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The Housing Corporation Discussion Paper (February 1999)

Comments from the Association of Chartered Certified Accountants

Introduction

The Association of Chartered Certified Accountants (ACCA) is pleased to comment on The Housing Corporation's Discussion Paper, Regulating Diversity, as invited by the Housing Corporation's Deputy Chief Executive.

General Comments

In light of the Government's policy to encourage Registered Social Landlords (RSLs) to adopt a strategy for sustaining communities through the regeneration programme and the Department of Environment, Transport and Regions (DETR) proposal to implement a statutory instrument permitting additional purposes for RSLs, ACCA endorses the Corporation's approach to regulation in order to ensure accountability to Parliament, taxpayers and tenants for any diversification from conventional social housing activities.

Specific Comments

The Corporation has invited comments on specific aspects of its proposals and these are addressed in the paragraphs below.

1. It is intended that the definitions of core social housing activities and primary activity (see paragraphs 4.2 to 4.4 of the discussion paper) be kept simple and that any housing which is currently subject to the Corporation's regularity framework should not be excluded. It is not clear from the paper whether this approach, i.e. to differentiate between core and non core activities, could result in similar activities being classified differently inter housing associations under current arrangements and intra association over time and hence appears complex and ambiguous. For example under some large scale voluntary transfers (LSVT) of housing stock, from local authorities to housing associations, were included such activities as sheltered and special need accommodation, shops and building maintenance. The Corporation could consider differentiating between housing accommodation and related activities and business activities such as shops and building maintenance premises which could be registered separately as non core activities and ring fenced for finance on a project by project basis.
   
   
   1. ACCA believes that the definition of social housing should incorporate the following key characteristics:
      
      • Social housing is all housing or provision which involves/d the investment of public funds and is subject to scrutiny by the Public Accounts Committee (PAC).
        
      • RSLs are answerable to Parliament through the Secretary of State for the DETR.
        
      • Social Housing is regulated by the Housing Corporation and is subject to the Social Housing Standard (SHS).
      
      
   2. ACCA believes that an activity test related to 'proportion (i.e. 2/3rds) of turnover (excluding sales of assets) or people receiving services' is too narrow a test to determine whether the provision of social housing is the primary activity and hence the Corporation could also give weighting to other factors such as: the proportion of tenants (existing and potentially) in receipt of housing benefit, earning profiles of tenants, demographic trends, right to buy legislation, market rents for the area and rent harmonization policies.
   
   
2. In relation to the proposed definition of materiality and the method of notification (paragraph 4.5), ACCA has the following comments:
   
   
   1. Using the 5% of turnover test as a measure of materiality might give different results for similar organisations depending on the interpretation of FRS5 when RSLs make use of managers. Care must be taken in the choice of base used for the calculation as is illustrated in the following examples. Where there is perceived to be a substantial transfer of risk to a managing body acting as a manager of a supported housing projects on behalf of RSL 'A', then the income will be excluded from turnover. If RSL 'B' interprets FRS 5 differently and includes the income from supported housing schemes in turnover then the two RSLs could show differing turnover (which could be substantial in some cases) despite the fact that in both cases the income relates to property that they own and hence shown in their respective balance sheets.
   
   
3. In relation to the use of RSL self-imposed limits on their level of non core activities, and possible measures of RSL's risk exposure to non-core activities (see paragraphs 4.7 to 4.9) ACCA has the following comments:
   
   
   1. If the Corporation were to differentiate between social housing and related activities for sustaining communities (i.e. where the taxpayer bears the financing risk), and business risk associated with income earning activities, for example shops and leisure centres (i.e. where the financial risk should be passed on to the private sector), then the Corporation need only concern itself with regulating the former as Private sector suppliers of finance would regulate the latter. If such projects were also subject to constraints as suggested below, then RSLs could be left to set self imposed limits on their level of non core business activities:
      • RSLs should not be allowed to raise private finance for business activities as a charge against social housing assets;
        
      • The Corporation could consider the level of government support and the relative timeframe for support when assessing government initiatives for sustaining communities and the associated level of risk as acceptable as a charge against social housing assets.
      
      
   2. The Corporation could consider the use of ratios for measuring performance: management costs/direct costs; maintenance costs/direct costs; actual debt charges/ income received etc.
      
      
   3. The note as suggested in Appendix 4 to the discussion paper appears too detailed for inclusion in published financial statements. Could the Corporation clarify whether the 'internal note x to published financial statements' is intended for internal corporation purposes only ?
   
   
4. In relation to the use of project appraisals (and suggested guidelines for project feasibility analysis) to help support and explain an RSLs business case for diversification (paragraph 4.11) ACCA recommend the following guidelines for project appraisal:
   
   
   • HM Treasury Guideline - Appraisal and Evaluation in Central Government;
   • NHS Executive - Capital Investment Manual;
     
   • The Corporation could develop a compliance statement to be signed by the governing body and subject to external audit;
     
   • RSLs should be subject to an extensive consultation process with the community when undertaking new projects with specific stages and the results reported to the Corporation.

5. ACCA endorses the use of long term financial projections and sensitivity analysis (paragraphs 4.12). This is a necessary requirement for securing private finance. Such long term projections could be verified by the DETR to ensure that assumptions are in line with long term government strategy.

6. ACCA agrees to the applicability of the business unit accounting techniques as good practice for RSLs (paragraph 4.13) as outlined in appendix 4 to the discussion paper.

7. The proposal to use external auditors to validate project appraisals and long term financial projections risk assessment measures of RSLs operating close to their financial limits would involve the RSL in additional expensive consultant's costs as such work does not fall within the usual remit of the external auditor. The Corporation may consider external validation of such projects through DETR as is done for Private Finance Initiatives (e.g. past LSVT).

8. ACCA raises no objections to the proposal that RSLs could operate extensive diversification control risk by carrying out non core activities within unregistered subsidiaries (paragraphs 4.16 and 4.17) subject to the comments made in previous sections.

9. The proposed requirement for RSLs to file accounts to include all parts of the group, both registered and unregistered (paragraph 4.18) appears reasonable. ACCA suggest that the wording may elaborated to avoid misinterpretation as follows: 'to file accounts' for all organizations which are either group members or where there is a material investment, guarantee or material contingent liability other than in the normal course of business (e.g. insurance claims, builders' bonds). This requirement might be enforced by requiring such investment, guarantee or material contingent liability.

10. With regard to the broad options identified by the Corporation for future use of Section 9 financial consents (paragraphs 4.19 - 4.20), the ACCA make the following observations:
    • In paragraph 4.19 the Corporation refers to the dilemma of 'putting up publicly funded assets as security for private borrowing to finance a wholly privately financed project' and the need to review the Section 9 financial consents which acts as a tool to ring fence publicly funded assets. ACCA believes that in order to minimise the risk premium of the cost of capital then the Corporation could consider relaxing the current 'ring fence requirement' in specific circumstances. The Corporation may need to widen the scope of the definition to embrace both social housing and related activities to include specific government backed projects for 'sustaining communities' in the context of pooling social assets for raising security for like projects (see previous comments in sections above).

    • Paragraph 4.20 considers three broad options for the future application of Section 9 financial consents. ACCA believes that the current arrangement i.e. option c may be the most prudent as it reserves the power of the Corporation to delay or refuse consent for borrowing proposals.

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