Successful places with homes and jobs A NATIONAL AGENCY WORKING LOCALLY What does the regulator expect of Boards? Matthew Bailes Director of Regulation, HCA

Overview  An important first principle  Finance and Risks  What we mean by diversification – what’s different?  Changes to the Regulatory Framework and how we regulate  What do we want to see?  How VFM fits in  Some news about the regulator

An important principle “The Principles of co-regulation 1. Boards and Councillors who govern providers are responsible and accountable for delivering their organisation’s social housing objectives” If your organisation is a charity, you might like to look at Charity Commission guidance on the role of trustees too.

Sector finances are healthy…  Healthy balance sheet  Assets worth £118bn, largely valued at cost  Growing surpluses - £1.8bn in 2012  Access to funding at competitive rates, increasingly through the capital markets  Available security, albeit not evenly distributed  Position will be pretty stable in next global accounts

.. but thanks in part to unusually benign conditions  Very low variable interest rates (1% on variable rate debt is worth c.£200m/annum)  Healthy profits from sales in a more buoyant market (profits from sales account for about 1/3 of the sector’s surplus)  RPI (rents) rising faster than wages

Historical perspective (base rates)

Historical perspective (house prices: earnings)

So although conditions might feel a bit like this…

The figures suggest conditions are more like this…

Sector risks  Second sector risk profile published September 2013  Welfare reform –Under-occupation –Benefit cap –Direct payment –What’s round the corner?  Historic debt and gearing covenants, in a world in which lenders are losing money on pre-credit crunch deals  Sales and development risks  IFRS, pensions and, for some, loss of rent convergence

Diversification  Exists already, but now driven by end of “vanilla” option  Diversification of activities and funding  Risk profile of activities varies considerably, e.g: –High turnover, low margin, limited liabilities –long-term liabilities that rely on non-social housing revenues –Exposure on sales receipts  Our interest lies in the potential recourse to social housing assets

Likely Regulatory Framework changes  Stress-testing of businesses – e.g. higher interest rate / sales risk scenario  Forensic grip of assets and liabilities, including recourse to social housing assets  Appropriate pricing of risk, in line with charitable vires/investment powers where appropriate  Skills and capability that measure up to market exposures  Boards confirming that they comply with our standards

What we expect of Boards  Underlying premise – Boards as custodians of assets for long- term provision of community benefits  Prudent risk taking to meet your objectives  Strategic choices grounded in commercial and financial realities  Iron grip on risks, and strategy for dealing with a more difficult market  Don’t lose sight of the basics – e.g. gas servicing  Transparency with us – and accurate data on time  Protecting the sector’s reputation

What we expect of Boards on VFM  Value for money is not an add on or a nice to have. Key to continuing to deliver and manage risks  We want to see, in the public domain: –An understanding of costs and the outcomes they deliver –An understanding of return on assets, and a strategy for optimising future returns –The basis of your assurance that your organisation measures up on the above (e.g. via benchmarking results) –A full and frank picture –Stretching future targets  There will be governance downgrades this year, based on weaknesses and timeliness of public statements  No room for complacency. For most what was good enough this year won’t be good enough next year

Sound advice

What about the regulator?  Credit crunch and austerity mean that: –Our resources have been cut and we need to continue drive out costs wherever we can –But we also have to regulate a more complex and risky market –We have made some important changes to improve our regulation and we’ll have to continue to evolve  Against that backdrop we want to start a debate with the sector: –To what extent should the taxpayer bear the costs of regulation? –Should the sector pay some or all of the costs, bearing in mind the benefits providers receive from regulation? –What’s the best way to ensure the regulator remains fit for purpose?