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:
- 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.
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.