Sector Risk Profile 2021
October brings with it the Regulator’s annual review of risks to the social housing sector. This is an essential read for all working in the sector, but particularly for members of leadership teams and non-executives.
One of the new risks highlighted this year is the disruption to market and supply chains, affecting the prices and availability of goods and services. The SRP warns that shortages of skilled workers has been compounded by the effects of Brexit and the pandemic, including shortages of chartered and incorporated fire engineers which has already resulted in delays for leaseholders who require an EWS1 to sell their property. Boards will need to have robust systems to manage the risks from these and other similar shortages in construction, building safety, care services and beyond.
The SRP also recognises a number of other key risks across a range of familiar themes:
- Strategy: In setting strategic direction, boards must balance competing pressures and trade-offs. On the one hand boards must consider undertaking essential investment to respond to building safety and energy efficiency standards while at the same time maintaining the quality of existing housing stock. The Regulator notes that it is “crucial that Boards have a strategic approach to these trade-offs; those who fail to achieve this, risk being overwhelmed, either financially, operationally, or reputationally.”
- Finance: Increased reliance on debt means boards need to be able to effectively monitor interest cover and assess the financial products they are choosing. Boards must also understand how higher than expected borrowing costs could impact providers’ financial viability.
- Stock Quality: The SRP notes that the review of the Decent Homes Standard announced in the White Paper and more stringent energy efficiency requirements associated with the government’s net zero-carbon commitments “are likely to result in requirements for substantial investment in providers’ existing stock”.
- Health and Safety: Ensuring that tenants are safe in their homes continues to be a fundamental responsibility of all landlords. RPs should note the introduction of the Fire Safety Act 2021 and the Building Safety Bill, including the creation of a new Building Safety Regulator. The extent to which a provider is able to meet statutory health and safety requirements will depend on a provider’s ability to hold good quality, accurate data on its tenants and stock.
- Tenants: Providers should expect to see further demands for transparency from tenants following the publication of the White Paper, and should therefore take action now to strengthen engagement with tenants and improve the services they receive.
Something that particularly stands out is the risk of stagnancy in decision-making as a result of competing demands – lack of decisive action may actually pose the biggest risk to the sector at the moment.
The Charities Bill – where are we now?
The Charities Bill is currently working its way through Parliament, and at the time of writing is at the Special Public Bill Committee Stage in the House of Commons. The Bill does not propose a major overhaul of the law (which explains why it is not overly long) but rather intends to reduce unnecessary bureaucracy and increase certainty for charities when interpreting existing requirements.
We have trailed the Bill in previous Snapshots, but of particular interest to charitable Registered Providers (RPs), whether exempt or registered are as follows:
- Land disposals and mortgages – whilst the current framework for restricting land disposals will remain in place, the Bill clarifies the available exceptions, including where the disposal is to another charity. The Bill also widens the list of professionals that can give advice on disposals. These changes have been much-debated in terms of whether they do enough to protect charity assets, but they give RPs more flexibility in the advice they obtain on disposals – and could result in some cost savings.
- Fundraising – expanding the circumstances in which funds from a failed fundraising activity can be re-purposed (with oversight from the Charity Commission).
- Ex gratia payments – ex gratia payments are payments that trustees/board members believe they are morally obliged to make, but are not legally obliged to and which cannot be justified as being in the charity’s best interests. The Bill will introduce a new statutory power to enable small ex-gratia payments without authority from the Charity Commission. The threshold for what constitutes an ex-gratia payment would depend on the income of the charity but would range from £1,000 - £25,000 per payment. The Bill will also change the test for making such payments from a subjective to an objective test meaning that the test would be whether a reasonable trustee would decide to make such a payment.
- Creation of a new power for the Charity Commission to ratify trustee appointments where they are potentially invalid, which may be helpful where there is any question over a past appointment and implications for decisions made since.
There are also several changes which will be of wider application, particularly if your group manages permanent endowment or has or is intending to merge with another charity which receives legacies.
It is expected that the Bill will progress smoothly through Parliament and receive royal assent early in 2022. A significant and phased implementation process will then follow which will likely be supported by the issue of new guidance across a wide range of topics – something we will be monitoring closely.
Key themes arising from recent regulatory notices and downgrades include:
- Insufficient controls to mitigate the risk of third parties not acting in accordance with legal agreements – and lack of oversight of payments made to those third parties. This is particularly important where ‘frontline’ services are contracted to other organisations, and may result in a breach of the regulatory requirements to ensure that arrangements do not ‘inappropriately advance’ the interests of third parties, and that taxpayers’ interests are safeguarded.
- Failure to evidence that financial forecasts are based on appropriate and reasonable assumptions.
- Consistency of data and information provided to the Regulator – data integrity again being of significant concern.
- Stress testing – again – was a key focus, with an emphasis on multi-variate and detailed testing to create mitigation strategies.
Protect your charity from fraud and cyber crime
As part of Charity Fraud Awareness Week 2021, the Charity Commission has issued guidance on fraud in the charity sector with the intention of raising awareness and helping charities avoid the key risks. Such guidance is likely to be well-received as new figures show that around 65% of charities feel the pandemic has increased their risk of fraud due to more remote working, the increased use of powers of attorney and virtual sign-off processes. Fraud and financial crime is one of the most common types of abuse for charities and pose a serious risk to valuable funds, sensitive data and the good reputation of and public trust in charities.
Together with the Fraud Advisory Panel, the Charity Commission is urging all trustees to sign up to a new Stop Fraud Pledge, which commits charities to taking six practical actions to reduce the chances of failing victim to fraud. These measures are:
- Appointing a suitable person to champion counter-fraud work throughout the organisation.
- Ensuring all the trustees are aware of their legal duty to protect the charity’s assets.
- Consulting with staff, volunteers and trustees to identify the types of fraud that are a threat and the ways these can be prevented.
- Creating a written fraud policy and sharing it regularly with staff, volunteers and trustees – this will help people understand what fraud is and how they can help prevent it.
- Performing checks on the individuals and organisations with whom the charity has a financial relationship.
- Assessing each year how well the fraud controls are working, taking into account new risks and making improvements as needed.
The guidance highlights that reporting fraud is also an essential element for combating it, as it helps builds a clearer picture of the scale of fraud affecting the sector. Action Fraud is a national reporting centre specifically for reporting frauds and has an online fraud reporting service, available 24 hours a day.
RPs are particularly susceptible to a wide-range of fraudulent activity, so it is well worth RPs reading the guidance and considering whether or not to sign up to the pledge.
Streamlined Energy and Carbon Reporting (SECR)
The SECR is designed to increase both awareness and transparency around the ‘carbon footprint’ of organisations – it is envisaged that such reporting will enable stakeholders to understand the impact of the organisations they interact with, as well as providing organisations with the data to inform the adoption of energy efficiency measures.
Many of our clients have been in touch to discuss whether or not these requirements apply to them. Whilst the answer to this question will very much depend on the nature of your group structure, in many cases it may not apply.
However, even where there is no legal obligation to comply, you may wish to adopt some or all of the reporting requirements and move to a voluntary reporting position over time.
Please get in touch if you would like to discuss your compliance obligations.
The SID Network recently met (virtually) to discuss the SID’s role in managing stakeholders. Thanks to all of those that attended – we are looking forward to our next session in January. If you have a SID and they are not yet part of the network, please drop us a line.
Our Committee Chairs’ Network also met to discuss how committees can gain assurance around disrepairs, and we are looking to arrange our next meeting early in the New Year to discuss cultural assurance. This network is new, so please do share the details with your Committee Chairs to see if it is of interest.