Section: Audit & Regulation
The New Framework: Cracking the Code
Posted 02.03.15
The HCA's new regulatory framework sets out specific expectations of RPs in the Code of Practice. Some of these do not change what RPs have to do whilst others do. In any event, there is likely to be an impact on most RPs, some requiring small changes or short reviews and others requiring a more detailed consideration of any changes they may need to make to working practices.
The specific requirements include the following:
- RPs should carry out an annual review of the effectiveness of their governance arrangements. Some areas of this may need to be carried out within a different timescale, if it helps to ensure the quality and effectiveness of the review, but the annual review should give assurance on timescale and progress.
- The board and executives must foster a culture of constructive challenge and debate and good governance practices. They will be expected to have skills strategies in place to address business needs, regularly assess competencies, ensure appropriate advice is taken when making material decisions and address any skills gaps.
- Board members should exercise independence and RPs must have appropriate mechanisms for managing conflicts and demonstrating probity and value for money.
- Material issues that may indicate a breach of the standards must be communicated to the regulator at the earliest opportunity. This might include material frauds, liquidity issues, breach of lender covenants or governance failures. Consumer standards should be taken into consideration in cases where there may be serious detriment.
- There must be an effective business planning, risk management and control framework in place. This does not need to be in one document, but RPs will need to pull together separate documents and review to be sure that they cover all areas of business.
- RPs must have a clear understanding of their risk tolerances; they should be able to identify the capital at risk from investment activities and always have regard to their objects.
Cash flow should be understood in relation to outgoings and receipts and the relationship between operational and capital cash flows (e.g. major repairs should be met from operating costs) and exposures should be managed.
There should be access to sufficient and committed liquidity at all times and sufficient headroom to allow for remedial action if business plan assumptions change significantly or the plan is not being delivered against.
- Boards should be aware of the risks posed where separate companies are effectively controlled by others (either through common or shadow directorships) and any liabilities that may be attributed to the RP, putting social housing assets at risk. Such risks should be identified and mitigated.
RPs will be required to have an assets and liabilities register which should contain sufficient information to enable a potential buyer to accurately price the value of the business and/or the social housing assets, in the event of distress.
The records need to cover the breadth of activities, including those carried out in subsidiaries, JVs or SPVs. There is no prescribed format however the assets record should clearly identify social housing assets and where they are encumbered.
- RPs are expected to stress test their plans against different scenarios across the whole group. The stress testing employed should use scenarios that assess resilience. Boards should consider both the long term, cyclical nature of economic factors, as well as internal business risks.
- Conflicts must be effectively managed, this includes ensuring that parent companies, or other entities or individuals who have control or influence (or whom the HCA reasonably believes has control or influence) cannot and do not exert influence which would have a damaging effect on the RP or its compliance.
- Good quality data must be provided to the regulator in returns made by RPs, and this includes that the returns are not missing any information, data is accurate and deadlines are met.
In the case of groups, an RP can look to other entities in the group for assistance with achieving compliance and the HCA expects the RP to ensure that the other entities are aware of the regulatory requirements placed on the RP.
Where a parent is unregistered, mechanisms must be in place to ensure the parent's assistance with compliance and ensure the parent (or another part of the group) does not do anything which compromises the RP's ability to comply.
In some cases it may be appropriate for the HCA to be a party to any agreements relating to this provision.
- Profit making RPs must separate out any activities which are not social housing activities, although a small amount (5%) may, where necessary, be allowed. The code of practice lists a number of activities which it considers are not related to the provision of social housing.
It would be a good time for RPs to review their policies and procedures in relation to risk and asset management, review the board composition, recruitment and skills and start to compile an assets and liabilities register. We can assist with reviewing or writing policies and procedures and with assets and liabilities registers.
This article has been reproduced from guidance provided by Croftons Solicitors. For further information, contact Jo Savage - Tel: 0161 214 6188; Email: jo.savage@croftons.co.uk.
