Executive Board at city council to consider external reports into misallocation of Housing Revenue Account as amount of funds incorrectly used rises to £40m

The Executive Board at Nottingham City Council is this week (28 April) to consider the findings and recommendations of two externally commissioned reviews into how more than £40m in funds from the Housing Revenue Account (HRA) were wrongly used in the general fund for all council services.

In December 2021 the council’s section 151 officer issued a Section 114 report when it emerged that it had acted unlawfully. At the same time, the monitoring officer issued a further report under section 5 of the Local Government and Housing Act 1989.

A report to the Executive Board on 28 April outlines the findings of the two subsequent independent investigations commissioned by the council into the matter, by CIPFA and Richard Penn, a local government expert and former chief executive. The report to the Executive Board recommends that all proposals to address the issues outlined in both reports are accepted and implemented in full.

The Penn report states that the payments from the HRA to the general fund were made “in an environment where there were many proposals to reduce expenditure or increase income in order to maintain services and avoid cutting jobs”.

It concludes that it was not case that the payments were a “mechanism conceived to divert HRA funds to the General Fund (GF)”. However, it was clear that the annual rebate received by the city council was used to benefit the pressures on the General Fund, and that as the annual expectation of savings/payments grew “it is likely that this became an accepted mechanism to divert funds from the HRA to the GF”.

The report to the Executive Board said Mr Penn had made the following recommendations:

Relationship with Nottingham City Homes (NCH, the council's arm's length management organication)

• • Having regard to the CIPFA Review and this investigation, urgent consideration is given by the Council to bringing back ‘in house’ the management of the Council’s housing stock and related functions.
  • Between now and when a ‘Notice to Terminate’ is served, the Council to expedite the significant strengthening of the governance arrangements applied to NCH, to ensure that the Council can demonstrate and exert the required control over NCH as a wholly owned Teckal company, to provide the necessary assurance over the management of the Housing Revenue Account.
  • This should include amending the Articles of Association, the rules governing how the company operates lodged at Companies House, to give the Council the right to appoint and dismiss the Chair of the Board and the Chief Executive.
  • Penn also recommended the ongoing strengthening of the Council’s local housing authority role, to include effective client arrangements of NCH, together with the undertaking of project planning for the return of council housing management to the Council, with the necessary resources being allocated.

Improved governance within Nottingham City Council

• • Arrangements should be made for additional advice, guidance and support for the Council’s Finance Team including external support and expertise.
  • that the Monitoring Officer and the s151 Officer should be formally and more actively involved than has been historically the case in fulfilling their statutory responsibilities for the provision of advice to elected members on any proposed action by the Council that could potentially be unlawful along with the Chief Executive, as the Council’s third statutory officer.
  • That any such advice from the Council’s three statutory officers must be fully respected by both members and officers and given due weight in the Council’s  decision-making processes.
  • That the Council’s External Auditors should be required to have a greater focus on how the Council is taking decisions and responding to the advice from the Council’s statutory officers rather than relying on ‘materiality’ to trigger potential intervention.
  • Whilst the operating environment may have been considered challenging or difficult, the investigation has found that a number of former NCC officers fell below the standard that could reasonably be expected in showing the necessary intellectual curiosity, and providing clear advice about the inappropriateness of action by the Council in this regard.
  • The Council should seriously consider passing details of the CIPFA Report and this (Penn) Report to relevant professional bodies where relevant professional qualifications were and are held, for those professional bodies to determine whether they wish to consider any support, guidance or action in this matter. This would be a serious step and proper consideration needs to be given to the relevant evidence before any such action is taken to avoid potential litigation.
  • That the Council’s Constitution - including the various Codes of Conduct - should be critically reviewed to ensure that the lessons learned from this experience have been fully encapsulated in the requirements set out in the Council’s Constitution.

The city council said: “Reverting housing services back to the host local authority is now a common practice. The Executive Board report highlights that from an initial 70 Housing ALMOs (Arms’ Length Management Organisations) created in the early 2000s to gain Decent Homes grant funding from Government, there are now only just over 20 ALMOs still operating.”

The CIPFA report meanwhile identifies that an additional amount of up to £24m from the NCH ‘management fee rebate’ could potentially have been incorrectly used since 2014/15 by both NCH and the city council. The overall scale of the issue was reported to be up to £40.126m.

The council said the process of repayment had already begun with an amount of £14.4m identified by CIPFA in the first phase of their investigation.

CIPFA also reports serious concerns about the lack of transparency in HRA reporting and the need to separate HRA from non-HRA activity in the work of Nottingham City Homes.

Commenting ahead of the Executive Board's meeting, Nottingham’s Leader, Cllr David Mellen, said: “This is a clearly a setback, particularly as the council has been making significant progress on improving our financial governance over the last year. This issue demonstrates the importance of that work and how thorough it has been.

“Last year we took swift and firm action to issue a Section 114 Notice and commission two independent reports into the circumstances surrounding the HRA funding.”

Cllr Mellen added: “The findings of these investigations show that the finance and governance arrangements around the ring-fencing of the HRA fell seriously short of acceptable standards, although we are disappointed that this wasn’t flagged up at the time by the council’s external auditors.

“Since these decisions were first taken, new leadership and senior management have shown determination to take the action necessary to address these issues and move forward positively.”

The city council's Chief Executive, Mel Barrett, said: “These reports identify underlying issues around governance and finance which the council is addressing as part of our ongoing improvement work through our Together for Nottingham Plan.

“While the reports bring to light the serious failings in past practice, Nottingham people may be reassured in knowing that the new leadership of the council have, at every stage, taken steps to identify, understand and own these issues. We have invited independent scrutiny and ensured open, honest and transparent management of our financial governance to ensure compliance is improved for future practice. We are determined to provide reassurance to local residents, the Improvement and Assurance Board and Government that we understand what went wrong and that we can and will put it right.”