Communities and Local Government
Oral evidence: The Work of the Regulation Committee of the Homes and Communities Agency, HC 541
Wednesday 16 July 2014
Ordered by the House of Commons to be published on 16 July 2014.
Members present: Mr Clive Betts (Chair); Bob Blackman; Simon Danczuk; Mrs Mary Glindon; David Heyes; John Pugh; Alec Shelbrooke; John Stevenson; and Chris Williamson
Questions 1-59
Witness: Julian Ashby, Chair, Regulation Committee, Homes and Communities Agency, gave evidence
Q1 Chair: Good afternoon, Mr Ashby, and welcome once again to the Committee. We begin our public session. This is a follow up to the work of the Regulation Committee of the Homes and Communities Agency; it probably will not surprise you. Just at the beginning, before we come on to ask questions, just to declare any interests that Members may have, either directly or even some distance from what we are talking about this afternoon, I rent out an individual property, but it is in no connection with a registered social landlord.
Alec Shelbrooke: Chair, my wife’s parents are owners of Spencer Properties in Leeds, which has several properties around the city, but I do not believe that they are related to the social housing sector.
Simon Danczuk: I also rent out a property.
Bob Blackman: Chair, I have six buy to let properties that I rent out. None is connected to any social units.
John Stevenson: It is the same for me. I have a private rented property, but it has nothing to do with social housing.
Q2 Chair: Thank you very much for that. Thank you for coming back to see us, Mr Ashby, to follow up on issues that we discussed last time. There may be one or two events that have happened since. Obviously time moves on and new situations arise. I suppose, therefore, the first obvious question is to look at an issue that has arisen recently. That is the issue around the Johnnie Johnson Housing Trust and your significant downgrading of that organisation. How bad are things in the trust at present? How concerned are you?
Julian Ashby: I think the Johnnie Johnson case shows that our new arrangements are actually working well. The situation at the association was, until around September, perfectly satisfactory; they were giving us no cause for concern. The events then unfolded. They had serious problems with a development programme. They did not handle that very well and we picked up those issues very quickly. Having picked them up, we intervened. Our engagement level went up. We uncovered some further problems.
At the stage when we were convinced that this might lead to a non compliant judgment, we put them on our new watch list of gradings under review, which is something we instituted in response to your recommendations following last year’s hearing. Subsequently, we downgraded them for both governance and viability to non compliant level 3 but, at the same time, we took action to ensure that the situation was stabilised, so that our core objective of protecting the social housing assets was met. We finished off by asking them to enter into a voluntary undertaking to make sure that the longer term strategic issues that this episode has uncovered are thoroughly addressed. This is not a matter that has been brought to a final conclusion; it is still under the course of intensive regulation.
Q3 Chair: Is it fair to say you are sitting alongside them and holding their hands at present?
Julian Ashby: We have been pretty actively engaged with them since September, but rising sharply at the point we concluded that—there was a period in which they were heading for liquidity problems. We ensured that very prompt action was taken to head that off.
Q4 Chair: This is not a Cosmopolitan, then.
Julian Ashby: This is not a Cosmopolitan, no.
Q5 Chair: Are your staff basically in almost daily touch with them?
Julian Ashby: Our staff are in very regular contact with them and we monitor that very closely.
Q6 Chair: The problems first came to light when?
Julian Ashby: In September.
Chair: In September. Okay, I think we probably want to pursue a bit of the background to that, so I will pass over to John Stevenson.
Q7 John Stevenson: Thank you. Issues relating to the Johnnie Johnson Housing Trust have been going on for a long time. It is quite clear from that. If you look back to 2011 it was graded as viable and properly managed. You have gone from that to downgrading to G3 and V3. Would you not have thought that would have been picked up?
Julian Ashby: What is clear in this situation is that there was no evidence that the association was performing poorly, up until September.
Q8 John Stevenson: September 2013?
Julian Ashby: September 2013. The issues that arose arose from the development programme they had embarked on. We cannot expect to pick up problems before they have arisen and, when problems arise, it is only then, at that point, that we see whether the governance is up to the quality of handling it. Again, that is not something that you can predict in advance.
Q9 John Stevenson: Can I just pick you up on that point? If you go back further to 2007 08, the accounts were reporting problems. Why were they not picked up then? The accounts were indicating some problems, so why were they not picked up then? They did not seem to be picked up then, and then, in 2011, it is viable and properly managed. Then within two years, it is not even a minor downgrading; it is a severe downgrading.
Julian Ashby: The severe downgrading, as I was saying before, was because they embarked on a development programme that ran into serious problems. Those problems did not exist at an earlier stage.
Q10 John Stevenson: You are saying it is down to one issue?
Julian Ashby: That was the core issue that caused us the most concern in terms of the protection of their social housing assets. When we became involved as a consequence of that, other things came to light. In fact, I think in the same month, they had reported to us a minor telephony fraud. That caused us to look at the quality of their internal controls, so we had some other concerns. They then compounded that by getting their accounts in late, missing the 30 September deadline, which was clearly another indicator that their financial controls were not adequate, but they had not missed those deadlines in former years.
Q11 John Stevenson: I can understand if you have a one off project that goes a bit haywire. That is an issue regarding viability, but it does not necessarily mean the management is flawed. It just means you could have been unlucky, for that matter. You have actually downgraded them both for their governance as well as their viability. I would have thought you would have been picking up some governance issues earlier.
Julian Ashby: A lot of our concerns about governance related to the way they handled the problems that arose. As you say, development problems can arise in many situations and, usually, associations handle those competently; they put mitigations in place and address the problems promptly, and it is manageable. In this case, it was not in our view well managed and that led us to conclude that the governance deserved to be downgraded in the way it was.
Q12 John Stevenson: Clearly you have identified a problem with Johnnie Johnson. Going by your figures, there is only one other organisation that has got a V4 rating. There are no other V3s, so you are comfortable and confident all the other housing trusts are viable?
Julian Ashby: At the present time, we are confident that other housing associations are compliant. That confidence stems from the fact that we have now completed gradings as the Homes and Communities Agency on all 245 groups and stand-alone associations on which we give grades. All of the current grades are now our grades. They have gone through the new and much more rigorous quality assurance process that we have put in place before grades are issued, and we are confident that those grades were accurate at the time they were made. They have all been made within the last 19 months.
Q13 John Stevenson: Are you saying to this Committee that you have every confidence in the gradings that have been made?
Julian Ashby: Yes, we are confident in all of the gradings that are now extant.
Q14 Chair: Can I just go back to what you just said to the Committee? This problem comes out of the ether in September 2013, yet the information I have just been given is that there have been problems with this organisation going back to the TSA’s regulatory role. Forecasts in 2006 07 were over optimistic. Presumably all this information is available to you and your staff. In 2007 08 and 2008 09, there were delays in the development programme. There were problems with meeting interest payments. In 2010, they could not meet the interest payments on a cover covenant on a loan and had to repay it, when they had not planned to. There were problems with the development programme over the Comprehensive Spending Review. Two schemes, worth £580,000, that had been invested in were closed in 2012 13 and the amounts were written off. It is just a catalogue of problems and it did not give you any cause for concern, any of that, until September 2013?
Julian Ashby: I am responsible for the issues that have arisen since we took responsibility for this in April 2012.
Chair: £580,000 was written off in that year.
Julian Ashby: Our staff would have been aware of that history, and the gradings that we now have in place have gone through that process that I described earlier. Clearly, the way in which gradings were issued earlier is not our responsibility at this time. I should emphasise that for associations to have problems from time to time is not unusual. The issue is how well they handle them and what their materiality is in relation to meeting their financial obligations.
Q15 Chair: There are two points there: first of all, you are right, but despite the fact your regulatory powers began at a certain date, you are aware of the history of organisations and any failings that may be around. It appears that, despite all these failings, they gave you no cause for concern about downgrading Johnnie Johnson until September 2013. That is correct, is it not? You were aware of all these failings and did nothing until September 2013?
Julian Ashby: We did look at their financial viability and we were satisfied that, prior to September, they were financially viable.
Q16 Chair: They were at the top marking on financial viability, even though they had written off £580,000 in the previous year?
Julian Ashby: Associations write off amounts on a fairly regular basis. If they have impairments, they are required to write them off under accounting policies. I think you referred to a very much larger impairment that another association made when we had this evidence session last year. It is not an unusual occurrence; it does not imply that an association is in a weak financial position.
Q17 Chair: From a common-sense point of view, Mr Ashby, it is quite likely, is it not, that even though your viability gradings and governance gradings were not changed until September 2013, things were going wrong before? Things do not just go wrong overnight, do they, with an organisation of this size?
Julian Ashby: The presenting issue of a serious development problem is exactly the kind of thing that can arise suddenly and unexpectedly.
Q18 Chair: There were no problems with this organisation; it suddenly happened?
Julian Ashby: The fact that they were not controlling that well led us to look at other issues and led us to the view that their approach to internal controls was not robust. It is possible that, if that had been looked at under our current processes, at an earlier stage, we might have uncovered that earlier, but actually you require the evidence of things not being handled well to form a conclusion that, if they arose, they would not be handled well. Predicting what will in the future be poor governance is not a very straightforward thing to do.
Q19 Chair: At your formal meetings, or indeed informal meetings, had you had any discussion about Johnnie Johnson prior to September 2013?
Julian Ashby: I am not sure what you are saying.
Chair: Did you have any discussions at all where concerns were expressed to you prior to September 2013 about either the governance arrangements or financial viability of this organisation?
Julian Ashby: In terms of the routine regulatory engagement we have with any association in that category, I would not be informed about it unless a serious issue arose.
Q20 Chair: Therefore, you had not been informed?
Julian Ashby: I personally have not been informed and I would not expect to be informed, but the Committee is kept abreast of cases that are involving serious issues, and the matters that relate to them, which you have described, would not have come into that category.
Q21 Chair: That was true at the same time when you were Vice Chair of the TSA, was it?
Julian Ashby: That would have been true at the same time, yes.
Q22 Bob Blackman: Mr Ashby, just moving on to some general areas, away from the Johnson case overall, looking at the changes in regulations and your watch list that you have developed, can you just explain to us how the watch list operates? How does someone get on to the watch list or, more importantly probably, once they are on it, get off it?
Julian Ashby: We are undertaking regular engagement with associations on both the viability front and the governance front. If, during the course of that, either routine engagement or because an issue comes to our attention, we come to the conclusion that there might be a non compliant judgment, then at that point we will put them on that watch list of gradings under review. We will complete our investigations. We take the accuracy of grades extremely seriously, so we will finish those investigations. We put the provisional conclusions through a quality assurance process and then we issue the final judgment. There may be a gap of a few weeks between somebody going on the watch list and a final conclusion being reached. They come off the watch list automatically the moment a substantive definitive judgment is made. At that point, they move from being on the watch list.
Q23 Bob Blackman: Is it fair to say then the watch list is a matter of judgment within your operation? You conclude whether that judgment is correct and then after that—
Julian Ashby: It is an early warning that an association or a provider might be in receipt of a non compliant judgment. That has been welcomed by the lending community in particular as being a useful early warning sign and, as I say, I am grateful to the Committee for pointing that out last time.
Q24 Bob Blackman: Potentially that could be very serious for an organisation, from their lender’s perspective, if they are judged to be on this watch list?
Julian Ashby: If they are put on the watch list, we will make it clear whether they are being put on for governance or for viability reasons.
Q25 Bob Blackman: I wanted to explore that in a minute, but clearly that would have serious consequences from their banking perspective and other lenders that may be giving the money.
Julian Ashby: It is a public matter and, therefore, yes; we are being transparent about our view that that grading might become non compliant quite shortly. It does not inevitably follow. Our further investigations might provide us with reassurance but, so far, when we have put somebody on that grading under review, we have gone on to make a non compliant judgment.
Q26 Bob Blackman: Obviously, one of the things that you said to us in your correspondence when you came before us last year was that, in your view, the failure against the financial viability standard is “almost inevitably” caused by failure in governance. You have already mentioned the issue of governance and financial viability being slightly separate, so do you still hold the view that one almost follows the other?
Julian Ashby: I want to make absolutely clear that we have two separate judgments: one for governance and one for viability. That has always been the case and we will continue to judge each separately, but there can be a linkage between the two so that, for example, when we are making a judgment about governance, we are making a judgment about the quality of the decision making of that provider. When we are making a judgment about viability, we are making a judgment about its ability to meet its financial obligations. The same issue can lead to us making adverse judgments about both, but it is a different quality of judgment that we are making. It is perfectly possible for somebody to have something that adversely affects their finances but be well governed, and equally the other way round. There are examples of that in both categories.
Q27 Bob Blackman: Are we clear that the people being judged here are clear what the terms and the definitions of governance and financial viability are that you are gauging them against?
Julian Ashby: Yes. Again following the last hearing, we clarified our straplines to emphasise, from our perspective, the importance of that distinction between a compliant and a non compliant judgment.
Q28 Bob Blackman: Could I just run through a few items that I think might help us understand this? In terms of failures in the particular areas, in the following list of things I am just going to run though, are they governance or financial viability ratings, or are they both? First, treasury management—is that finance, governance or both?
Julian Ashby: It could be both but if, for example, we formed the view that the treasury management of a provider was weak, certainly we are talking about the quality of their decision making. That would certainly be a governance issue. Whether it was also a financial viability issue would depend on the seriousness of the impact of that weakness on their ability to meet their financial obligations.
Q29 Bob Blackman: I am inclined to say, how weak does it have to be for it to be considered?
Julian Ashby: We are looking at whether they can meet their obligations. That is the key issue. An organisation can have weaknesses but be very rich and, in that situation, it is not going to be under a serious viability threat. We might say that there is a material exposure that they have to manage to stay compliant, and there are 33 providers in that category at the moment, where we have said they are not V1. There is a material financial exposure they have to manage, and we watch them very closely through that process, but, as long as they are managing it satisfactorily, they are compliant with our standard.
Q30 Bob Blackman: I can get the drift of this. Could you give just brief answers on these particular items? The business plan, would that be a financial viability or governance issue?
Julian Ashby: Again, if the planning control was weak, it would be governance. If the impact of that weakness was severe¬—for example, if it was forecasting that the organisation would not have the resources in the medium term—we would treat that as a viability issue.
Q31 Bob Blackman: Internal controls? I guess that is straightforward.
Julian Ashby: Internal controls is more likely to be governance only.
Q32 Bob Blackman: Cash flow?
Julian Ashby: If we are talking about ability to meet liabilities as they fall due, that would be very much financial viability, but people can handle cash badly and still have enough of it around. In that situation, it might be governance only.
Q33 Bob Blackman: Value for money?
Julian Ashby: Value for money, I would have said, would generally be regarded as a governance failure unless again the impact of and extent of the failure meant that they were in serious financial difficulties, but that is unlikely to be the case.
Q34 Bob Blackman: Two other things: finance function procedures?
Julian Ashby: Again, procedural failings will be governance.
Q35 Bob Blackman: Financial management generally?
Julian Ashby: Again, financial management generally will be governance, but we will always separately look at the impacts. It is that impact that we will be making the financial viability judgment on.
Q36 Bob Blackman: Finally, there is a whole series of things here that seem to me to lead to a judgment. The issue potentially for an organisation if they are on the watch list could be very serious, or alternatively could lead to a massive failure if they are not on the watch list. I am just thinking how you reach that judgment. What is the process that you go through to achieve that? Looking at all these various different items, looking at all the various different areas, someone has to make that judgment. Is that you or is it a committee? How does someone get on to this watch list?
Julian Ashby: It is a delegated responsibility from the committee. The arrangements are that operational teams are the ones responsible for provisionally making judgments, but then the quality assurance process that we have put in place is run centrally, so that provisional judgment is subject to challenge. There will be, as it were, an internal third party look at that judgment and, from time to time, those people looking at a provisional judgment will refer it back and say, “We are not satisfied.” It is a robust process before we come to that conclusion.
Q37 David Heyes: You said that just being on a watch list is a serious issue for lenders or bankers. I just want to test how serious it would be in relation to potential breach of loan covenants. Would downgrading a registered provider to V3 be likely to cause the provider to breach loan covenants?
Julian Ashby: There are some loan covenant conditions that refer to material adverse regulatory judgments. That is relatively rare. There are two issues here: they are rare in loan agreements, but they exist. Of course, you only need a single loan agreement to have it and then very widespread cross default clauses that exist in most loan agreements would mean that, if you were in default under one agreement, you are probably in default under all agreements. It is a relative rarity, although there is some pressure from lenders to reintroduce this as a term in loan agreements.
The separate point to make is that a downgrade to a non compliant judgment does have adverse financial consequences for a provider. It would make it very difficult for it to raise finance on the bond market, for example, and that will mean that it is very much limited in its options in terms of raising further funds, so it is not a trouble free thing to happen. As I answered before and would emphasise again, the potential impact on an association would never deflect us from issuing what we consider to be the accurate judgment.
Q38 David Heyes: It is never an inhibiting factor?
Julian Ashby: It would not be a factor.
Q39 David Heyes: You talked previously about your preference to sort out these sorts of issue behind the scenes. Is that in a different context?
Julian Ashby: That is not the issue of how we approach the use of our judgments. We will always give the judgment we believe to be accurate, irrespective of whether it is going to cause further problems to the association. In terms of the wider issue of the use of statutory powers, that takes us into a different area. There we will always take the action that, from our perspective, will be the most effective at addressing the issues that are arising. If that happens to be the use of statutory powers, then we will use them but, in most cases, the intention is that we pick up problems early enough so that using statutory powers would not be necessary.
As I mentioned last time, they carry the risk of actually making a situation worse by triggering a breach of covenants. Our intention is always to discover problems early and address them quickly, but there is nothing either cosy or behind closed doors about it. As you have seen in the Johnnie Johnson case, they have gone on a “public gradings under review” watch list and have subsequently had a very public downgrade. That is a fully transparent process, as indeed it should be.
Q40 David Heyes: What you are saying really is it all depends. You cannot give us a definitive view on the impact of a V3 or a V4, and whether or not it would have a re pricing trigger impact?
Julian Ashby: We certainly do not know what is in all of the thousands of loan agreements that will be across the sector. We are aware that it has that potential impact. The other point we are stressing is that it is up to the lenders in that situation and how they choose to react. For example, it is in the public domain, as I mentioned earlier, that Johnnie Johnson actually got its accounts filed late. That is a fairly normal breach of covenant issue. Their lenders were forbearing in that situation. That is the role of the lender: to judge where its interest lies when it is in that situation. That is not a matter for us; it is a matter for the relationship between the provider and its lenders.
Q41 David Heyes: I guess you spoke to social housing to contribute to their report on 30 April. You were quoted as saying that there were three large providers with financial viability issues, yet we still only have Johnnie Johnson on V3. Why is that?
Julian Ashby: I am afraid I have no recollection of the particular thing that you are referring to, but I have for example just said that there are 33 providers that have material financial exposures that they need to manage effectively in order to stay compliant. At the current time, the only one that has a non compliant viability grading is Johnnie Johnson, but there are four or five that have a non compliant governance judgment at the present time.
Q42 Chair: We have talked about Cosmopolitan; we have talked about Johnnie Johnson. We know that the whole sector probably had quite a few organisations that had ambitious development programmes prior to 2010, and then had the reality of the Comprehensive Spending Review, reduced grant arrangements, etc. Do you think there is a danger of systemic failure or systemic problems for the whole of the sector coming from those sorts of issue?
Julian Ashby: The sector is always potentially prone to systemic problems, in so far as it engages in market related activities. The property market is in a very buoyant state at the moment. The chances are that that will not continue for ever; it never has historically. In each of the previous property market downturns, there have been systemic problems in terms of associations not being able to sell properties as quickly as they had planned to sell and that indeed was one of the issues that the Tenant Services Authority had to manage in the immediate wake of the credit crunch, when the property market downturn was very severe. It can happen.
The new steps that we have taken additionally are contained in our proposals for the regulatory framework. They are to require, among many other things, robust stress testing of business plans against exactly that kind of combination of circumstances. A property market downturn is not just an issue of not being able to sell properties; it can lead to impairments and it can lead to changes in the level of interest rates and in the ability of associations to borrow, and so on. What we are expecting future associations to do is actually stress test their business plans against those kinds of eventuality.
Q43 Chair: So you are saying to us that, if systemic problems arise, the systems you have put in place ought to prevent them from becoming systemic failures?
Julian Ashby: If the changes we are making to the framework have the desired effect, then associations looking at the potential causes of systemic failure will be putting mitigations in place. We will be looking at the sorts of mitigation they are putting in place ahead of those situations arising and, if we are not satisfied, that is potentially an area where we might downgrade somebody’s governance for not putting proper preparations in place.
Q44 Chair: That is anticipating problems and trying to get in there?
Julian Ashby: We are seeking to anticipate problems, yes.
Q45 Chair: The caveat was a big one, was it not—if they “have the desired effect”? What exactly does that mean?
Julian Ashby: At the end of the day, it is the boards of providers. They are free-standing businesses. We are not shadow directors. They have the primary responsibility for ensuring that they meet their objectives and stay solvent. We give them standards that we hope will be sufficient so that compliance to those standards will keep them viable. I am aware, and I am sure you are aware, that there are times when problems are uncovered and it turns out that an association has not made adequate preparations. I would not be willing to say that problems can never arise in the future.
Q46 Chair: When you spoke to us last time, you accepted that there was probably some strengthening that you needed to do of your management team, and you took steps later in the year to do that. It then was drawn to our attention that you made a comment to the Social Housing magazine in April that you needed to “skill up” as a regulator. That seemed not quite to square with the steps you were taking at the end of the year to get better skills in place in your management in the organisation.
Julian Ashby: I do not think skilling up is a once and for all task, under any circumstances. What we have implemented since we were last speaking together is quite a major restructuring. We have tripled the number of senior managers in the organisation. We have brought in significant higher level skills to cope with the greater level of complexity in the sector. We have strengthened our investigation and enforcement team. We have introduced, as I described earlier, a quality assurance team, and we have put a fairly heavy investment in place in training and development, but those are ongoing things. We also have plans to further strengthen regulation over the coming year, and we will absolutely continue to train and prepare staff for future changes in our regulatory framework.
Q47 Chair: What are you planning for?
Julian Ashby: In terms of improvements in the coming year?
Chair: You said you have plans in place.
Julian Ashby: We are planning an increase in the level of staffing over the course of the next 12 months.
Q48 Chair: Is that with any specific objective in mind? Is there any specific area where you have concerns now?
Julian Ashby: Yes, we have very specific plans that will strengthen particular areas of the regulation function.
Q49 Chair: Which areas? Sorry; I am trying to get out a little bit more information about what you are intending.
Julian Ashby: The reason for my hesitance is only that these are matters that have not been fully aired. We have not consulted staff yet on the full detail of these proposed changes. Although we have publicised that we are intending to expand the staff roll, I would rather describe the detail of that through the normal process of discussions with staff to inform them.
Chair: I understand that, but surely you could tell us the general areas that you think need strengthening, if not the particular positions.
Julian Ashby: We will be strengthening the operational teams. We will be strengthening financial analysis in particular. We will be further strengthening our investigation and enforcement team. That is the sort of area. I was not trying to be—
Q50 Chair: That sort of description I am happy with. If you could then probably write to the Committee when you are able to say a bit more about the details in due course that would be very helpful.
Julian Ashby: I would be very happy to do so.
Q51 Chris Williamson: Are there any aspects of the regulatory framework that you would like to change, but you feel unable to do so?
Julian Ashby: The regulatory framework of standards is basically for us to deal with. We have plans to make quite wide ranging changes to those. We are proposing to change, in particular, the governance and viability standard in a number of ways. We are changing the rent standard, but that is mainly to reflect the new direction from the Secretary of State. We are making changes to our disposals regime and we are making some consequential changes to our registration criteria. The regulatory framework and what we think of in those terms are matters within our control and we do not feel constrained in terms of making changes to them as we consider necessary.
Q52 Chris Williamson: Can you tell us what proposals you dropped from the discussion paper on amending the regulatory framework, and how you are going to address the problems that they were meant to solve?
Julian Ashby: I suppose probably the headline issue was around ring fencing. We will be retaining ring fencing for for-profit providers and those that do not have a registered parent company, so we are not abandoning it altogether. During the course of the discussions we had, it became clear that, actually, ring fencing had a number of drawbacks. Perhaps if it had been implemented 10 or 15 years ago, before the sector had diversified to its current extent, that would have made life for subsequent regulators easier, but the level of diversification that now exists makes it impractical to actually put a ring fence in place. It would require people to renegotiate many of their funding arrangements.
We concluded, and indeed our earlier proposition was, that providers would be required to comply or explain. It became clear from the consultation that, actually, so many of them would be saying, “Well, it is not practicable for us to comply, but we will explain,” that the more useful thing to do would be to set out what sorts of thing we want them to do in order to strengthen their risk management in particular. The one to which I would give particular emphasis, but, as I say, it is not the only one, is our proposed requirements around business plan stress testing and ensuring that, when associations undertake new business, they have in mind the results of that stress testing, so they are able to look at the potential addition of new risk at the same time as they are judging how they are going to cope with existing risks.
Q53 Chris Williamson: What about so called living wills?
Julian Ashby: The other area is living wills. Again, our experience has been informed by what took place in Cosmopolitan. What was clear from that case is that a prior condition of a successful work out plan is that a provider has, in one place, a comprehensive register of their assets and liabilities. That is comprehensive; it is not just relating to property, but loan agreements, covenants, what is secured, what is free and available as security and all of those kinds of issue. As it happens, that detail was not available to Cosmopolitan. We had to put it in place as part of our contingency plans that, in fact, in the end, were not needed.
Q54 Chris Williamson: The reference to ring-fencing or, indeed, living wills was not in the discussion paper though, was it, as far as I could tell?
Julian Ashby: We have certainly now majored on that in what is now out for consultation, which is that, instead of having a living will, what we are requiring is that the first stage of living will preparation, which is having that comprehensive register of assets and liabilities, is held by all associations. One of the lessons from Cosmopolitan is that actually constructing a recovery plan in a distressed situation is a highly specialist business. Expecting all 250 providers that we grade to be doing that would, first, not necessarily be a very good use of their resources, compared with making sure that they have got that comprehensive register of assets and liabilities in place.
Q55 Chris Williamson: Are you satisfied then, with reference to ring fencing and living wills, that measures are in place that would address the issues that they were meant to deal with?
Julian Ashby: Yes. In fact, I could go further: I think that what we are now consulting on will be a more effective package of measures than the ones that we were proposing in the initial discussion document.
Q56 Chris Williamson: Was there a reason why you did not wait for the Cosmopolitan Housing Group Lessons Learned report before consulting on the proposals for changes to the regulatory framework? Was there any rationale for that?
Julian Ashby: The proposals to strengthen the regulation framework basically stemmed from the analysis we undertook as an incoming regulator, back in 2012. We had a fundamental review of what we saw as being the risks and potential risks in the sector. We concluded at that time that it would need to be strengthened, and we have embarked on that process initially through a discussion document and, subsequently, through a consultation document. We did not consider it appropriate to put that very important process on hold, but we have fine tuned it in places, as a result of the experience of working on that case, as well as the findings of the independent review, subsequently.
Q57 Chris Williamson: Based on that Cosmopolitan Housing Group Lessons Learned report then, is there anything that you would have done differently now, had you had the benefit of that?
Julian Ashby: There are a considerable number of things that we are doing differently.
Chris Williamson: As a consequence of that report?
Julian Ashby: A majority of them are things that we began to put in train beforehand. What the report has also highlighted are some specific issues—for example, around being satisfied that, where a merger is taking place, if one party is weaker than the other, the receiving party does have the full ability to cope with and address those weaknesses. We are looking at how we can strengthen the processes that we have for approving mergers to take light of that. I am sure you will have noticed that there are recommendations in the report to look at our statutory powers in relation to a moratorium and, again, we welcome the opportunity to work with the Department, which the Department is in agreement with, to review those matters. That is a very productive way forward.
Q58 Chris Williamson: The final question then, from me, is: apart from the areas highlighted by the Cosmopolitan Housing Group Lessons Learned report, are there any other areas of the legislative framework that you would like to see amended?
Julian Ashby: The ones that we would like to see strengthened we are consulting on at the moment. This is a matter that we have made clear from the outset we will keep under regular review. If it seems to us that we need to make amendments to that, we would not hesitate to do so but, at the moment, we feel that this is quite a substantial shift in, particularly, the governance and viability standard to give a considerably stronger emphasis to risk management. We feel that that is a very appropriate response to what we see as the upcoming risks in the sector.
Q59 Chair: Finally, Mr Ashby, I think you probably appreciate last year when you came to see us you left the Committee with a few concerns.
Julian Ashby: I accept that. Yes.
Chair: Do you think today you are basically saying to us that you are more confident, both about the regulatory framework you are operating with and the policies that are part of that, and your implementation of them?
Julian Ashby: Yes.
Chair: Thank you very much for coming in and giving evidence to us this afternoon. Thank you. That brings us to the end of our public proceedings today.
Oral evidence: HC 541 13