Welcome to our snapshot of key changes and current affairs for Company Secretaries working in social housing.
Gift Aid Payments
It’s that time of year, when many Registered Provided (RPs) will be looking to get their finances in order before the close of another financial year. One area that should not be forgotten is gift aid payments made from trading subsidiaries to charitable parent entities. Gift aid payments from trading subsidiaries are usually made in one of the following ways:
- By recognising gift aid payments as they are paid.
- By making a single payment on account just before year end. This can only be based on best estimate of profits for the trading subsidiary and will usually need to be corrected post year end.
- After the end of the financial year, when accountants are able to calculate the precise profit amounts available for distribution. Companies that are wholly-owned by a charity or one or more charities have nine months from the end of an accounting period in which to pay the amount they want to donate to the charity as a qualifying charitable donation.
Where payments are made within the nine-month timeframe, we are seeing an increasing number of RP clients documenting the decision to grant gift aid payments under deeds of covenant. These deeds confirm that the subsidiary is obliged to pay the entirety of their taxable profits to the charitable parent for that financial year. They need to be in place before the end of the financial year if this route is chosen, and can help smooth the governance journey for approval of these kinds of payments for future years. Worth a chat with your finance teams about this if you want to consider it - we’re on hand to answer any questions you or they might have.
Charity Commission Criticises Kids Company
An official report by the Charity Commission made a formal finding of “mismanagement in the administration of” Kids Company over its repeated failure to pay creditors. The Commission found that Kids Company operated a “high risk business model”, characterised by a heavy dependence on grants and donations, reliance on a key individual for fundraising, low reserves, and a demand-led service.
This follows a High Court ruling in 2021 which cleared the trustees of any personal wrongdoing. The Commission agreed with the High Court judgement that there was no dishonesty, bad faith, or inappropriate personal gain in the operation of the charity. But the Charity Commission report did make the following findings:
- Delayed action to address financial and operational risks: the trustees were aware of the risks arising from the charity’s operating model for years and had recognised the need to make changes. They should have acted sooner during the period of the charity’s growth to improve its financial stability.
- The charity’s records and record keeping: there were concerns around Kids Company’s records relating to decision-making about direct spending on beneficiaries. Some of the records were destroyed at the time of its collapse. There was also “insufficient evidence” for the Charity Commission to be satisfied that the charity’s significant expenditure on a relatively small number of beneficiaries was either justified or in the charity’s best interests.
- Leadership factors: the board lacked expertise in certain fields, potentially limiting challenges to executive decisions. The founder CEO had been in post since 1993, and its chair had served since 2003. The Commission noted that “rotation amongst a charity’s trustees allows for an injection of new ideas and approaches and for challenges to the way in which a charity operates”.
Issues for the wider charity sector
The Commission have highlighted the following lessons for charities to learn:
- Effective board leadership: Founders of charities need to be mindful that a permanent leadership role is rarely in the best interests of a charity and can lead to unhealthy board or wider organisation dynamics and poor decision making. No charity should be defined by a single individual.
- Managing risks associated with innovative approaches: There is no ‘best’ way for charities to deliver public benefit. Diverse and innovative operating models can help keep the sector relevant and dynamic. Problems can arise when a charity’s innovative approach is not balanced by management of the commensurate risks.
- Planning reserves: There is no single level of reserves that is right for every charity. Trustees should undertake financial planning and recording including maintaining a reserves policy.
- Managing growth: Charities should ensure infrastructure, governance and resources keep pace with growth. They should have sustainable income to support their growth and ensure that policies are scaled up to reflect the needs of any expanded or newly introduced beneficiary groups. They must ensure that their governance is robust, ideally with at least one trustee with experience of managing a charity of similar scale on the Board.
The FCA’s plans to become a more innovative, assertive and adaptive regulator
The Financial Conduct Authority (FCA) has implemented changes that have shifted existing certain decision-making responsibilities from its Regulatory Decisions Committee (RDC) to senior FCA staff (executive decision makers). These changes relate to the FCA’s wider financial services arm, not to the Mutuals division, which oversees the registration of registered societies.
The decisions that have been shifted to senior FCA staff are those relating to:
- A firm’s authorisation or an individual’s approval.
- The FCA using its own initiative powers to impose a fundamental variation of permissions or requirements on firms.
- Taking action in straightforward cancellation cases.
- Commencing civil proceedings, such as seeking an injunction.
- Commencing criminal proceedings, such as a prosecution for insider dealing.
The changes are intended to make the FCA more adaptive and quick to respond to issues and the FCA anticipates that the higher standards will result in increased refusal, withdrawal and rejection rates.
The key changes are as follows:
The FCA staff making executive decisions will be experienced members of staff and will usually be from the relevant industry area. They will not be involved in the process of gathering the evidence on which the FCA’s decisions are based.
The FCA has said that its in-house lawyers will be overseen separately to ensure they discharge their professional obligations and provide objective and balanced legal advice.
2. Disclosure and evidence
The FCA has clarified that subjects of decisions will receive a clear notice setting out the reasons for the decision and the supporting facts and matters, as well as the material on which the decision was based. This is so that they can assess whether they want to make representations or appeal.
3. Challenging decisions
Under the FCA’s new decision-making processes, firms and individuals will only be able to make oral representations where fairness demands it. Whilst there are concerns around the effect this may have on the perceived fairness of the FCA process, the FCA has said that the perceived benefit of oral representations is outweighed by the negative impact that the time taken to arrange and deliver oral representations has on the speed and efficiency of FCA decision making.
Where the FCA considers a case to be straightforward, its new approach enables it to take action without reference to the RDC. The FCA envisages that this will include cases where firms have failed to pay their regulatory fees, submit the relevant regulatory returns, or meet the FCA’s threshold conditions.
This remains a risk and potential area of challenge as recent Upper Tribunal cases have highlighted cases which the FCA has treated as straightforward but which the Upper Tribunal has deemed to be complex or unusual.
Consumer Regulation Review: Tracker
The Secretary of State for Housing, Communities and Local Government has announced that he expects the Social Housing Regulation Bill to now be published in the third sitting of parliament. This means that we can now expect to see the bill sometime in May or June. It was originally anticipated that the bill would be published in March.
It also looks like the new bill may include requirements on social homes to be maintained to a certain level, based on the Housing Secretary’s recent statement that his department is considering what is needed to ensure that the “bill and the requirement to maintain social homes in a decent way can be made”.
We will continue to keep a close eye on how the bill develops.
Our monthly review of regulatory upgrades/downgrades/regrades in the sector has highlighted the following themes:
- Emphasis on the need for registered providers to have a cost-effective repairs and maintenance service and to meet all applicable statutory requirements that provide for the health and safety of tenants in their homes
- Potential breaches of the Home Standard may apply to communal areas within the management of registered providers. As a side note, we consistently see issues arising with management companies where there is no board in place, or lack of clarity around the structural arrangements and responsibilities. This may enhance the risk of breach.
- A continued focus on health and safety, in particular ensuring that electrical safety assessments, fire risk assessments and asbestos surveys are completed on time and kept up to date.
NHF Code of Conduct
The National Housing Federation has now closed its consultation with is members on its draft new code of conduct. We’ll be reporting on the new code during the course of 2022.
Fit for purpose structures – Mergers
In our recent webinar with Abri, we explored the various stages of a merger and gained top tips to help equip your leadership teams and Board. If you missed the event, you can access the recording via our website.
NHF Finance Conference
Are you attending the NHF Finance Conference on 16-17 March in Liverpool? Our Governance and Finance colleagues will be in attendance, as well as presenting on the first day. If you would like to arrange a chat to discuss your challenges or find out how we can help you, please contact Banking.C&IPA@bevanbrittan.com.