After an initial computerised assessment of an RSL's
finances, using financial ratios and benchmarks, the Corporation's
regulatory staff investigate further and use their own knowledge
about an RSL to arrive at an assessment of whether the RSL's performance
is satisfactory, should be under observation, or under supervision.
The National Audit Office found that, in 1999-2000, 45 per cent
of RSLs were computer assessed as an observation case (a cause
for concern) or a supervision case (a cause for serious concern)
but two out of three such cases were subsequently upgraded to
satisfactory by regulatory staff.
There were also wide variations in the extent of
such re-assessments across the Corporation's offices. The Corporation
acknowledged that those variations were not acceptable, unless
they could be explained by the character of the RSLs covered by
those offices. The Corporation recognised that some regulators'
judgements might be better than others. A quality assurance programme
had been in place for the previous two to three years, which found
that regulators' judgements were questionable in a small number
of cases. The Corporation hoped that their new training system
would ensure much greater consistency.
On the other hand, when the Corporation visit a selection
of RSLs each year to validate their performance returns, some
45 per cent of visits result in RSLs being downgraded, mostly
from satisfactory status to observation status, with some being
reclassified to supervision status. Around a quarter of reclassifications
relate to financial concerns. The percentage of RSLs reclassified
in this way has increased over the last few years.
The Corporation's regulation of RSLs had depended
in part upon RSLs certifying each year their compliance with the
Corporation's performance standards. With the introduction of
the new regulatory code self-certification by RSLs would be reduced.
The Corporation would be consulting RSLs about this reduction,
and they expected instead to require RSLs to have information
validated by their internal or external auditors before submitting
it to the Corporation.
Of the 20 RSLs visited by the National Audit Office, none had
sought to validate their returns before submitting them.
The demands on the skills and knowledge of regulatory
staff are likely to increase as more RSLs diversify into new business
activities and establish complex organisational structures and
partnerships, which will make it harder to assess RSLs' financial
performance. In a survey of RSLs, the National Audit Office found
that 36 per cent of respondents disagreed or strongly disagreed
that the Corporation had staff with the right skills regulating
their organisations. In particular, 60 per cent disagreed or
strongly disagreed that the Corporation had staff with the necessary
business experience to regulate their organisations' management
of financial risk.
The Corporation had recently recruited a number of
specialist financial regulators, several of whom had come in from
other regulators in the financial services industry. They now
had lead regulators, who were quite senior people, dealing with
the largest and most complex RSLs.
Most financial regulation staff had a professional qualification
in finance. However, only a minority had a recognised professional
housing qualification or direct experience in housing management.
The Corporation were considering expanding their secondment scheme
to encourage secondments to and from RSLs and other bodies involved
in the social housing sector.
The sector was expected to continue to expand over
the coming years as a result of the Large Scale Voluntary Transfer
programme. Registration of new RSLs created under this programme
would be likely to place increased demands on regulatory staff.
A review commissioned by the Corporation in July 1999 estimated
that the regulatory workload would increase by 45 per cent up
to 2004-05, as the transfer programme expanded.
The Corporation acknowledged the pressure that had been placed
on their staff in recent years. In response, the Department had
given the Corporation more resources, leading to a 23 per cent
increase in the number of regulatory staff.
The Corporation's administration budget was expected to rise
from £30 million in 1999-00 to £34 million in 2003-04,
an increase of some 13 per cent.. The Corporation were confident
that they had sufficient resources to cope with their workload.
If their resources were likely to prove insufficient, they would
ask the Department for more.
The Corporation had not issued any guidance to RSLs
explaining their financial ratios and benchmarks and how they
were used to assess RSLs' solvency and financial viability. None
of the 20 RSLs visited by the National Audit Office had a clear
understanding of the ratios or of how the Corporation arrived
at their financial assessments.
The Corporation acknowledged that it was increasingly important
that RSLs understood the financial ratios and the benchmarks so
that they knew what they were being assessed against. Until recently,
the Corporation had been reluctant to tell RSLs how they calculated
the ratios, although they had now done so. They intended to be
much more open with RSLs about the ratios in future.
At the 20 RSLs visited by the National Audit Office
there was common concern that the Corporation had not provided
the RSLs with appropriate and timely feedback on the results of
their regulatory investigations. In their survey of RSLs, the
National Audit Office also found that a substantial number of
them were not satisfied with the feedback provided by the Corporation.
Lenders and local authorities also wanted to see more information
put into the public domain.
The Corporation recognised the importance of providing RSLs with
appropriate and timely feedback. A system of feedback to RSLs
existed but could be improved. Since the National Audit Office
survey, the Corporation had introduced a system of lead regulators
to develop a continuous relationship with the largest RSLs. With
this system in place, feedback had improved significantly. The
Corporation were also putting more information into the public
domain. With the agreement of the RSLs concerned, the Corporation
had recently put 60 regulatory appraisal reports on to their Internet
website, and they expected further expansion in the coming years.
The National Audit Office examination, and the Corporation's
own quality assurance programme, found significant variations
in regulatory assessment between the Corporation's offices. The
Corporation should monitor the performance of their offices on
a regular basis, and seek substantiated explanations where an
office's regulatory assessments appear out of line with others.
They should use the results of their monitoring to determine
whether their new training system for regulatory staff is helping
to provide more consistent judgements about RSLs' performance
in similar circumstances.
The regulatory regime is also dependent on the Corporation
having staff with the right skills and business experience to
act as effective regulators. The Corporation have taken action
to address the concerns of RSLs and others about the range of
their regulators' skills through their current recruitment policies.
They will also need to ensure the continual updating and expansion
of regulators' skills as the sector changes. Their current consideration
of an expanded secondment programme with bodies involved in the
social housing sector should aid them in this respect.
The Corporation have been slow to provide RSLs and
other stakeholders, such as local authorities, with feedback on
the results of their regulatory assessments. Feedback should
be full and timely, so that prompt action may be taken on any
problems identified. The Corporation should consider expanding
their current trial of placing regulatory assessments in the public
domain for the benefit of all stakeholders in the sector. Appropriate
caveats could be added about the purpose for which they had been
prepared, where necessary for legal liability or other reasons.