Company Secretary Snapshot - November 2023

Welcome to our snapshot of key changes and current affairs for Company Secretaries working in social housing.

This month we’re looking at the new Sector Risk Profile for 2023, the latest consultation from the Regulator of Social Housing (RSH), updates from the Financial Reporting Council (FRC), some recent relevant court judgments – and more!

Sector Risk Profile 2023

The RSH has published this year’s Sector Risk Profile (SRP). The SRP is essential reading for anyone working in the sector, especially board members and executive leadership teams. The SRP focuses on the risks to delivering the outcomes required to the RSH’s economic standards, but given the introduction of the Social Housing (Regulation) Act 2023 (the SHRA23), it won’t come as much of a surprise that this year’s edition emphasises the introduction of the new consumer standards. There is also a reminder of the current struggles that many registered providers (RPs) are facing as a result of the war in Ukraine and instability in the Middle East, the rise of inflation, higher interest rates, challenges accessing skilled labour and a declining housing market.

Perhaps most significant is the RSH’s acknowledgement that some of the risks highlighted in previous SRP’s are now crystallising, and “managing these is already testing the resilience” of many RPs. External pressure is weakening financial capacity for RPs and there is now less margin for error when implementing mitigations.

The SRP also recognises a number of other key risks across a range of themes:

Strategic risks

The “macroeconomic headwinds” that RPs are facing in the economy have resulted in a shrinking financial capacity which has made it harder for RPs to deliver competing objectives. Boards are therefore forced to manage difficult trade-offs. The balance between investment in existing stock and developing new social housing continues to be debated by boards across the country. At the same time, RPs also need to focus on the quality of the service that they are delivering to tenants, without losing focus on the requirements to effectively achieve strategic objectives under value for money principles. All while RPs are facing heightened levels of scrutiny: from tenant satisfaction measures to the government to the media. This all means that RP boards need to be transparent in how they manage the risks inherent to these trade-offs. It also means that boards need to set a clear strategic direction for their RPs. Boards should continue to stress test against various scenarios to establish mitigation plans – scenarios which the SRP recognises as “severe yet feasible”.

Existing Stock

the RSH reiterates that RPs must provide homes that are decent, safe and well maintained and the tenants in these homes should receive services from RPs of an appropriate quality. Under the SHRA23, the RSH will have greater powers to ensure that RPs are meeting these standards. RPs must therefore maintain adequate investment in existing stock and, as the sector knows, failure to do so can have significant consequences for tenants. Any savings made by these short-term failures may be negated by the cost of dealing with the decline in quality to the homes in the longer term. The RSH notes that in this sense RPs’ stock is a long-term asset and encourages RPs to think of them as such. Boards must therefore ensure that:

Effective repairs and maintenance system are in place to ensure that minimum stock standards are met

They have comprehensive, robust, and up-to-date data from stock condition surveys. These surveys should adequately assess the Decent Homes Standard’s four criteria. This will allow for effective management of stock to be achieved, and

They understand how the condition of stock relates to current and evolving requirements – e.g. changes arising from the government’s upcoming review of the Decent Homes Standard.

Tenant Safety

Health and Safety has been top of the agenda for boards for some time and the SRP recognises this and the importance of data collection to mitigate against health and safety risks. The RSH notes that its own consumer regulation review has highlighted the importance of reliable data on health and safety to allow RPs to meet their fundamental responsibility of ensuring that tenants are safe – highlighted tragically by the death of Awaab Ishak. Failure to proactively identify issues is a cause for concern for the RSH, e.g. the RSH has noticed a recent decline in approaches to gas safety. Meanwhile there is a raft of new legislation being enacted that RPs need to be aware of and comply with. This includes Awaab’s Law – to ensure tenants understand their rights and that effective processes are in place for tenants to raise concerns about damp and mould and the Building Safety Act 2022 which introduces a regulatory framework for high rise buildings. The RSH has also written to all RPs in relation to the presence and risk of reinforced autoclaved aerated concrete (RAAC) and in relation to responsibilities under the Fire Safety (Regulatory) Order 2005.

Finance and treasury management

Debt continues to account for the majority of financing in the sector. At the end of June 2023, RPs had agreed facilities of £123.9bn. RPs had generally taken advantage of the low interest rate environment to fix a substantial proportion (80%) of their debt and the sector’s effective interest rate of 4.2% is now significantly below the Bank Rate. Nevertheless, the number of RPs projecting less than 100% interest cover in the first year of business plans has increased from 41 to 55 RPs. To manage the challenges in this environment, RPs should act early to communicate with lenders, including seeking waivers where essential safety works might threaten covenant compliance. This is one way of ensuring appropriate treasury management and governance processes are in place to effectively monitor existing loan covenants and to mitigate the risk of breaches.

Costs and Inflation

RPs are not immune to significant costs rises. Though materials inflation has diminished, continued high inflation and a tight labour market will put pressure on RPs’ wage costs, with UK wage growth close to record highs. Boards need to fully understand their cost base and capital requirements and have a clear approach to prioritising activities to ensure continued delivery of essential services and safety. Boards will also need to consider how decisions taken to mitigate risk in the short term may increase risks in the longer term. Boards will need to ensure that investment appraisal is robust, and that they understand the financial and operational impacts from any changes to strategic investment decisions due to high inflation.

Read the Sector Risk Profile 2023 in full here.

Regulator of Social Housing to consult on new powers

The RSH has launched a consultation in relation to the new and revised powers which the RSH will receive under the SHRA23. It is a requirement for the RSH to publish guidance on how it uses and intends to use its powers. It is a further requirement that before giving such guidance the RSH must consult with various parties including RPs. The consultation therefore represents an opportunity for RPs to comment on the RSH’s revised guidance. The new and revised powers for which the RSH is consulting on include:

• The removal of the £5,000 cap on fixed penalties thereby allowing the RSH to issue unlimited fines
• The repeal of the “serious determinant test”. This will enable the RSH to regulate consumer standards proactively by allowing the RSH to use its monitoring and enforcement powers in relation to any failure to meet a consumer standard without first applying the serious detriment test
• The expansion of the exercise of the RSH’s enforcement powers to include compliance with health and safety requirements, compliance with RSH directions and the imposition of obligations under performance improvement plans, and
• Extending enforcement powers to for-profit RPs.

To participate in this consultation RPs should complete the online survey. The consultation will end on 16 January 2024.

Economic Crime and Corporate Transparency Act receives Royal Assent

The Economic Crime and Corporate Transparency Act 2023 received Royal Assent on 26 October 2023. The Act includes a number of important developments, including:

• The introduction of a failure to prevent fraud offence for large organisations. A large organisation includes companies, registered societies and charities which meet two out of three of the following criteria: more than 250 employees, more than £36 million turnover and more than £18 million in total assets. The offence will apply to organisations when a specified fraud offence is committed by an employee or agent, for the organisation's benefit, and the organisation did not have reasonable fraud prevention procedures in place. It will not need to be proven that consent or connivance existed.
• A change to corporate criminal liability by expanding the class of persons whose conduct can be attributed to the company. An organisation will now be guilty of an offence where a "senior manager … acting within the actual or apparent scope of their authority commits a relevant offence".

There is no current date set for the changes to come into force.

FRC publishes policy update to its consultation on revisions to the UK Corporate Governance Code

On 7 November 2023, the FRC published a policy update in relation to its consultation to amend the UK Corporate Governance Code, The FRC intends to take forward only a small number of the original proposals set out in the consultation and to stop development of the remainder. Specifically, it will take forward:

• A small number of changes that streamline and reduce duplication associated with the Code that were overwhelmingly supported by stakeholders in the interests of reducing burdens.
• Revisions to its original proposal on internal controls.

It will not take forward the remainder of the original proposals, including those relating to the role of audit committees on environmental and social governance and modifications to existing Code provisions around diversity, over-boarding, and Committee Chairs engaging with shareholders. Several other proposals will also not be taken forward following the government’s recent decision to withdraw its statutory instrument relating to an audit and assurance policy, reporting on distributable profits and resilience statement requirements.

The FRC notes that it is keen to explore ways of ensuring any guidance issued under the Code is proportionate and limits burdens whilst not weakening effective governance. It therefore intends to give an additional remit to its Stakeholder Insight Group to provide the FRC with advice on whether there are aspects of its current and planned guidance that could be improved to ensure the right balance is struck between supporting effective governance and reducing unnecessary burdens.

The FRC intends to publish an updated Code in January 2024.

FRC publishes its annual review of corporate governance reporting

On 16 November 2023, the FRC published its annual review of corporate governance assessing the quality of reporting against the UK Corporate Governance Code.

Recommendations include:

• Code compliance. Disclosures on non-compliance with the Code provisions should be improved. Companies are expected to provide meaningful explanations for non-compliance, including when practices will be aligned with the Code.
• Purpose, culture and values. Culture reporting should include practice and policy, and progress towards milestones. Better reporting would explain what the company's values mean in practice, how they translate into behaviours and how they have been embedded.
• Stakeholder engagement. Disclosures should be improved by addressing the nature of the engagement, reflecting on feedback received and how this has led to high-quality outcomes, and its impact on board decisions. Companies should report on shareholders' key priorities and, in relation to workforce engagement, why it considers the chosen engagement method to be effective.
• The FRC expects companies to improve their level of compliance across all recommended task force on climate-related financial disclosures. Good reporting includes disclosure of governance structures and processes in place to manage climate-related risks and their oversight by the board and management.
• Companies continue to be asked to define their business strategy clearly and link this to their diversity objectives. Reporting should include progress made on achieving set targets and improvements year-on-year. Diversity reporting should go beyond gender and ethnicity-related disclosures to include social mobility, disability and LGBTQ+ people in senior management.
• Audit and risk. Companies should be more specific in disclosing how audit committees have assessed the independence and effectiveness of the external audit process and report on their findings. Companies should focus on the most significant risks and report on changes to these risks during the year. Overall reporting on monitoring and reviewing risk management and internal control systems still needs improvement.
• Cyber risk. Boards should understand cyber risks within the organisation and how they are managed.

High Court consider requirements for valid legal assignment of execution of documents

In determining whether the rights under two loan agreements and a guarantee had been validly assigned, the High Court recently considered the requirements for a legal assignment (also known as a statutory assignment) set out in section 136 of the Law of Property Act 1925.

In Frischmann v Vaxeal Holdings SA, the defendants argued that an assignment was ineffective and void because it was not in writing and signed by the assignor, as required by section 136 of the Law of Property Act 1925. The assignment had been signed on behalf of the assignor by an attorney acting under a power of attorney.

Finding there was not a valid legal assignment, the court held that an effective assignment under section 136 must be in writing and signed by the assignor, and an assignment signed by the assignor's attorney did not satisfy the requirement. The court did not accept that the wording of the Powers of Attorney Act 1971 should be treated as rewriting the Law of Property Act 1925 without express reference to the earlier statute.

Although the court found that there was not a valid legal assignment, the court went on to find that the assignment took effect as an equitable assignment.

The lesson for RPs is to consider taking legal advice when executing any assignments.

ClientEarth refused permission to appeal dismissal

In our September Snapshot we reported that environmental NGO ClientEarth (CE) was refused permission for a derivative claim – i.e. a claim brought by a shareholder, here a shareholder of Shell Plc – in relation to a breach of duty by Shell’s directors relating to the directors' approach to energy transition and climate risk. 

On 14 November 2023, the Court of Appeal refused CE permission to appeal that judgment saying that CE had failed to make out a clear or obvious (or what is referred to as a “prima facie”) case to enable the grant of permission under section 261(1) of the Companies Act 2006 for it to continue a derivative claim against Shell's directors for alleged breaches of their general duties in connection with the company's climate change risk management strategy.

The duties alleged to have been breached included the duty to promote the success of the company under section 172 of the CA 2006 and the duty to exercise reasonable care, skill and diligence under section 174.

The case has been closely watched as it has raised the profile of climate change risk with boards and the importance of robust net zero transition targets and strategies. The case also shows a clear averseness by the courts to impose additional duties on directors. The threshold to apply to use the derivative claim procedure is therefore considered high when used as a mechanism to challenge a company's climate change strategy.

Charity Commission guidance on supported housing

The lease-based model of supported housing has been in the spotlight for some time and the Charity Commission’s recently published guidance note is a helpful reminder of key risks for trustees to be aware of when operating in this market. This includes flagging that trustees must ensure that they fully understand and manage the risks of entering into complicated contractual property agreements.

Regulatory ‘regrades’

The RSH continues to find that the current economic uncertainty in relation to inflation and interest rates alongside investment requirements in existing stock means that many RPs now have less financial headroom and reduced capacity to respond to adverse events – as highlighted in the SRP. Following yesterday’s publication of further regulatory judgements, approximately two-thirds of the sector are now graded as ‘V2’.

AOB

Building Safety Act 2022

The new Building Safety Act reforms came into force in October 2023. See our recent publication for a summary of how these reforms will impact your organisation: Building Safety – Key Changes from 1 October 2023 | Bevan Brittan LLP.

We’re taking a break for the festive period and look forward to catching up in the New Year!