Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 1 - 19)




  1. This afternoon we are considering the Comptroller and Auditor General's Report on the Housing Corporation's regulation of housing associations' management of financial risk. Could I first invite you, Dr Perry, to introduce your colleague.
  (Dr Perry) Thank you, Chairman. I have with me Mrs Clare Miller, who is the Director of Regulation Policy at the Housing Corporation.

  2. Thank you for that. Have either of you been before us before?
  (Dr Perry) I came for the Report which you published yesterday.

  3. Of course so you will remember in any event that I try to give you an indication of which paragraphs we are talking about to give you some steer. The first question is about paragraph 2.15, which tells us that the Corporation is replacing its performance standards, which will be one of the corner-stones of the fresh regulation, with a new Regulatory Code which is more general, if I read it correctly. How will you ensure that the high standards of probity and governance of financial management expected in the sector will not be diminished?
  (Dr Perry) The system that we have used up till now has 69 performance standards which are very prescriptive about the processes which housing associations need to use in order to attain and keep these high standards. The Regulatory Code will focus more on outcomes, but the way in which those outcomes are reached is essentially a matter for the internal decision of RSLs. However, our league regulators and our league regulation system will need to monitor the processes that are used in order to obtain the outcomes. In our belief it is a low-risk transition that we are making.

  4. We will come to individual risks later. A simple question, requiring a yes or no answer; did you consult the NAO in drawing up the new code?
  (Dr Perry) We are not yet at the stage of formal consultation. We have issued a draft paper for general information and comment and I believe at least one copy is in the hands of the NAO. Our board at its meeting last week approved a paper for formal consultation and clearly the NAO is one of the bodies with whom we automatically consult.

  5. My next question relates to figure 6 which shows year-by-year the decline in the number of large RSLs—housing associations for those of us who are a bit older—passing the Corporation's financial ratios. What are you doing in response to this deteriorating performance?
  (Dr Perry) We do not necessarily agree, Chairman, that it is a deteriorating performance. The sector is faced by financial challenges and the Government itself in its policy does seek to make assets work harder within RSLs and housing associations. The 85 per cent figure for passing is actually a trip wire which is conditioned by our workload requirements rather than being an absolute judgment of how well they are doing. Where associations fall below individual ratios which talk about short-term solvency then that triggers some investigatory action by league regulators and quite intensive discussions often with the associations.

  6. If I were feeling paranoid you have given one the suspicion that when the hurdle gets hard to cross you want to lower it, but we will come back to that and let others perhaps pursue that individually. Paragraph 2.20 is my next item. That points out that many institutions that lend to RSLs are worried that the RSLs are diversifying into new business activities without adequate preparation. What assurance can you give the Committee that RSLs are capable of managing the risk that comes with diversification, particularly the private finance deals which fund such activities, and that your staff, in turn, have the necessary skills to understand and regulate the management of those risks?
  (Dr Perry) The question of diversification, as you are well aware from the Report, is quite controversial. We have put trigger points for RSLs to tell us when they are diversifying. For the sector as a whole we think there is a very low risk in diversification because the financial capacity is strong and the sorts of activities into which diversification is taking place are consistent with the aims and objectives of RSLs. Each individual housing association has to weigh the risk themselves, discuss that with the lead regulator, and it is difficult to predict in advance whether an individual RSL is capable of taking on that risk. That is something that lenders have to consider and something that the regulator has to consider.

  7. Let me say to you that I had the misfortune of living through that period of British business activity when diversification was all the rage and nobody then thought it was very risky and a large number of companies went bankrupt. I am quite concerned and, if nobody else picks this up, I may come back to this at the end and to the question of how you ensure that public money is not used to subsidise the losses of poor commercial performance in diversifying activity. I will leave that one and somebody else may pick that up before I come back. My next question relates to 3.12 and 3.13. RSLs' risk appraisals have an important part to play in your new regulatory approach. Those paragraphs tell us that RSLs' risk appraisals are not always of very good quality nor, indeed, are they used effectively. How do you ensure that the RSLs have identified the key financial risks and adopted appropriate strategies for managing them?
  (Dr Perry) The Report gives information on a survey which the NAO did in 1999, which was very shortly after we had introduced the mandatory requirement in May 1998 for RSLs to do risk appraisals. It is probably not surprising that the first round of them might be of variable quality and there was a variation, as it says in the Report, in the number of risks that each of them identified. Since then we have worked very closely with the sector on tightening up the guidance. For example, one might hold up a very large document which we published in December 2000 on risk management for RSLs and the new lead financial regulation system will pay a lot of attention to the quality of risk appraisals. As you rightly say, it is key to whether the new system works or not.

  8. You will forgive the Committee if it is a little less trusting about some of this given its previous experience, but again others may want to pursue that. Related to that, paragraph 3.16, the Corporation has gathered information on various aspects of the assessment of financial governance and management. That paragraph points out that you have not yet compiled a systematic or comprehensive appraisal of financial risk in this sector. What action are you taking to compile such appraisals?
  (Dr Perry) We think that is a very helpful suggestion and we are going to work on it very strongly. The Report does point out in that paragraph that we have already assembled a fair amount of information. It is fair to say that the size of the sector has grown very rapidly in the last few years, principally through stock transfer. The macro-economic importance of the sector is now getting to the stage where it would be helpful to us to produce a report on overall financial health and to lay that before Parliament.

  9. Do you maintain any sort of risk model of these RSLs?
  (Dr Perry) For the sector as a whole? No, we do not, not yet.

  10. Do you not think you should?
  (Dr Perry) It forms part of the work that we are doing. As the sector becomes larger and more significant, I think we ought to do that.

  11. I would hope that it is an urgent part of your work. My next question relates to paragraphs 4.8 and 4.18, which point out that your financial ratios need to be improved, particularly for the RSLs created under the Large Scale Voluntary Transfer programme (the LSVT) where your existing ratios are inappropriate. What are you doing to improve these financial ratios to assure that they are robust and relevant to the whole of the sector?
  (Dr Perry) With your permission could I invite Mrs Miller to talk in detail about the ratios. So far as the LSVTs are concerned, we acknowledge quite freely that those ratios were not designed for the particular financial circumstance of LSVTs. Given that most of the larger ones are relatively recent and their business plans are very recent—and we think it is appropriate to monitor their performance against their business plan as that is what their lenders will be doing as well—we have commissioned consultants to work on longer-term ratios for LSVTs which will become important as we have a number of years of track record. For the ratios as a whole they are intended to be indicators of short-term solvency rather than long-term structure and stability. With your permission, Mrs Miller can answer detailed questions on that.
  (Mrs Miller) We found the Standards and Poors recommendations very interesting and very useful and as a result of that we have introduced some modifications to the ratios but, as Dr Perry referred to earlier we are commissioning Robson Rhodes to undertake a thorough review of all our ratios with a view to looking specifically at LSVTs.

  12. When will we get a result from that?
  (Mrs Miller) The work has already been commissioned so we would be hopeful that we would get a result this year.

  13. This year? By December, you say?
  (Mrs Miller) Yes.

  14. I see. Okay, let me press on. Your staff use the financial ratios—this is paragraph 4.16—to generate initial assessments of the RSLs' finances and that paragraph points out that it is very common for regulatory staff to reassess the RSLs, moving them from "observation" or "supervision" status to "satisfactory" status. The extent of re-assessment varies between regional offices. This is what I had in mind when I said if they do not pass the hurdle you just lower the hurdle. Why are so many RSLs re-assessed as satisfactory and why are there such wide variations across regional offices?
  (Dr Perry) If I could take the latter question first. I do not think that it is acceptable for there to be wide variations between regional offices unless they can be explained in terms of the performance of the RSLs, which is why there has been a quality assurance programme in place for two or three years now, and the system we are moving towards will ensure much greater consistency between regional offices. I would not care to say that the variations would be acceptable had they been allowed to continue. So far as the reasons are concerned as to why assessments are made, again the ratios are intended to be trip wires, triggers, for the regulatory staff to look at what the ratios throw up, and one of the main points of being a regulator is to try and assess the materiality of any performance figure which goes below a threshold and then to assess what a proportionate response might be. Effectively, the staff are applying their regulatory judgment to what the computer has thrown up.

  15. Implicitly, if you are accepting that some regions are doing poorly by comparison to others, then some regions' judgment are not very good. Is that what you are effectively saying?
  (Dr Perry) That could be the case. Our quality assurance work which has gone and looked at a number of the re-assessments indicates that only in a small number of cases would they want to come to a different judgment. It is a point thrown up in the C&AG's Report which we do take seriously and which we hope will be eliminated by the new regulatory training system that we have drawn up.

  16. Okay. My last question before I widen it out relates to paragraph 5.4. What that tells us is that some supervision cases run on for quite a long time. Some stay under supervision for more than four years. Given these are cases where, by definition, there are serious causes for concern, what are you doing to ensure that they are resolved more quickly?
  (Dr Perry) The supervision cases are not always to do with financial issues. We can say that where serious financial issues are concerned then the resolution is reached quite quickly because if it were not reached then the organisation might go under. The longer running cases tend to be ones where there are governance issues, constitutional issues which sometimes need quite a lot of unwinding before they can be resolved.

  17. Give us an example.
  (Dr Perry) There is one that has actually been the subject of a statutory inquiry by the Corporation—and we only just received the report before the board last week—which is a co-operative in East London where there have been problems about the way in which the organisation is run, their standing orders, their ability to retain governing bodies, which have nothing do with financial probity, but have really given us quite serious grounds for concern.

  Chairman: Yes, I see. Others may want to come back to that. Let us widen it out. Mr Gerry Steinberg?

Mr Steinberg

  18. On page 22, paragraph 3.5, it says that in 1993 only 50 per cent of RSLs submitted their financial accounts on time and it was recommended that firm action should be taken against those who did not. That was way back in 1993. Six years later we are told that 33 per cent still did not submit their accounts within six months of the required date and we are told that it takes up to one year to get in 98 per cent of the accounts. Why has there not been a better improvement than that?
  (Dr Perry) There are a number of reasons for that. In line with the Committee's recommendations in 1993 there was greater effort on the part of the Corporation to use enforcement action, for example, to go to court to seek prosecutions. A number of these were successful but the courts in general did not take kindly to this kind of action. They regarded it as bureaucratic bullying on the part of the Corporation because the defaulters, if you can call them that, are normally very small associations, very often they have never had a penny of public funds and they are run by volunteers who sometimes struggle to put in the accounts. The action that we are taking at the moment is to try and see whether we can assist those small associations to bring their accounts in on time. We are setting up small teams of people in each of our new offices to assist small associations. For some of them we may suggest that they would be better off de-registering. The main point of being a registered social landlord is to be able to claim Government money if you want to develop. If they are a non-developing association sometimes they do not need to be registered, so we are also doing some more work on de-registration.

  19. That is all well and good and I take the point that you are making about the ones that do not have public money, but how can you assess the financial performance of an RSL if you do not have their accounts?
  (Dr Perry) For all of the associations' financial performance that we do need to assess, that is the 600 largest, unless Mrs Miller corrects me, we get the majority of their accounts in on time.

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