Governance Updated

Updated March 2020 View full section
The purpose of this section is to explain the governance requirements for housing associations and how they are met, including regulatory requirements, the codes that apply and reporting on governance.

The focus of this section is on the Regulator of Social Housing (RSH) regulatory standard on governance and the National Housing Federation codes of governance. There are separate codes in Wales and Scotland, as well as the UK Corporate Governance Code (the benchmark for corporate entities). Housing associations are required to adopt and comply with an appropriate code of governance however they are able to elect which code of governance to adopt.

The fundamental principles of good governance are as applicable to housing associations as to any other organisation. However as the boards of housing associations often involve volunteers and housing associations are in receipt of considerable amounts of public money, and as the sector is increasingly diverse, there is more focus on governance in this sector than in many others.

The Homes and Communities Agency (HCA) was replaced by the Regulator of Social Housing and Homes England in January 2018. The focus on governance is reflected by the RSH setting the governance requirements for housing associations. The HCA issued the Governance and Financial Viability Standard effective from 1 April 2015 (see the Regulator of Social Housing Governance and Financial Viability Standard below). The RSH continues to assess the compliance of housing associations against this standard.

Boards and committees of management have legal responsibility for the running of a housing association. They retain ultimate control and responsibility over all aspects of the activities of the housing association and must ensure that the financial and legal responsibilities are properly fulfilled. They must maintain independence, and always act in the best interests of the housing association.

The powers and responsibilities of boards and committees are wide and, although particular functions may be delegated to sub-committees or to executive teams and staff, boards and committees retain the responsibility for seeing that those functions are carried out properly.

Boards and committees are central to the governance of housing associations. Their roles and responsibilities normally include:

  • defining the housing association’s strategic objectives
  • establishing plans to achieve those objectives
  • approving each year’s budget, business plan and financial statements prior to publication and monitoring the performance of the housing association in relation to these plans and budgets
  • establishing and overseeing an appropriate framework of delegation and effective systems and control
  • establishing and overseeing an appropriate risk management framework
  • Establishing an appropriate framework of assurance that business objectives and regulatory requirements and expectations are fulfilled.
  • appointing and, if necessary, dismissing the chief executive
  • satisfying themselves that the affairs of the housing association are conducted lawfully and in accordance with generally accepted standards of performance and propriety.

The regulatory requirements for a housing association will in part depend upon the type of entity it is.

For associations that are limited companies there are statutory requirements in place within Part 10 Chapter 2 of the Companies Act 2006 which set out the duties of company directors.

For associations that are registered charities there are some provisions with Part 9 of the Charities Act 2011. These primarily concern the remuneration of charity trustees and are much less detailed than those outlined in the Companies Act 2006. However the Charity Commission has issued a great deal of guidance on how it expects charities to be governed, which is available on its website (www.charity-commission.gov.uk).

The current Charities SORP which became effective from 1 January 2019, and the SORP for registered social housing providers 2018 (Housing SORP: 2018 update), have requirements for trustees to make disclosures in the trustees report on governance arrangements (see Reporting below).

There are also limited requirements within the Co-operative and Community Benefit Societies Act 2014 (formerly the Industrial and Provident Societies Act 1965) concerning the handling of the association’s monies, but these again are far less comprehensive than those in the Companies Act. The remaining provisions of the Act deal with matters such as the contents of registered societies’ rules including appointment of officers, voting rights and holding of meetings, as well as borrowing powers and the provision of audits.

The RSH requires housing associations to adopt an appropriate code of governance which should establish clear roles, responsibilities and accountabilities for boards. Housing associations must assess their effectiveness annually and explain areas of non-compliance with their chosen code.

The current RSH regulatory regime came into effect in April 2015. There have been some changes to the Regulatory Framework since its introduction and these changes encourage housing associations to regulate themselves against a series of regulatory standards issued by the RSH. These standards include economic standards and consumer standards. These are:

Economic standards

Consumer standards

  • Home
  • Tenancy
  • Neighbourhood and Community
  • Tenant Involvement and Empowerment Standard

The RSH has published the document Regulating the Standards, with the March 2019 version being the current version. The RSH outlines how it monitors associations compliance with the regulatory standards in a number of ways, including:

  • Review of Quarterly Surveys
    Housing associations owning 1,000 or more units must complete quarterly surveys about their financial health including access to cash and liquidity position.
  • Stability Checks
    This involves carrying out annual financial viability and governance reviews, using the most recent business plan and annual accounts. The review focuses on indicators of financial robustness and considers evidence of any significant changes in risk profile. The RSH’s work verifies that the information contained in the standard regulatory returns do not appear inconsistent with the provider’s existing published governance grade.
  • In-Depth Assessments (IDAs)
    For housing associations with 1,000 or more units, the RSH anticipates carrying out IDAs every three or four years. The frequency of IDAs is linked to the RSH’s assessment of the relative risk profile for individual housing associations including the occurrence of any significant changes in the scale and nature of activities that a provider undertakes. IDAs assess housing associations’ compliance with each of the three economic standards and focus on the issues the RSH believes to be the most important for each housing association. The areas covered are strategy, structure, financial resilience, risk profile and mitigation, and governance. Additionally, governance and risk management, vulnerability to covenant breaches, liquidity, approach to value for money as well as approach to managing the risks to social housing assets arising from non-social housing activity. On occasion, IDAs may need to be carried out at short notice but generally six weeks’ notice is provided in order to discuss the planned process with the housing association.
  • Annual planned engagement meetings
    The RSH anticipates carrying out IDAs of some providers on a biennial basis because of their size and complexity. In the year when an IDA is not carried out, face-to-face meetings with the executive teams of this group of housing associations take place.

For all housing associations with 1,000 or more units, the RSH publishes assessments of their compliance with the Governance and Financial Viability Standard, split into a grade for governance and a grade for financial viability.

The governance grades range from G1 (meets all governance requirements) to G4 (does not meet governance requirements, there are serious regulatory issues, and the housing association is subject to intervention or enforcement action). The financial viability grades range from V1 (meets all financial viability requirements and can deal with a range of financial risks) to V4 (does not meet financial viability standards, there are serious regulatory issues, and the housing association is subject to intervention or enforcement action).

The Governance and Financial Viability Standard (the standard) was published by the RSH alongside a new Governance and Financial Viability Standard Code of Practice (the code of practice) that is “designed to amplify the requirements of the Governance and Financial Viability Standard. It is designed to help housing associations understand what the regulator is looking for when seeking assurances on compliance with the standard.”

The code of practice is not prescriptive, and housing associations may comply with the standard in other ways. The standard takes precedence over the code of practice.

It is the responsibility of boards of housing associations to meet this standard. The Governance and Financial Viability Standard requires housing associations to ensure:

  • there is access to sufficient liquidity at all times
  • financial forecasts are based on appropriate and reasonable assumptions
  • effective systems are in place to monitor and accurately report delivery of the housing association’s plans
  • the financial and other implications of risks to the delivery of plans are considered
  • housing associations monitor, report on and comply with their funders’ covenants.

The code of practice and the standard was effective from 1 April 2015 and require housing associations to:

  • adhere to all relevant law
  • comply with their governing documents, their adopted code of governance and all regulatory requirements
  • be accountable to tenants, the regulator and relevant stakeholders
  • safeguard taxpayers’ interest and the reputation of the sector
  • have an effective risk management system and internal controls assurance framework
  • protect social housing assets, using group structures for other operations if necessary.

There are further requirements in the standard on frameworks for business planning, risk and controls as well as requirements for effective controls and governance of subsidiaries in group structures. The decision to include group structures in both the RSH and the NHF codes reflects the increasing complexity of housing associations’ structures as they diversify the range of their activities.

The RSH takes a co-regulatory approach to regulation. This means that:

  • board members are responsible for ensuring that housing associations are managed effectively and that providers comply with all regulatory requirements
  • housing associations must help tenants to influence and scrutinise delivery of service, and to hold the board responsible.
  • the RSH operates as an assurance-based regulator, seeking assurance from providers as to compliance with the standards. The onus is on providers to demonstrate compliance to the RSH and where assurance is not supplied that this will be reflected in judgements reached.

With the trend towards smaller boards and less opportunity for tenants to be active board members, it is important to facilitate tenant scrutiny in other ways.

In accordance with the code of practice, housing associations are responsible for demonstrating their compliance with the standard to the RSH. They must also consider continuing compliance when significant new risks emerge. Housing associations shall communicate with the RSH in a timely manner on material issues that relate to non-compliance or potential non-compliance with the standards. The RSH, through the code and the standards influence how associations govern themselves by requiring board members with appropriate skills identify and manage the risks. This is then part of the in-depth assessments conducted by the RSH under a programme of review and enforcement of the standards. In addition the RSH requires boards to have appropriate training, annual assessments and set term of appointment. This is a trend that is likely to continue in the future.

There therefore needs to be a process in place in housing associations to assure the board that compliance in all areas is being achieved. As the code of practice states that housing associations must make a statement that they comply with all relevant laws, housing associations must also have a process for monitoring compliance with this requirement. There must be a process for monitoring where the standard is not met, to report this non-compliance in their annual report and take action to rectify the breach.

Boards have an increasing duty of scrutiny in light of recent deregulation. Part 2, Section 8 of the Accounting Direction for Private Registered Providers of Social Housing 2019 (The Accounting Direction) requires disclosures regarding compliance with the standard.

The primary code of governance adopted by housing associations is the NHF Code of Governance 2015. A number of housing associations elect to adopt the UK Corporate Governance Code which was recently updated in 2018 for accounting periods beginning on or after 1 January 2019 by the Financial Reporting Council. Some housing co-operatives have elected to adopt the Excellence in Governance Code of Governance for Housing Co-operatives 2012. Housing associations which are also registered charities may adopt the Charity Governance Code.

The Financial Reporting Council has also published Guidance on Board Effectiveness in 2018 and Guidance on Audit Committees in 2016 to assist Boards and Audit Committees in considering how to carry out their role effectively.

The National Housing Federation issued a code of governance for housing associations in 2010 and this was revised in February 2015, Code of Governance: Promoting Board Excellence for Housing Associations (the code). It applies to all housing associations that choose to adopt it, and sets out best practice in respect of:

  • the constitution and composition of the board
  • essential functions of the board and chair
  • board skills, renewal and review
  • conduct of the board and committee business
  • the chief executive
  • audit and risk
  • conduct, probity and openness.

It also provides guidance on how to apply the code, and provides references to useful resources for each section.

Housing associations that adopt the code must publish a statement of compliance with the code in their annual financial statements and comment on any areas of non-compliance. Departure from the code does not cause a breach of compliance with the code when the principle behind the guideline is still observed, and there is an explanation of why this variation was necessary.

Provisions in the code include board compositions and responsibilities in group structures. A summary of the main provisions are:

  • new board recruits should be assessed annually against objective criteria applied to all members
  • boards should be diverse enough to avoid ‘groupthink’
  • a maximum tenure of nine years, composed of two or more consecutive terms of office, applies
  • all board members must assess their effectiveness annually, with a more formal review every three years
  • boards should consider the chief executive’s contract and in the event of termination reserve for themselves the approval of any terms
  • provisions regarding board payment
  • additional provisions relating to groups to ensure conflicts of interest are acted upon
  • the committee responsible for audit must independently oversee the internal and external audit functions, and report to the board
  • as well as duties relating to procedures, boards are responsible for setting the culture of the housing association
  • for subsidiaries, board composition may be a matter for the parent board to decide.

The National Housing Federation has recently consulted on the existing NHF code of governance in order to inform and guide a new code of governance.

The extent to which governance matters are reported in the housing association’s financial statements depends partly upon its size. A strategic report is required by the Housing SORP for all housing associations with 5,000 or more units, and is considered best practice for associations with fewer than 5,000 units.

The FRC has issued a document, Guidance on the Strategic Report (June 2014).

The Housing SORP sets out the main expectations of what should be included in the strategic report. These are:

  • objectives, and strategy for achieving those objectives
  • business model
  • development and performance throughout the financial year and position at the end of the financial year
  • future prospects
  • a description of the principal risks and uncertainties being faced
  • analysis using financial and non-financial key performance indicators, and
  • governance arrangements.

However the Housing SORP provides very general guidelines and does not specify what information is expected in respect of the above requirements.

The Charities SORP has requirements for trustees to make disclosures in the trustees report on governance arrangements including:

  • the charity’s organisation structure
  • how decisions are taken and which are delegated to staff
  • induction and training of new trustees
  • pay setting of key management personnel and any benchmarks, parameters or criteria used in setting their pay
  • relationships between the charity and related parties
  • where the charity is part of a wider network, the implications if any on the operating policies adopted by the charity.

All boards of social landlords are required to conduct an annual review of the effectiveness of their system of internal control. The Housing SORP does not require a statement of internal control to be included within the annual report although it is considered best practice to make reference to internal control within the annual report.

The annual financial statements should also include a statement of the board’s responsibilities in respect of the financial statements.

As housing associations are public benefit entities, per FRS 102 PBE3.3A they must make an explicit and unreserved statement that they are public benefit entities. For registered charities, per the Charities Act 2011, they must explain the activities carried out for the public benefit, and include a statement that they have had regard to the Charity Commission’s guidance on public benefit.