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Learning from regulatory downgrades

20 July 2016 • Phil Morgan

GUEST FEATURE: Learning from regulatory downgrades, by Phil Morgan

Croftons is delighted to publish a new detailed report from independent housing consultant and governance expert, Phil Morgan, which explores key lessons Registered Providers can learn from recent governance rulings and regulatory downgrades. This is the third such report Phil has written, and it aims to support to boards and executive teams in ensuring regulatory compliance and effectiveness.

Find out more about Phil and his work at

Over the past 40 months the Regulator has issued over 65 governance rulings following downgrades for housing associations. This report seeks to explore why those downgrades have happened and the common threads that landlords should be looking to learn from.

This report details the areas that the Regulator has highlighted in the Regulatory Judgments (RJs).

In this updated version I am pleased to see that a number of previously downgraded housing associations now have satisfactory governance rulings from the Regulator, and others, whilst still below the G1 rating, have made significant progress. This version also echoes some of the more explicit expectations set out by the Regulator in 2015 in the revised Regulatory Framework and associated Code of Practice. The Code includes a requirement that “Registered providers shall assess their compliance with the Governance and Financial Viability Standard at least once a year. Registered providers' boards shall certify in their annual accounts their compliance with this Governance and Financial Viability Standard.”


About 15 years ago I read Julian Ashby’s seminal “Learning from Problem Cases” – a study of why housing associations went into supervision. What I learned was the importance of sound governance both in housing associations and for housing regulation. When I became a senior housing regulator I started any speech on regulation with a clear recognition that good governance was key to tenant involvement and the services for which I was responsible.

Two years ago, in my then role as Vice Chair of Wulvern, I started thinking about co-regulation and how boards could seek assurance that they were regulatorily compliant. I knew that the Regulator had become more active and had issued a range of rulings. But thinking back to Julian’s work, I didn’t know of anyone who had sought to capture it and use it to inform good governance in landlords.

So I sat down and read all the recent governance rulings. I started to understand that there were common threads running through the RJs and that articulating these threads would help boards, executives and others trying to ensure compliance, and effectiveness.

I am grateful to Diane Jones and Janet Hale for their help with the original version and their on-going encouragement. I am also grateful to C&C and Waltham Forest HA for the opportunity to work with them on the issues identified in this paper in providing assurance around regulatory compliance. Finally I am grateful to Jo Savage and Crofton’s for their support in publishing this report.

This is an updated version of the original report and includes new information from regulatory downgrades until the end of April 2016. 

Executive Summary

Under co-regulation it is boards that have the responsibility for ensuring that their landlords meet the regulatory standards. This report helps highlight a number of areas where boards, and the staff working with them, can learn from where others have failed.

This includes boards ensuring they are clear about regulatory requirements, that they are compliant with them and produce all necessary reports and statements (e.g. VFM) in an accurate and timely manner. They need to take account of consumer standards including health and safety of their tenants. They need to ensure that risk is well covered and that they have effective internal controls.

Boards need to ensure that they meet their own Code of Governance and that they operate effectively. The Code of Governance helps ensure that boards are run properly. Too often in this report it appeared that hubris prevented boards from implementing basic rules to ensure compliance with their own agreed Code of Governance.

Finally, boards also need to ensure they operate effectively, establishing clear relationships with staff, seeking and taking expert advice, ensuring they provide robust challenge to the executive, work together effectively and are able to meet new challenges.

Using this report will help Associations in meeting their new annual assessment and preparing for In Depth Assessments by the Regulator.

A. Regulation and boards

Under co-regulation, boards are responsible for ensuring the Regulatory Framework and Standards are met. This means understanding - and meeting - those requirements, as well as ensuring a professional approach to the Regulator and regulation. The Regulator consults formally, and informally, on changes to the Regulatory Framework and Regulating the Standards. Boards should keep abreast of such consultations and the impact of subsequent changes.

1. Keep up to Date

Boards need to ensure that they are working to the current version of regulatory requirements. The most recent changes were made in 2015 and include the requirement to assess compliance annually and publish that assessment in their annual accounts.

2. Tell the Regulator

It’s important to tell the Regulator as soon as you become aware that things are wrong. Too often, landlords thought they wouldn’t tell the Regulator about problems until they had tried to put them right first. Failure to declare non-compliance of economic standards, including the Code of Governance, is also a breach of those standards. There also instances of where landlords don’t provide accurate returns or take enough notice of the Regulator.

3. Hit HCA Deadlines

There are deadlines and they should be kept to! Ensuring that reports and returns to the HCA are on time and accurate is a basic building block in the relationship with the Regulator. Boards can ensure that these returns are reported to boards and monitor their timeliness. Accuracy is essential for both the relationship and the integrity of the board. This includes late filing of accounts which has resulted in recent Regulatory Notices being issued to ‘small’ (under 1,000 properties) landlords.

4. The Rent Standard

The rent standard is economic regulation. With the emphasis on governance and financial viability through the ratings, it’s important not to forget that housing associations also need to comply with the rent standard.

B. Consumer standards

5. Health and Safety

Nearly all of the breaches of consumer standards and serious detriment feature some element of health and safety. This also applies to Councils who own housing stock.

6. Gas Safety

A failure to ensure that gas safety checks are timely, breaches ‘serious detriment’. While consumer regulation is not actively regulated, it undergoes a ‘serious detriment’ test. Gas safety remains the most frequent, but not sole, cause of breaching the serious detriment test.

7. Fire Safety

However it is not just gas safety but fire safety that breaches serious detriment.

8. Repairs

To date there is only one instance of customer service failure breaching the serious detriment test.

C. Hubris – the threat to good governance

As with Julian Ashby’s earlier report, governance remains key to the effective running of housing associations and there are a number of areas where compliance can be achieved very easily. However, for some landlords, rules are ‘meant to be broken’ - or ignored. Often, these are the same landlords who experience other difficulties as hubris clouds their vision of what their role should be.

9. Publish (Non) Compliance with the Code of Governance

Housing associations are able to choose an appropriate Code of Governance. Having chosen their preferred code, there is then a requirement to ‘comply or explain’. Some associations have not explained at all, others have not given a satisfactory explanation for their non-compliance. The National Housing Federation updated their Code of Governance in 2015 and this now provides a stiffer test for compliance in line with issues raised in previous versions of this report.

10. 9 Years Maximum

Terms of office are a maximum of 9 years, however the ‘9-year rule’ is not an absolute rule and there may be reasons why, exceptionally, some board membership might exceed that period. However this must be discussed with the Regulator and put in the context of a sensible succession strategy. In most cases it isn’t adequate to cite “continuity” as a reason for non-compliance, as a joint letter to Chief Executives from the HCA and the NHF in February 2014 made clear.

The Regulator will engage with landlords and agree sensible ways forward.

Yet some landlords didn’t agree sensible ways forward and in some cases had members with 20 or even 40 years board membership. What was revealing was that in most of these cases excessive length of membership resulted in poorer governance and overly close relationships between board and staff.

The answer is simple - put a succession plan in place well in advance of hitting the 9-year rule.

11. Board Skills

As housing associations diversify in their operations, boards face a growing range of issues on which they need expertise. Examples include development, marketing, finance, commercial activity and treasury management. This was an issue with nine landlords and often core to failings of their boards.

You need to ensure the board covers all the necessary bases, and not be afraid of change, including change in your governing documents, to ensure this happens. This is one of the reasons why board renewal and fixed terms of office are important, the skills needed five years ago are not necessarily the skills that will be required in five years time.

12. Annual Appraisals

Having got your board in place there should be an annual mechanism for appraising their effectiveness and identifying areas for personal development and any gaps in board skills. It is surprisingly common to find associations which operate an “alternate years” or even a triennial appraisal process.

13. Board size

Less is more. Make sure your board is 12 or less. There’s a strong body of research published showing that boards that are too big are less effective. It can be hard for larger boards to admit that they are too big and, even harder, that some board members will have to go. The Regulator will want to know if an oversize board has a plan to achieve compliance, and within a reasonable timeframe.

14. Review Your Governance

There should be a regular cycle of reviewing the board and its governance arrangements to ensure that they remain fit for purpose. And, as with many of the matters included in this report, it can be useful to commission (and take note of) external advice.

15. Board Payment

Board payment should be proportionate – and published. There are too many occasions outside housing when people awarding themselves money has caused reputational damage. The same applies within social housing – excessive board member payments will be damaging for that landlord (and the sector more widely). Board payments should be published on a named basis too – allowing for transparency and accountability and identifying differing payment levels for different board roles.

C. Value for money statements

16. Have a robust VFM approach and publish openly

The very public downgrading of 14associations in February 2014 for failing to meet the VFM standard, plus the letter notifying the vast majority of housing associations that they were at risk of non-compliance, was a wake-up call for the sector. Landlords will want to look at recent best practice and advice from Housemark as well as guidance from the HCA. The HCA’s approach has evolved from the initial downgrades for not published (or not doing so openly) to a more critical review of their content. In June 2016 the HCA issued new, tougher, guidance on VFM.

Even so some landlords fail to comply and even repeat that failure.

D. Risk, internal controls and sound financial planning

Managing risk is now central to the work of landlords and core to the role of effective boards. Ensuring that there are effective internal controls in place safeguards staff, tenants and board members.

17. Do Risk Properly

It is essential for the business to have a robust risk framework in place, monitored and used to drive mitigation and improvement.

18. Financial Planning

When planning for the future boards will need to ensure that plans are robust and well founded.

19. Internal Controls

It’s important that there are robust internal controls, ensuring the business is well run and the organisation’s money is handled properly. Central to this is the correct use of (externalised or internalised) Internal Audit, which gives assurance that the organisation’s internal controls are effective.

E. Operation of the board

As well as meeting basic rules on good governance, boards need to establish and maintain proper working relationships with staff, ensure meetings are well run and seek and take notice of external advice.

20. Chief Executives

In a nutshell: Don’t give your departing chief executive a big severance package. Three landlords have been downgraded for such packages, failing to put it place challenge from the board, consideration of VFM and potential reputational risk. Thus highlights the need for appropriate challenge from the board outlined earlier and the dangers of excessively long terms of board membership.

In particular, regularly review your employment policies and executive contracts well away from the emotion created by the departure of a hard working stalwart.

21. Clear Relationships

Four landlords had issues in this area so be clear about the respective roles of board members and executives. You need to have a good working relationship based on those clearly defined roles, don’t delegate too much to staff and be particularly clear about roles where chief executives are also board members. It also means being precise about delegation to Board working groups.

22. Take Expert Advice

There will be times when boards cannot have all the skills they need within the set of board members to provide adequate expertise and advice when considering courses of action. It is right to seek external advice in these situations and use that to support decision-making. It is also important that, having sought advice, boards should heed it and act accordingly.

23. Run Board Meetings Properly

Board meetings should be run properly - and minutes should be taken. This is a fundamental matter of record keeping.

24. Structures and Subsidiaries

It is essential to have a firm grip on complex structures and subsidiaries.

Obviously this is driven, in part, by the Cosmopolitan experience but also by the increasingly diverse nature of the sector in setting up subsidiaries for tax efficiency and/or creating new lines of income. Boards should be aware that there are potential risks in complex structures and that the Regulator will be sensitive to both the overall impact of that risk and potential impact on social housing run by the landlord. In “Protecting social housing assets”, published in April 2013, the Regulator consulted on regulating where there were subsidiaries. Their thinking was partially updated in the Regulator’s summary of responses to the consultation in October 2014.

There have also arisen concerns about Registered Providers operating within a Group structure and how these need to ensure they are able to protect social housing assets.

25. Robust Challenge

Central to the relationship between the executive and the board is the willingness of boards to provide robust challenge.This is referenced above in the context of chief executives’ severance packages, however this is not the only circumstance in which boards must be robust in challenging the ambitions of the executive.

26. Accurate Information

To provide robust challenge, boards need to ensure they have access to adequate and accurate information. It is not sufficient to rely on the executive to provide the information necessary.

27. Co-operative Board Relationships

To operate effectively board members need to be able to work together successfully.

28. Governance and new challenges

And whilst skills are important to meet new challenges, such as new growth, it is equally important to ensure that boards ensure that all areas are robustly monitored.

© Phil Morgan, July 2016.

Need governance advice?

If you would like to discuss any of these issues further, or need support or advice on anything relating to governance and regulatory compliance, then please get in touch with our Head of Governance and Regulatory, Jo Savage. Click here for Jo's contact details.

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