evidence we are not completely assured that the Regulator is discharging his responsibilities as we would expect. First, he has interpreted his remit as narrowly as possible. In responding to our report we request that he explain and justify his application of a test that breaches of standards should be systemic when he assesses serious detriment caused to tenants by a breach of consumer standards. Second, we formed the impression that the Regulator has treated consumer regulation as a distraction from his main job, economic regulation. (Paragraph 42)

12. We recommend that the Regulator, working with a body such as the British and Irish Ombudsman Association, bring forward arrangements for an annual evaluation of the Regulator's handling of consumer complaints by an external, independent reviewer to ensure that it meets the criteria of independence, fairness, effectiveness, openness and transparency and accountability. The reviewer should be appointed by the end of this year and complete the first evaluation in time to publish it no later than Easter 2014. (Paragraph 42)

13. In the first year of operation, 310 complaints were wrongly directed to the Regulator, who then advised tenants of the correct channel. This is not only a waste of the Regulator's time and resources, but frustrating for tenants. We recommend that the Government, working with the sector and the Regulator, should clearly publicise the correct complaints procedure regarding consumer standards to avoid misdirected complaints.(Paragraph 43)