Company Secretary Snapshot - September 2023

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

We’re back after a summer break and what a busy summer it was! This month we’re looking at the Social Housing Regulation Act 2023 and subsequent updates from the Regulator of Social Housing, a detailed look at automatic disqualification grounds for board members that are easy to miss, and changes from the Charity Commission – and more!

Social Housing Regulation Review - updates

The Social Housing (Regulation) Act 2023 (the Act) received Royal Assent back in July. We have produced a summary of the Act for your ease of reference.

As a result, the Regulator of Social Housing (RSH) has published its consultations on the proposed new consumer standards (closing date: 17 October 2023) and fees (closing date: 31 October 2023).

The fee consultation follows an announcement by the government that, from July 2024, RPs will need to pay for the full costs of their regulation, in line with many other regulated sectors.

The RSH has also made updates to several of its guidance notes to reflect the new provisions in this new legislation. Some of the most relevant updates are:

• Register and de-register as a provider of social housing: This now explains that the RSH has the power to set registration criteria which includes standards for applicants to comply with the new competence and conduct criteria and qualifications for senior housing executives.
• Information for investors: This has been updated to confirm to investors that from April 2024, the RSH are introducing a new integrated regulatory approach, with proactive regulation of the consumer standards.
• RSH and HO Service - factsheet: This now confirms that the Social Housing (Regulation) Act 2023 includes measures to formalise and strengthen the relationship between RSH and the Housing Ombudsman (HO), including putting the Memorandum of Understanding on a statutory footing.

The RSH has also updated the following guidance notes:

• Memorandum of Understanding between the RSH and the HO
• De-classification of a dwelling as social housing
• Restructures and constitutional changes
• Information for social housing tenants
• Section 27 approval for local authority housing management agreements

New Charity Commission investment guidance published

The Charity Commission has officially brought its guidance on investments (CC14) up to date. The new guidance offers greater clarity and should help give the boards of charitable RPs confidence to make investment decisions that are right for their organisation.

The new guidance follows an extended Charity Commission consultation on financial investment and follows the significant High Court judgment on charity trustees’ investment duties (the Butler-Sloss judgment).

The Charity Commission has explained that the new guidance:

• includes examples of various issues which may be relevant for board members to consider when making investment decisions, such as the potential for an investment to conflict with the purposes of the charity, or the reputational impact of an investment decision.
• lists steps board members ‘must’ take to be compliant with the law and those board members ‘should’ do which are strongly recommended as best practice but not legally required.
• explains that acting in the best interests of a charity is about ensuring that above all else any decision furthers its purposes. It also warns board members/trustees to not allow personal motives, opinions, or interests to affect the decisions they make.
• incorporates previously separate guidance on social investment and no longer uses terminology that could get in the way of board members’ understanding, such as ‘ethical investment’, ‘mixed motive investment’ and ‘programme related investment’.

The Commission conducted user testing during the drafting process with a sample of 1000 charities. It also engaged with sector representatives and a range of other relevant stakeholders, to help ensure the guidance meets the needs of the charities and trustees who will be using it.

Helen Stephenson CBE, Chief Executive of the Charity Commission, said that those on boards of charitable bodies, “must balance the potential benefits of your approach with any risks it brings to your charity and ensure that your decision ultimately serves your charity’s purposes. You may opt to take issues such as sustainability or climate impact into account, provided it is in the best interests of your charity”.

In our experience there can be a lack of understanding by boards as to the classification and rationale for investments from a charity law perspective, and therefore the basis upon which such investments should be reviewed in terms of risk and return. This is particularly important at the moment where you are grappling with economic uncertainty where investment in ‘non-charitable’ activity, such as outright sale may be higher risk; as organisations increasingly involve residents in investment decisions to reflect the proposed new consumer standards; and to reflect your sustainability strategies. You may therefore want to use this as an opportunity to refresh your investment policies, review your investments in terms of the ‘new’ terminology used and also undertake training with your committees and boards.

ClientEarth refused permission for derivative claim against Shell on directors' approach to energy transition and climate risk at oral hearing

In our May Snapshot we reported that environmental NGO ClientEarth (CE) was refused permission for a claim brought by a shareholder of Shell Plc in relation to a breach of duty by Shell’s directors (known as a derivative claim) relating to the directors' approach to energy transition and climate risk. The High Court has now confirmed, that CE had failed to make out a clear or obvious case to enable the grant of permission for it to continue the derivative claim against Shell plc's directors for alleged breaches of their general duties in connection with the company's climate change risk management strategy. This new judgment consolidates, and therefore repeats to a significant extent the judgment from last May.

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. Although in some areas CE's position had shifted by the time of the oral hearing, on reconsideration the court maintained that CE had still not made out a prima facie case for permission either on the basis that the directors were in breach of their duties or on the basis that the court should grant the relief sought.

Among other things, the court found that the test under section 263(2)(a) of the CA 2006 had been met, which requires an application for permission to continue a derivative claim to be refused if the court is satisfied that a person acting in accordance with their duty to promote the success of the company would not seek to continue the claim.

FAQs: Automatic disqualification rules for charity trustees and charity senior positions

Welcome to our regular FAQ section where we spotlight some of the more common topics that you have been asking us to advise on.

Board members of charitable (and non-charitable) RPs will already be aware of the fiduciary duties that they owe to their organisations by virtue of siting on the board of a charitable organisation. They may not be aware of the fact that there are also certain rules which disqualify certain people from being a trustee or senior manager of a charity, including a charitable RP. These rules apply to registered and exempt charities.

Being disqualified means that a person can’t take on, or stay in, a charity trustee position (ie. as a board member of a charitable RP) or senior manager position – even on an interim basis, unless the Charity Commission waived the disqualification.

A person is disqualified from acting as a charitable board member or senior manager if any of the following reasons apply and the board member/senior manager in question is:

• found guilty of disobeying a Charity Commission order or direction under the Charities Act
• is subject to notification requirements under sexual offences legislation, commonly referred to as being on the sex offenders register. If these notification requirements apply, the board members is disqualified by the automatic disqualification rules, even if their offence is spent
• is currently declared bankrupt or is subject to bankruptcy restrictions or an interim order, including an individual voluntary arrangement (IVA) – limited exceptions apply
• is subject to a debt relief order under the Insolvency Act 1986, or a debt relief restrictions order, or interim order, under that Act
• is disqualified from being a company director – limited exceptions apply
• have previously been removed as a trustee, or as an officer, agent or employee of a charity by either the Charity Commission or the High Court due to misconduct or mismanagement
• have previously been removed from a position of management or control of a charity in Scotland for mismanagement or misconduct
• have been found to be in contempt of court for making, or causing to be made, a false statement – limited exceptions apply, and
• are a designated person under particular anti-terrorist legislation.

The senior manager positions that are affected by disqualification are at chief executive and chief finance officer level.

It’s important that you check carefully whether a board member may be disqualified and get advice if you are in any doubt. It is normally an offence to act whilst disqualified. Conviction may lead to a fine, imprisonment or both.

If you have adopted the National Housing Federation Model Rules, then some of these disqualification criteria may also apply to your committee members and co-optees. The disqualification of individuals with IVAs or those with rent arrears, for example, has come up recently as problematic in terms of the involvement of residents or those with their own businesses and therefore you may wish to consider if you change your rules to allow involvement on committees, where the board is satisfied that the circumstances are appropriate.

If a board member is disqualified, they can, in most circumstances, apply to the Charity Commission to waive their disqualification. They can do this at any time after they become disqualified. If given, a waiver will bring their disqualification to an end in respect of the charities named in the waiver. The Commission has the power to grant a waiver from such a disqualification for board members and senior managers of exempt charities also. The Commission must consult the Financial Conduct Authority (FCA) before doing this.

Regulatory Grades

Our review of the upgrades/downgrades/regrades in the sector has highlighted the following themes:

• Downgrades to governance grading from G1 to G2 resulting from:
  • Gaps in the board’s oversight of stress testing, risk management, and delivery of the strategic plan outcomes
  • The Board lacking capacity to provide strategic oversight and effective scrutiny of its increased financial risk profile
• Downgrades to governance grading from G1 to G3 and viability from V2 to V3 resulting from:
  • The board had not adequately considered the financial implications when taking on new liabilities or ensured appropriate monitoring of the risk
  • The Board has not been managing its affairs with an appropriate degree of skill, diligence, prudence and foresight
  • Lack of assurance in relation to finance systems and resources are adequate to ensure plans are monitored and accurately reported
  • Weak financial position
  • Lack of a robust financial plan and lack of approved mitigation plan
• Breach of the consumer standards resulting from not having carried out remedial actions identified in fire risk assessments
• Breach of the economic standards resulting from:
  • Affairs not managed with an appropriate degree of skill, independence, diligence, effectiveness, prudence and foresight
  • Lack of appropriate, robust and prudent business planning, risk and control framework
  • Lack of assurance that the RP had not inappropriately advanced the interests of third parties in its lease deals, connected party transactions, and payments to both internal and external individuals
  • Weakness in governance arrangements leading to lack of assurance that the RP complied with the Home Standard and the Rent Standard.

AOB

Social Housing (Regulation) Act 2023

Five years on from the Social Housing Green Paper and over two years on from the Social Housing White Paper, this key piece of legislation received Royal Assent on 20 July 2023. Read our recently produced article on the new Act which outlines the key elements.

We are also undertaking a series of video digests to enable RPs to gain greater understanding on the Act. These will be published shortly.

Recent housing articles

Our team produce a range of articles and insights. If you or your colleagues would like to receive any of our other newsletters, including Housing Finance Snapshot, Governance Snapshot, Property Focus, Pension Points and Employment Eye, you can sign up to receive these via our subscriptions page.

Diary date for Senior Independent Directors

Is your SID a member of the Senior Independent Directors Network? The group is free of charge to attend and provides an opportunity to share ideas and experiences with peers from within the housing sector. The Network will next meet on Tuesday 10 October at 10 am and welcomes new members. For further details contact Sarah Greenhalgh.