Regulatory dilemmas

The Regulatory Committee of the HCA has published Protecting Social Housing Assets in a More Diverse Sector, which is styled as a discussion paper, but which also contains some thought-provoking questions about how regulation can and should work in a much diversified, increasingly risky and entrepreneurial social housing domain.  We are working in an environment which is almost unrecognisable from what it was in the 1990s and perhaps even just a few years ago.  This creates regulatory dilemmas about how best to protect assets in the most proportionate manner (a familiar dilemma, and one which does not seem to have been particularly affected by the financial crash, one might think).

The document is both navel-gazing - asking important questions, such as "what is social housing?" - and thoughtful about regulation itself - drawing on lessons from other regulators.  I'm very impressed, to be honest; whether it will be enough to avoid another Ujima is another question, but at least they are taking the opportunity to think about it and do something.  The closing date for responses is 4th June by 5pm; responses can be emailed to  consultation@hca.gsi.gov.uk

The discussion is essentially around three big questions: how to protect public assets in such a risky environment; planning for crisis; and what to do with assets disposed out of the sector.

As regard the first, the Committee has drawn on regulation of other sectors to suggest ring-fencing of social housing assets (hence the question, what is social housing?  The interesting view taken is that the definition in the 2008 Act is too narrow).  The risks are summarised neatly in the introduction:

These risks included reductions in grant, sales exposure, various treasury risks, and risks to income including those from significant changes to the welfare system. Taken together, these risks mean that providers are operating in a new and much more challenging environment.

There is a lot of detail here, but the key suggestions are that the social housing business should be accommodated in a discrete corporate entity and new restrictions on indebtedness (the latter regarded as the most significant): "Our starting point will be that providers should undertake such activities on a non-recourse basis, off the balance sheet of the social housing asset holding regulated entities, with any liability from the unregulated activity to the regulated business capped and disclosed to the regulator in a transparent fashion".

Planning for crisis involves a recognition by the regulator that the sector needs to get used to a pretty bumpy ride for the foreseeable future.  The risks to business plans are so significant that they need to develop recovery planning - what is termed a "living will" - for the organisation's social housing business.  Their current thinking is to tier the oversight, so that the most risky organisations (ie those where the potential for financial failure is high) will be required to have the most developed such plan.

As regards disposals, the key question is how best to protect public value in a situation where a for profit organisation, registered with the HCA, disposes of assets.  What they want to avoid is public money being distributed to shareholders and/or out of the sector.  The committee believes that its current approach works for not-for-profits.  There are two options here.  Option 1 is to allow only a limited proportion of disposals (as for REITs).  Option 2 is to work out the "public benefit value" of a disposal between providers, which would then have to be reinvested in social housing (either by that provider or through the HCA/London Assembly).  This is where the formulae taxes my brain somewhat, but seems to involve balancing current market value with vacant possession against value obtained in the disposal.  The formula would "represent the maximum amount of profit that could be made by changing use or tenure after purchase and selling on."  Further, "On any future sale outside the social housing sector, the Regulator would require the provider to return that percentage of the market value at the date of the eventual sale for use for social housing purposes" (original emphasis).

Anybody interested in reflecting on the future of social housing would be advised to read this document.  It is thoughtful and impressive - which rather puts my original cynicism about the abolition of the TSA in its place.

 

Posted in FLW article, Housing law - All, Uncategorized and tagged , .

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