Select Committee on Public Accounts Eleventh Report


The Corporation's oversight of Focus

18. The Corporation regulates housing associations to ensure their effectiveness in providing social housing and to safeguard the interests of taxpayers and tenants. It has powers to register and de-register housing associations, to draft statutory guidance and regulations on key areas of landlords' activities, to scrutinise information returns and accounts, and to supervise landlords whose performance is unsatisfactory, including intervening in cases of mismanagement or misconduct. At the time of the corruption at Focus the Corporation's regulatory system had three elements: performance standards setting out its expectations of landlords; cyclical review visits, and from 1994, desk reviews, to assess landlords' performance; and taking or requiring remedial action when necessary.[14]

19. The Housing Corporation made performance review visits to Focus in 1992, 1993 and 1995. In 1994 it undertook a desk review of performance and carried out two audits of a sample of Focus's housing developments. The Corporation assessed Focus's performance as satisfactory until its review in 1995 and, while it identified concerns with some aspects of Focus's development activity, it failed to identify the lax management culture in Focus's property services department and hence the scope for impropriety.[15]

20. The Corporation conceded that there were deficiencies in its regulatory system at the time. The emphasis was on box ticking and double-checking, rather than on standing back and looking at the whole culture of an organisation. In the early 1990s the regulatory system was adjusting to a recent Housing Act and a new system of finances for housing associations. Additionally, Focus had recently been formed by merging three previous associations, and was in a period of change.[16]

21. Focus had been well regarded, developing properties and housing people, and its finances had been in good shape. However, the Corporation acknowledged that if the procedural flaws which it had reported to Focus in 1992 had been acted on, and if the Corporation had pursued these in its 1993 follow-up visit, the scope for corruption would have been reduced.[17]

22. None of the allegations or suspicions received by Focus before November 1995 (Figure 1) were reported to the Corporation. However, the Corporation had received two other indications of impropriety. In November 1993 the Chief District Valuer of the Inland Revenue's Valuation Office Agency told the Regional Director of the Corporation's West Midlands office that certain housing associations in the West Midlands were regularly buying land and property at inflated prices from the same vendors. Because of taxpayer confidentiality requirements, however, the District Valuer could not give the Corporation information that would have allowed it to identify the landlords or vendors concerned. In June 1994 an officer at the Corporation's West Midland office heard rumours that Hartshorn may have had an improper financial relationship with a contractor and a structural engineer. The allegation was reported orally to Focus's Chief Executive but the Association was not informed in writing nor was it asked to investigate the allegations. Nor was the Association told that Hartshorn had left a previous association under suspicion of similar impropriety.[18]

23. The Corporation agreed that the allegations had not been followed up properly at headquarters and that they should have been reported in writing to Focus. The allegation made in 1994 proved to be untrue, and actual collusive corruption was very difficult to trace. However, the Corporation now recognised that a much more rigorous examination of the allegations should have been made at the time.[19]

24. When, in November 1995, Focus's Chief Executive told the Corporation about the allegations he had received, the Corporation immediately suspended funding of Focus, convened frequent meetings with Focus's senior staff to monitor progress and the investigations, nominated two members for appointment to Focus's Management Committee and imposed conditions on Focus before approving any further funding. In June 1996 the Corporation resumed funding for Focus, having satisfied itself that proper internal controls were being operated, and in January 1998 the Corporation removed Focus from its supervision list following satisfactory performance reviews in January and November 1997.[20]

The Corporation's oversight more generally

25. In their 20th Report of 1993-94 (HC204) our predecessors identified the need for the Corporation to improve its oversight of housing associations. The Corporation noted that since the early 1990s it had increased its focus on housing associations which presented the greatest risk, and sought assurances about associations' internal controls, including the presence of a strong internal audit function with a direct line to the Board. The Corporation makes an initial assessment of performance by reviewing the annual regulatory returns and other data required to be submitted by housing associations. It uses this to inform decisions about investigatory visits. Additionally the Corporation carries out validation visits to check on the accuracy of data supplied. For large and medium sized housing associations these will be at least every 3 years.[21]

26. The Corporation also considered how the organisation operated as a whole, the relationship between the management and the Board, the nature of reporting to the Board, and the frequency and content of those reports. These changes had culminated in 1998 in a system called lead regulation, in which specialist staff within the Corporation developed a closer knowledge of the work of particular housing associations.[22]

27. On the question of why it had taken until 1998 to respond to recommendations made by our predecessors in 1994, the Corporation acknowledged that its actions might have been faster but claimed that it had to consult widely with stakeholders on changes in regulation. It had also drawn on findings from several internal reviews and the Focus case. The thrust of the changes in the last five to six years had been to improve housing associations' internal controls, and to obtain assurance that boards of management were in charge of their affairs.[23]


28. Acknowledged weaknesses in the Housing Corporation's oversight of Focus in the period from 1991 to 1995 allowed the corruption to go undetected. Regulatory procedures failed to recognise the lax management culture and poor standards of internal control at Focus, nor did the Corporation ascertain whether corrective action had been taken by Focus to address the procedural weaknesses which regulatory supervision had identified. The Corporation took appropriate action to supervise Focus closely once the corruption was discovered, but too late, leaving Focus's tenants to bear the losses.

29. The Corporation's actions fell below the standards expected of a regulator in other respects. It handled allegations of impropriety received in 1993 and 1994 in an unsystematic and informal way; nor did it inform Focus that Hartshorn had left a previous association under suspicion of similar impropriety. The Corporation should provide its staff with clear guidance on the action to be taken when allegations of impropriety are received, and ensure that all allegations are properly investigated.

30. The Corporation has revised its regulatory arrangements to improve its review of the standards of management and governance within housing associations. The Corporation should monitor closely trends in these standards and in levels of reported impropriety at housing associations, and review its arrangements periodically in the light of this monitoring.

14  C&AG's Report, paras 1.10 and 1.12 Back

15  ibid, para 2.6 Back

16  Evidence, Qs 2, 20 Back

17  Evidence, Qs 74-75 Back

18  C&AG's Report, paras 2.7 and 2.8 Back

19  Evidence, Qs 3-4, 53 Back

20  C&AG's Report, paras 2.9-2.12, Evidence, Qs 162-163, 172-173, Evidence, Appendix 1, p19 (PAC/296) on Q173 Back

21  Evidence, Qs 16, 135, 154-156, Evidence, Appendix 1, pp 18-19 (PAC/296) on Qs 154-158 Back

22  Evidence, Qs 16, 76, 135 Back

23  Evidence, Qs 76, 123, 142-148 Back

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