Sector Risk Profile 2021 – what registered providers need to look out for

Jo Loake looks at the Regulator of Social Housing’s 'Sector Risk Profile 2021' and provides commentary on what it means for social landlords.

General themes

The general themes of the Sector Risk Profile are:

Strategy

Registered provider boards are facing competing pressures and trade-offs when looking at the registered provider’s strategic direction and in utilising their limited financial capacity.

Macroeconomic risk

There are a number of risks in areas such as labour and supply chain, some of which are as a result of the pandemic. This could affect the costs and availability of goods and services.

Financing

Increased reliance on debt to fund strategic objectives such as investment in new and existing housing may impact on a registered provider’s margins.

Stock quality

Registered providers may need to invest in existing stock over the next few years.

Health and safety

Ensuring tenant safety is a fundamental responsibility of all registered providers.

Service delivery and accountability

Increased transparency with tenants and the increased importance of the consumer voice and tenant engagement.

New supply and the housing market

Registered providers will still need to implement and continue development plans and keep an eye on the market.

What registered providers need to consider

Strategy and stock

Registered providers are likely to need to invest significantly in response to changing building safety and energy efficiency standards, in terms of existing housing stock, whilst also continuing to invest in developing new homes for future tenants. Registered providers’ purposes, how they make choices, and performance in delivering objectives will be scrutinised by multiple stakeholders. Boards will need to be able to clearly articulate their registered providers’ purpose and be transparent in communicating performance against it in order to manage reputational risk inherent in relation to trade-offs within the organisation and setting its strategy.

Boards must ensure that registered providers provide a repairs and maintenance service to homes and communal areas that represents value for money and which ensures the homes meet minimum standards. Housing stock is a long-term asset and boards will need to ensure that it continues to be fit for purpose over its lifetime, including the resilience of stock to the effects of climate change, such as higher temperatures, more extreme weather events, and indoor air quality. Boards will need robust and up-to-date stock condition data and must understand the implications of the new requirements, including economic performance of assets and identification of investment needs as well as how this relates to evolving requirements from the review of Decent Homes Standard and the Government’s decarbonisation agenda.

Action: boards should ensure that they have up to date a robust data about stock and have a clear understanding of the impact of changes to the Decent Homes Standard and environmental agendas.

Skills and labour

Boards must fully understand the registered provider’s cost base and capital requirements and will need to stress test across a range of assumptions and develop robust mitigation plans. Access to skills and labour could be a significant consideration for delivery of development programmes, major repairs and maintenance, health and safety compliance and key services to tenants and boards will need to ensure that any likely and continuing shortages are monitored and do not undermine essential activities.

Action: boards must monitor the market in relation to any shortages of goods, services, skilled labour and assess the impact this may have on the delivery of development, repairs and maintenance programmes.

Finance

Boards must have the necessary skills to understand and challenge the merits and risks of all financial products which a registered provider may use and ensure that they are right for the registered providers in delivering its objectives. Boards must understand how higher than expected borrowing costs could impact a registered provider’s financial viability.

Action: boards should ensure that they are familiar with the current financial position of the RP and that they are familiar with the covenants which the registered provider must comply with and the risk of issues such as crystallisation. Any consideration of new funding models must be considered with regard to the objects of the registered provider and risk must always be considered in terms of risk v return.

Health and safety

Boards must have assurance that the registered provider’s stock meets all relevant statutory health and safety obligations, irrespective of whether the registered provider is carrying out these checks directly. Boards must understand their duties and responsibilities with regard to fire and building safety under the new regulatory regime introduced by the Fire Safety Act 2021 and future legislation currently reflected in the Building Safety Bill.

The Fire Safety Act 2021 and the Building Safety Bill introduce wide-ranging changes, including the creation of a new Building Safety Regulator with a range of enforcement powers and a new regulatory regime. The Regulator’s Consumer Regulation Review highlights the extent to which a registered provider’s ability to meet statutory health and safety requirements relies on holding good quality, accurate data on their tenants and their stock. It also highlights the importance of being proactive in managing risks and responding promptly to identified issues. Failure to inspect and deliver safety remediations in a timely manner can put tenants at risk and also has a substantial impact on shared owners who can find themselves unable to sell and trapped in homes that no longer suit their needs.

Action: boards must ensure that they have comprehensive and effective building safety systems and programmes in place to provide assurance that tenants remain safe. This is particularly important when services are provided by third parties such as managing agents or contractors. Contracts should be carefully drafted, negotiated and reviewed.

Service delivery and transparency

Boards must understand any costs associated with remediation works and any implications for planned major repairs, particularly for large and complex buildings. Where remediation works may take time to implement, taking account of industry capacity and risk, boards must ensure that registered providers communicate transparently with tenants and other stakeholders.

Demands for transparency will increase and registered providers should take action now to strengthen engagement with tenants and improve services. Boards’ assurance that tenants are being treated with fairness and respect, and that their diverse needs are considered, should be reinforced by decision-making processes supported by robust data and effective internal controls. Boards must also ensure that systems are in place to ensure data security to protect tenants from potential harm.

The Social Housing White Paper commits to delivering proactive consumer regulation, transparency on landlord performance, building safety, effective handling of complaints, strengthened resident engagement, and good quality homes and neighbourhoods. The impact of the pandemic has meant tenants have spent more time in their homes and this has underlined the importance of the relationship between tenants and their landlord.

The recently published Consumer Regulation Review identifies key issues and lessons and demonstrates the importance of effective communication with tenants and learning from complaints. The Regulator considers how a registered provider interacts with tenants and how it puts things right when they have gone wrong is indicative of a registered provider’s culture and how its systems and processes operate in practice.

Action: boards must ensure that strong governance arrangements are in place to continue to manage effective delivery of services to tenants and maintain compliance with consumer standards.

Supply

The development and sale of new units carries significant risks which boards will need to manage, including the potential impact on financial viability and the achievement of strategic objectives, as well as reputational risk. Registered providers and their boards need to ensure rigorous stress testing and mitigation planning and they must assure themselves that they understand and can mitigate against these risks, including impairments of joint venture investments.

The development of new housing – both social and non-social – remains a key priority for government and registered providers continue to play an important role in meeting this demand. Some registered providers develop units for sale to meet their strategic objectives, as well as to generate surpluses to cross-subsidise other activity. However, exposure to the housing market brings its own set of risks to manage.

Action: boards must consider the market in which they operate, as well as the supply v demand in the areas in which they work. When developing houses for market sale, boards must consider any charitable and non-profit status, and the objects of the registered provider, as well as the cross-subsidy issues across any group entities.

Additional considerations

The Sector Risk Profile also considers additional risk factors, such as:

Diversification

Boards must understand the full range of risks diverse activity can expose registered providers to and ensure that such activity has a clear strategic role in meeting the registered provider’s purpose and objectives. Furthermore, boards must clearly understand the potential risks associated with the finance and funding structures of non-social housing activities and have appropriate governance structures and ring-fencing arrangements in place to ensure that social housing assets are not put at risk by, for example, guarantees or impairment relating to non-social assets.

Charity status

Charitable registered providers must also have regard to charity law when undertaking diverse activity.

Contractual risks

Registered providers enter into contracts with a wide range of third parties, including funders, insurers, auditors, pension providers, construction and maintenance contractors, care providers and through joint ventures. These can be useful and effective for the delivery of key services and represent value for money. However, entering into contracts with third parties exposes registered providers to counterparty risks and can reduce the control that they have over the delivery of those services. Reliance on a limited number of third parties or sources of finance also exposes registered providers to concentration and reputational risks.

Boards must have assurance that concentration risk is being managed, including monitoring of counterparty robustness and consideration of protections for breaches or termination of contracts. Due diligence should be undertaken to ensure any potential conflicts are identified that could breach policy, regulation, legislation or cause reputational harm.

Value for money

Boards must continue to closely monitor and constructively challenge registered providers’ performance to make well-informed decisions regarding the effective use of the assets and resources available to them.

Supported housing

Where a registered provider is involved in significant supported housing or support contracts, they must ensure they understand funding risks, including stress testing against increased costs, loss of contracts, and the commissioning of revised or new services. Boards will need to ensure that the delivery of adequate services to tenants is not threatened by lack of staff. Boards of providers tendering for contracts in unfamiliar areas of support need to fully understand the wider risks involved, such as increased safeguarding risks, and have robust systems of oversight and effective mitigation strategies in place.

New and existing debt

Boards must ensure appropriate treasury management and governance processes are in place to effectively monitor existing loan covenants to mitigate the risk of breaches. Boards must also stress test against changes in underlying assumptions to understand and mitigate against unforeseen requirements for financing or increases in interest costs.

Registered providers have shown increased consideration of Environmental, Social and Governance (ESG) linked funding and sustainability linked loans, which is reported to have widened the number of interested investors. While such funding can be slightly cheaper, there can be extra costs associated with evidencing delivery against targets. Boards should ensure that decisions around which debt funding option is right for the business stems from its activity, rather than the other way round. It is crucial that boards have the skills and expertise to understand and effectively challenge financial advice, especially when considering innovative and/or complex funding structures.

Where registered providers are agreeing to targets as part of ESG funding, they need to ensure that the targets are deliverable and do not undermine the board’s control over the business. Boards will need to manage relationships with investors and lenders and manage counterparty risk, particularly where long-term debt may be sold on to other parties. Boards should ensure they undertake robust stress testing to understand the sensitivity of business plans to decreases in investor appetite and potential changes to the cost and availability of debt.

New funding models

Boards must assess the risks associated with any new types of funding and ensure that there are no potential conflicts from the influence of funders over strategic direction and that the board remains independent. Boards must bear in mind that they cannot outsource their responsibilities and ensure that they own and manage the risks associated with specific business models.

The Sector Risk Profile also makes reference to other risks, such as:

• Data security and integrity
• Rent setting
• Rent arrears
• Costs and inflation
• Risks in construction
• Pensions
• Fraud

Although this article does not detail these risks, advice can be provided if required. 

Jo Loake is a Principal Associate at Weightmans.