Company Secretary Snapshot - January 2023

Welcome to another edition of our monthly snapshot and our first edition of 2023!

This month we’re looking at the various updates to the consumer regulation review, including the newly published implementation plan by the Regulator of Social Housing (RSH), and more developments around the sector.

The RSH publishes its implementation plan for consumer regulation

The RSH has published its “implementation plan” for reshaping consumer regulation, setting out the steps it is taking to prepare for the Social Housing (Regulation) Bill (the Bill).

The Bill aims to grant the RSH greater powers to protect residents, including plans for regular Ofsted-style inspections linked to the consumer standards; the introduction of ‘performance improvement plans’ and competency requirements for staff; and unlimited fines for poorly performing landlords. Subject to the Bill being passed by Parliament in early 2023, the RSH expects to implement its new approach from April 2024. Some key aspects of its implementation plan include:

• Pilot inspection scheme: See more on this below.
• Directions: the Government will consult on and issue directions to the RSH on some specific aspects of the new standards. The RSH notes that the most effective way for landlords to influence these areas will be by responding to the Government consultation on the Directions, rather than wait until the RSH consults over the summer on the standards themselves.
• Consultation: The RSH will also consult with landlords, tenants and other stakeholders on the standards that will underpin proactive consumer regulation.
• Code of Practice: the RSH will issue a code of practice on consumer issues (which it will also consult on) to help tenants and landlords to understand what is expected under the new standards. This will work in a similar way to the Governance and Financial Viability Standard Code of Practice, setting out what it considers to be best practice but will not be binding.
• Enforcement Powers: the RSH will also consult on updates to its guidance which include the new enforcement powers the Bill will give the RSH and how these reflect its new consumer role.

There are still a number of ‘unknowns’ associated with the Bill, including the impact on the cost of regulation (the RSH has indicated this will increase to reflect its expanded role); the information requirements for ‘small’ landlords; and how competency requirements will be enshrined.

Fiona MacGregor chief executive of the RSH, said: “It is vital that landlords get ready now… Where there are issues, landlords should act to put things right – before we start carrying out our consumer inspections.” We will publish further details relating to the consultation exercises in due course, to help you to influence the changes.

Pilot Consumer Regulation Scheme launched

As part of its implementation plan for the Bill (see above) the RSH has launched a pilot inspection scheme with seven landlords. The pilot will assist the RSH to develop and refine its approach.

The Bill requires the RSH to produce an inspection plan that will outline which types of RPs the RSH will inspect on a regular basis and the circumstances when the RSH may need to carry out reactive inspections. The RSH has confirmed that at this stage it intends to inspect all large landlords (i.e. over 1000 units), including local authorities, against the new consumer standards every four years. 

Subject to the outcome from the pilot schemes, for private RPs such as housing associations, it is likely that the RSH will combine its IDAs and the consumer inspections so that the RSH can reach a clear view of whether the RP is meeting both the economic and consumer standards. . Inspections by the RSH of local authority landlords will solely focus on consumer issues.

For-Profit RPs: Code of Governance to be launched

A voluntary code of governance covering for-profit RPs is expected to be launched in 2023, produced by the British Property Federation (BPF). BPF has set up a working group with investors and representatives in the sector to develop the idea.The number of for-profit RPs has continued to grow over the last decade. The RSH requires all RPs (whether for profit or not) to adopt and comply with an appropriate code of governance.

Most registered providers have adopted either the National Housing Federation code (NHF Code) or the UK Corporate Code (UK Code). However, the NHF Code has been created specifically with ‘non-profit’ RPs (i.e. housing associations) in mind, and the UK Code does not reflect some of the nuances associated with the sector – in particular, although stakeholder accountability is enshrined, it does not specifically address resident engagement.

It will be interesting to see what differences are in the new code, and whether this will challenge the prevalence of the NHF Code in the sector beyond for-profit RPs. Watch this space!

Financial Reporting Council (FRC) publishes its annual review of corporate governance reporting

This is the third year in which the FRC has reviewed how companies have reported on their governance in line with the Principles and Provisions of the UK Corporate Governance Code (the UK Code).

The FRC has found year-on-year improvements in reporting, but there are few companies whose disclosures meet the highest standards. The key to good reporting is to provide clear and specific reporting, avoiding repetition, ambiguity and lengthy boilerplate statements. Companies should disclose the effects of the company’s policies and procedures by highlighting the outcomes and impacts of the initiatives and actions and explaining how these relate to the company’s purpose, strategy and values.

The main findings from this assessment are set out below:

• Code compliance – In last year’s report, the FRC reported that it expects companies to be clear where their reporting is non-compliant with the Code and should give clear explanations for such non-compliance. Although the FRC has found some good examples of reporting, the overall findings demonstrated that disclosures could be improved, particularly where Principles require actions of the board. Companies should also be transparent about any non-compliance with any provisions of the Code by clearly acknowledging any departures from it.  This is a helpful reminder in relation to the NHF Code too, which takes a similar ‘comply or explain’ approach.

• Values and engagement – Companies should refer to and disclose corporate values within their report and explain how they applied the Principles of the Code. Companies should also demonstrate effective and regular engagement with shareholders. Reporting on the feedback received from shareholders is an important indication of the effectiveness of engagement. A good report should include an explanation of why the company has chosen their engagement mechanism and how they will monitor this to ensure that it is effective. Although most RPs have closed shareholding (i.e. their shareholders are the same as their board), this would translate well into engagement with residents and customers in annual reporting.
• Modern slavery – Companies should provide appropriate cross-referencing to modern slavery statements in annual reports.
• Gender and ethnicity – Diversity and inclusion should be central to business strategy and companies should continue to create and develop plans to achieve truly diverse board and executive committees.
• Audit and risk and internal controls – risk management procedures should demonstrate the organisation’s approach to identifying, assessing and mitigating internal and external risks.

Although the UK Code is not adopted by most RPs, it is a helpful guide in terms of wider governance trends outside of the sector.

Regulatory grades

As we reported in November’s edition, dozens of landlords were due to be regraded. Since then 32 RPs have been regraded from V1 to V2. The RSH has continues to find that the current economic uncertainty in relation to inflation and interest rates means that many RPs have now less financial headroom and reduced capacity to respond to adverse events.

Our review of regulatory upgrades/downgrades/regrades in the sector since our November edition has also highlighted the following themes:

• Breaches of the Governance and Financial Viability Standard resulting from:
  • not managing resources effectively to ensure viability can be maintained
  • not ensuring governance arrangements are effective
  • not being able to demonstrate that affairs are managed with an appropriate degree of skill, independence, diligence, effectiveness, prudence and foresight, and
  • failing to ensure that an appropriate business planning, risk and control framework is in place that ensures sufficient liquidity at all times.

• Governance downgrades resulting from:
  • a failure to provide assurance that the association was able to actively consider the risks, and take steps to safeguard its reputation, and that of the sector in advance of decisions being made, which resulted in poor outcomes for the organisation and its tenants
  • insufficient oversight governance arrangements and a lack of accountability in the group structure
  • weaknesses in financial planning and risk control resulting in the board not being fully sighted on the financial exposures associated with a loss-making subsidiary
  • ceding control of social housing assets to investments companies, a lack of economic interest in the association’s properties and weaknesses in its governance arrangements, and
  • weaknesses in financial governance including inadequacies in financial monitoring and board reporting, coupled with a lack of effective board oversight and scrutiny, resulting in coming within weeks of potential loan covenant breach.

• Breaches of the consumer standards resulting from:
  • a failure to meet statutory health and safety requirements in relation to gas safety as a result of having more than 800 overdue gas safety checks, and
  • a failure of the repairs and maintenance service responding to the needs of families with mould in their properties.

Our take-aways from the above are a reminder to:

• Review group structure arrangements regularly to close any ‘risk’ gaps
• Address viability issues with subsidiaries at an early stage, and monitor performance closely
• Be cautious and monitor third party influence / control over the business / assets

Ensure financial reporting and monitoring arrangements are tight, and controls are in place to catch inaccuracies in data.

AOB

Will you be attending NHF Housing Finance Conference 2023? Our housing finance colleagues will be in attendance, with Jessica Church presenting alongside Trina Chakravarti from Building Better and Andrew Smith from Savills on Unlocking the value of MMC. We look forward to seeing you!

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