MPs attack approach by regulator to financial viability of housing providers

MPs have attacked the financial viability ratings of social housing providers issued by the sector’s regulator.

In a report, the Communities and Local Government Committee criticised Julian Ashby, chair of the Homes and Communities Agency’s regulation committee, over his reluctance to give some providers lower financial viability ratings, even though he admitted that they gave him concern.

This practice was adopted because of fears that adverse financial viability ratings could trigger an upward re-pricing of the providers’ debt.

The MPs said that the regulator instead used governance ratings to signal concerns about financial viability.

But this approach meant that the regulator could not use many of his statutory powers, the report said.

Calling for the practice to be stopped, the CLG committee said it lacked transparency and risked too close a relationship between the regulator and providers.

The report said the regulator should examine how other regulators – such as the devolved administrations’ housing regulators – had addressed concerns about whether the use of statutory powers might be counter-productive.

Committee chairman Clive Betts MP said: “The committee was surprised to find that what purported to be an assessment of the financial viability of housing associations was no such thing. As it stands, if a housing association was in serious financial difficulty, nobody would have a clue.

“The current approach of using governance ratings to signal concerns about financial viability lacks openness and is confusing. It is unfair to expect tenants, taxpayers and lenders to understand and decipher the regulator’s coded messages.”

Betts added that if the sector knew that the regulator would not use his formal powers, then his position and effectiveness would be undermined. “The regulator must find answers, and he must do so quickly.”

The CLG committee highlighted the case of Cosmopolitan Housing Group, which came close to insolvency in 2012, as underlining its concerns.

Betts said: “The eventual downgrading of Cosmopolitan amounted to a futile exercise in locking the stable door long after the horse had bolted. It exposed the serious shortcomings of the system. It comes as no surprise to the committee that Moody's cited the episode when downgrading all but one of the English housing associations in May this year.”

The CLG committee also said it had concerns about the regulator’s effectiveness in discharging his remit for consumer regulation.

It highlighted how, of 111 complaints related to consumer standards referred to the regulator, no case of serious consumer detriment had been found.

The committee called for an annual external check to be carried out by an independent reviewer. The first such evaluation should be published no later than Easter 2014, it said.

Betts added: “The regulator has a key role to play in regulating consumer standards in the social housing sector. He appears, however, to have interpreted his remit in this area as narrowly as possible and we were left with the impression that he saw it as a distraction from his main job of economic regulation.

“It is not for us to judge individual cases. It is for us, however, to consider whether the regulator has systems in place that allow him to discharge his duties effectively. We are not convinced this is the case.”

In its response to the report, the HCA Regulation Committee insisted it was “entirely focused on meeting its statutory objectives on economic and consumer regulation set out by Parliament” and that it published “regular and robust” judgements on providers’ compliance with its standards.

The HCA said: “If there is a failing on viability or governance then the regulator will make this clear in timely and transparent way. However, non-compliance with our viability standard should be rare.

“Social housing providers benefit from predictable revenues and a strong asset base, often underpinned by substantial levels of public subsidy. They should not be putting social housing assets at risk. In addition, our regulatory approach is to spot and resolve emerging problems, in line with our statutory objective to ensure the on-going viability of the sector, before a V3 or V4 rating is necessary.”

The HCA said that where a provider did not meet either its governance or viability standard, the regulator would say so.

However, in light of the CLG committee report, it said it would alter its description of a grade three viability judgement to make it clear that it regarded a non-compliant viability judgement as a very serious issue rather than just a concern.

The HCA continued: “Where a provider is not meeting our economic standards we have a range of statutory powers. We will use these where it is the best way of meeting our statutory objectives.

“Given the potential impact of using statutory powers, including the possibility that the use of powers will trigger a default under the terms of loan agreements, if a provider is willing and able to resolve the issues it faces without a statutory intervention then we will work with them to do so.”

The regulator said that, after discussions with lenders and other stakeholders, it had also agreed that where it believed its existing judgement might be subject to significant downward revision it would make it clear that the relevant provider was under review.

“We already indicate where we believe an existing public judgement is out of line with our emerging internal view, as we did in the Cosmopolitan case,” it added.

On consumer regulation, the HCA pointed out that its role had changed under the Localism Act 2011. It will publish a review of its first year’s experience of this new role in the autumn.