Infrastructure and Capital Investment Committee

Meeting date: Wednesday, December 4, 2013

Official Report 543KB pdf

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Scottish Housing Regulator (Annual Report and Accounts 2012-13)

Agenda item 3 is an evidence-taking session. I welcome Kay Blair, chair, and Michael Cameron, chief executive, of the Scottish Housing Regulator. Kay, would you like to make an opening statement?

Yes. In the interests of time I will keep my opening remarks short, so that you have lots of opportunity to ask us questions. Thank you very much for your invitation to present our first annual report as an independent regulator. Some of you may recall that we presented to the committee last June, but it may be helpful if I articulate briefly our key objective and our work over the year in question.

As you know, we are the independent regulator of social landlords. We are directly accountable to the Scottish Parliament. It was helpful that you gave us one single statutory objective in the Housing (Scotland) Act 2010—although I would not say that that makes our life easy, it has given us a key focus. The statutory objective is to protect the interests of tenants and all those who use social housing services. We monitor, assess and report regularly on social landlords’ performance of housing activities. We address the financial wellbeing and standards of governance of registered social landlords. We have a very important and serious role, given the number of people who rely on us as an effective, independent and efficient regulator.

I will describe the scope of our activities. We regulate around 600,000 tenants and their families and around 40,000 people who may be homeless and who are seeking help to find a decent, safe and secure home. We regulate and protect around 100,000 people who receive factoring services from their landlords and, importantly, around 500 Gypsy Traveller families who use the local authority services provided by social landlords at the 32 official sites.

We have a wide scope and play an important role, which we have described in full in the annual report that we are discussing today. I will not go through that in detail, so I will highlight some of our key outcomes. The outcome of our work over the past year was very much linked to our key priorities as a regulator: the financial health and good governance of social landlords in Scotland, and effective service delivery by those social landlords—the quality of service that is delivered on the ground to tenants and others.

In the annual report, we talk about our regulatory activities and our criteria for how we assess RSLs and local authorities; that includes looking at those with which we have a more intensive engagement in a bit more depth. We also describe our preparatory work for the Scottish social housing charter. The charter, which will operate from next April, is important.

We have been very busy with the sector, ensuring that the indicators are the most meaningful and that we have good engagement with it. We also are keen to engage tenants and others on our key priority. As such, we have a comprehensive engagement strategy. We highlighted to the committee last year our national tenant panel, which is part of that strategy. We are keen to engage diverse communities and to reach some of the more hard-to-reach-groups. Our objective makes it clear that we should do that so, as I said, we have set up a tenant panel; I would be delighted to take any questions about that.

That is probably enough from me at this stage. I am sure that you have lots of questions to ask.

We have, so we will try to rattle through them.

You published a framework for monitoring how landlords meet the requirements of the social housing charter. Can you explain what the framework covers?

It covers various criteria that we use in relation to areas of financial strength, how landlords are meeting Scottish housing quality standards and what they are doing to ensure that they have sufficient financial headroom to meet some of the particular risks that the sector faces. We have a clear framework against which we will monitor performance. Michael Cameron can talk in more detail about the eight specific criteria.

We have consulted on and published a range of indicators, as Kay Blair mentioned, that we will use from the start of the next financial year to assess landlords’ performance in relation to their achievement of the standards and outcomes that are set out in the Scottish Government’s charter. In total, we have put in place 37 indicators on which landlords will report to us each year. We will then use that information to produce an annual report on each landlord for its tenants, which we will publish and require landlords to disseminate to all of their tenants. We will also provide tenants with access to online tools that will enable them to manipulate the data in a user-friendly way and to compare their landlord’s performance with the performance of other social landlords, thereby enabling them to have conversations with their landlord about that landlord’s performance.

While we are on that subject, will you give us an indication of the timescale that is involved in reporting on the charter for landlords and the regulator?

We will start collecting data after the first full year of operation. It starts in April 2014 and we will be in a position to report—

We aim to have those tenant reports available probably in about August 2014.

What benefits will the charter bring for tenants?

There will be clear benefits, not only in giving tenants information about their individual landlord’s performance but in enabling them to put that performance in context and compare it against the performance of comparable landlords in the sector. That will be valuable information, as it will enable tenants and others to hold their landlord to account and to ask questions about issues such as the speed of repairs, how voids are managed in the housing stock and the levels of rent that are charged. There will be lots of really interesting information about things such as satisfaction levels and value for money.

Did you engage tenants in the process of setting up the monitoring framework and the on-going reporting of it?

Very much so. We were conscious that we should involve a range of stakeholders, and not just tenants but some of the other people who use the services of social landlords. We spent about 12 months engaging with all those people. We did not expect everybody to come to us, so we toured the country and we spoke to, I think, about 750 organisations—which seems a large number—including a number of tenant organisations. We also spoke to individuals. We encourage direct dialogue with us through other means because, as I said, it is important that the system works for tenants and others; that they think that our criteria and indicators are the most important ones; and that they can use the information when they get it. It was important that we spoke in plain language and ensured as far as possible that our language was accessible and well understood.

We look forward to accessing those reports when they are available, but that is a little while away yet. Can you comment more generally at this stage on the current performance of social landlords in undertaking their housing management functions and duties?

We are a risk-based and proportionate regulator, which means that our primary focus is on the risks to the interests of tenants and others who use the services of social landlords. We assess the risks for each landlord annually, and develop individual engagement strategies in response to those risks. Within that, we will—as things stand—consider the limited range of performance-related information that we currently receive for RSLs only. When the charter comes in and we receive the full range of 37 indicators that I mentioned earlier, we will have a far richer source of information that will enable us to incorporate far more fundamentally the performance of social landlords into that risk assessment.

At present, our assessment looks at the risks rather than necessarily the performance. Where we have a concern about performance in terms of service quality, we will reflect that in our engagement with the landlord and publish details of what that engagement will involve. We do that for our registered social landlords through our regulation plans, and for councils in collaboration with our scrutiny partners through the joint scrutiny framework that operates for local authorities.

So the work that you are about to undertake, which will be published later next year, will give you a broader picture of what is happening.

That is absolutely the case.

We move on to the Scottish housing quality standard.

Earlier this year, the SHR published an analysis of social landlords’ progress towards achieving the Scottish housing quality standard, which identified 10 RSLs and one local authority as being at risk of not achieving that standard by 2015. Why is that, and what is being put in place to ensure that they meet the standard?

A range of factors contribute to that, some of which are particular to individual landlords. One element is the quality of the stock that landlords have; another relates to historical investment strategies that have perhaps not set up the landlord to respond well to the Scottish housing quality standard; and another is the fact that some landlords do not have access to the national grid for gas. Energy efficiency is an area in which landlords find particular challenges in meeting the standard.

We are aware of the 11 landlords that have identified that they are at risk of not achieving the Scottish housing quality standard. We have regulation plans in place with the 10 registered social landlords in that group, and an assurance and improvement plan in place with the one local authority. We are engaging with those landlords to ensure that we get adequate assurance from them that they are taking appropriate remedial action to enable them to work towards meeting the standard, and we will continue to monitor their performance all the way to 2015.

What will happen in 2015 if they have not met the standard?

If they have not met the standard by then, we would have to understand the reasons for that and the level of non-achievement. We must bear in mind that those landlords are not saying that they are not meeting the standard for any of their houses; it may be an ever-diminishing group of houses that are outstanding. We would put in place an appropriate regulatory strategy to deal with the particular circumstances of that landlord. It is difficult at this stage to say that we would do X, Y or Z; what we would do would very much be tailored to the individual circumstances and nature of those SHQS failures.

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We move on to homelessness. Can you explain in a bit more detail how you will monitor the quality of the temporary accommodation that homeless households are placed in?

That is obviously on our radar. As we speak, we are conducting a research survey to find out more information about homelessness and the housing options that are available. We will report in January, when we have more information—we will also report what we are intending to do. We are very conscious of the issue, so the board will meet in early January to discuss the findings of that up-to-date report.

Councils must know that they have a severe problem in many areas. Have you had any indication of how they intend to tackle it?

A fair bit of work is going on in partnership with local authorities and RSLs to try to address the challenges around having an adequate supply of appropriate temporary accommodation. Any rush to try to meet what is undoubtedly a supply-side challenge runs the risk of putting in place inappropriate responses to temporary accommodation issues. It is about local authorities and RSLs working together to build up the supply of good-quality temporary accommodation.

We will have a particular eye to ensuring that we understand how accessible good-quality accommodation is. We will engage with any local authority where we see a risk of people who are experiencing homelessness not getting access to appropriate temporary accommodation.

You will know that we conducted our own inquiry into whether the 2012 homelessness targets were being met. Do you have any evidence to date on how that target is impacting on the delivery of local authorities’ and their partners’ homelessness services?

We are looking at that and we will have more information on it in January. We are very keen that we get up-to-date information on that impact. Would it be helpful if we got back to the committee in writing once we have more information?

Yes. We might also consider whether we have time to question you on it, too.

You are carrying out a study. You have said that the findings will be made available. An article in the press at the weekend said that Shelter was

“frustrated by the failure of the Scottish Housing Regulator to step in and protect the rights of homeless people in the city”—

by which it meant Glasgow. Do you have any comment to make on that?

I would like to speak to Shelter directly to hear more about that, because I was not made aware that there was a concern about that before the article appeared. It would be premature of me to give an answer when I have not spoken to Shelter to get more evidence about that.

It is perhaps worth saying that we have an on-going engagement with Glasgow City Council in relation to its homelessness service. We were aware of the difficulties that the council was having. It is also worth being clear that the council has acknowledged those difficulties. We are engaging with the council on this matter at the moment. We have already published details of that engagement through the assurance and improvement plan. We will be looking for the council to provide us with appropriate assurances that it is in a position to tackle these difficulties in the short term and the longer term.

Why do you think that Glasgow specifically has those problems?

There are a range of challenges in Glasgow. People who are experiencing housing difficulties in the wider hinterland of the city often gravitate to the area. There are challenges in the fact that the city council does not have its own housing stock and relies on its partners to help it to meet its statutory duty. Glasgow is also in the process of significant change, including the renewal of hostels in the city. A lot is happening that means that Glasgow City Council faces challenges. We want to understand how it is responding to those challenges and, in particular, to ensure that it is able to discharge its duties in relation to people who find themselves homeless.

I have a question on the financial health of social landlords. Can you give the committee an update on the financial challenges that social landlords face as a result of economic circumstances and the impact of welfare reform?

That is a very pertinent question. We have described some of the risks that we think are present in the sector, which are very much to do with the fact that we are in a different lending climate. Borrowing is becoming much more challenging for the sector as a whole because of the level of borrowing costs. Another issue is pension liabilities and how pension deficits are going to be funded and reported in accounts in the future, which might impact on lenders’ propensity to lend. The impact of welfare reform is another risk that we are exploring at the moment. There are a number of risks that are challenging for registered social landlords.

Having said that, I believe that the performance of the sector to date has been strong, with a few exceptions. As a regulator, we are keen to ensure that that strong performance continues and that the outcomes for tenants continue to be good. Nevertheless, it would be remiss of me not to highlight the fact that risks are escalating in the sector and are proving to be challenging. Because of that, we are keen to ensure that tenants get a good deal and that landlords are being run well and managed effectively. It is important that we take account of financial health in our regulatory assessments.

Closely linked to that is the need for effective governance in the sector. One of our key priorities is to ensure that social landlords are well governed—that their boards have the right skills and expertise and are equipped to ask the right questions; that they understand the economic challenges; and that they meet tenants’ needs effectively. I highlight effective governance, allied to financial health, as one of our key priorities.

Thanks for that. Let us focus on the tightening of lending criteria and increased borrowing costs. Are those costs justified, given that social landlords have reported that surpluses and turnover have grown and the fact that the number of registered social landlords recording a deficit is at a five-year low?

It is up to individual lenders to negotiate an individual deal with each social landlord, so I am not sure that I could give a generic answer to that question.

In terms of the reserve that social landlords have, it is important that they have sufficient financial headroom so that they are able to weather some of the risks that are out there in the sector. As a regulator, we have a remit to regulate not the sector as a whole, but each individual landlord.

Do you want to say something about that, Michael?

No, but I would echo that point. When we consider the financial health of an individual landlord, we are looking at that landlord. We do not take a systemic or sectoral view of financial health. The message that we put out recently in a regulatory advisory note that we issued to the sector said that it is incumbent on landlords to ensure that they have an understood, appropriate and sustainable financial headroom to enable them to tackle the type of financial risks that will be coming their way over the next few years.

A number of social landlords have said that lending institutions are trying to change terms and conditions when they are applying not only for new borrowing but for existing borrowing, which increases those costs. In your experience, has that been widespread across the sector?

There are always situations in which a landlord is advised to negotiate and to engage with its lender. We always advise the landlords to ensure that they are properly informing lenders and communicating what they intend to do in future, to keep the lender on board.

It is important that those relationships are managed effectively as there are various events that require landlords to engage with their lenders. For example, when it comes to managing their costs, it is absolutely crucial that each landlord manages the relationship so that the lender appreciates the situation, the issues and the challenges that they face.

We are aware that there are new forms of funding that could be attractive, but we do not know about their potential attractiveness because to date we have not had any firm proposals for new forms of funding come across our desk. All funding has its risks and its costs, so we are keen that the boards of each landlord understand the situation that they are in and what their borrowing costs are and might be in the future, and that the relationships are managed to ensure that lenders are kept informed appropriately.

In the past financial year, you carried out 22 performance inquiries. In general terms, what were the findings of those inquiries?

It is worth saying first of all that those inquiries would have been initiated by a concern that we had or by the identification of a risk. It is not the case that we engage in routine cyclical inspection activity, which would give a broader view of performance, so I sound a note of caution about taking the outcomes of such inquiries and extrapolating from them across the sector as a whole.

The inquiries have been about specific issues, not about broader performance. What tends to happen when we engage with landlords is that we get a good response and they seek to give us the level of assurance that we need that they recognise and understand the performance issues and have appropriate plans in place to address them. Nothing that has come out of those inquiries has been so significant that we have had to consider using our statutory powers.

Does the nature of the performance inquiry relate to the financial health of the organisation, to the governance or to the quality of delivery?

The 22 inquiries that you referred to were specifically about service quality or performance issues. We have a range of other engagements with a number of landlords around financial health or governance issues, and they do not feature among that figure of 22.

Also in the past financial year, you managed three landlords out of near insolvency. What factors brought about that situation, and what measures do you have in place to ensure that other RSLs are not in the same position in future?

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In each of the three cases, poor governance alerted us to the situation. The landlord did not particularly understand the challenges that they faced, did not identify and mitigate risk, and did not understand some of the financial implications of the situation that they were in. Each case stemmed from poor governance.

We engaged closely and intensively with each landlord, because it was extremely important from the point of view of tenant outcomes that we managed the situation and that we found rescue partners, which we helped to facilitate. I am pleased to say that each of those landlords has been rescued effectively.

It is critical that we ensure that that does not happen again. We have initiated a series of publications called “Governance Matters”. It is important that the whole sector understands the issues and challenges that the landlords in those cases faced. We are publicising a range of some of our more serious cases. We are doing so in an anonymous way, in that we are introducing other issues that we encounter in the sector.

As well as launching those publications, we have tried to engage directly with board members in the sector, because we are keen to do that. In addition, we have run a series of governance matters events around the country to facilitate board members in getting together, engaging with one another and learning what went wrong. That will, we hope, enable them to ask themselves what they would have done in similar situations—and, indeed, whether they are in a similar situation—what the right questions to ask are and what kind of assurances should be sought. Those events have been extremely popular, to the extent that we will run them again this year, and we are continuing to publicise particular issues under the governance matters agenda.

When particular issues such as near insolvency arise, we feed them into our regulatory assessments to ensure that we are asking all the right questions and that we are aware of what might happen in similar situations elsewhere.

Does the fact that you have launched your governance matters publications and events suggest that there is a weakness in RSLs as far as governance is concerned that must be addressed?

Yes, I think that it would be fair to say that there is. In certain RSLs, there are weaknesses in governance, as has been seen. Having the right skills and expertise and level of challenge round a board table is always a challenge, and we are keen to ensure that they are there. In our advice to the sector, we tell boards to ensure that they continually ask themselves whether they have the right skills round their table; how they can train and develop their members, both existing and new; and how they can continue to attract the right skills so that the right level of challenge—and therefore assurance—is provided.

I acknowledge that there are issues to be addressed, and we are working to highlight them. Regardless of the sector, every board around the country would say that it is always necessary to look at good governance and to ensure that the right skills, experience and knowledge are present round the board table.

I return to the financial risk that welfare reform poses to RSLs. The research that you published in October said that, in the first three months of 2013-14, there was an increase of around £789,000 in rent arrears across all RSLs for which you had complete data and that 65 per cent of RSLs saw an increase in their percentage arrears levels.

I want to get a sense of how serious that issue is and how important it is that the Scottish Government does all that it can to mitigate the impact of the bedroom tax through the provision of discretionary housing payments.

For some time now, we have recognised the potential risks that welfare reform poses for social landlords. I think that social landlords were among the first to appreciate what some of the challenges would be and that they have already gone some way towards preparing their organisations and supporting the tenants who may be affected.

It is quite early on to draw too many direct conclusions—our first survey covered the first quarter of this financial year. We are certainly conscious that the impact has been mitigated, both by the work that social landlords have undertaken and by the availability of discretionary housing payments, and we will need to see how things progress over the coming year or so. We will repeat our survey on a quarterly basis to ensure that we have as much up-to-date information as possible on what the impact may be. We will put that information—including the mitigating impact of discretionary housing payments—into the public realm so that others can use it to help in evaluating policy responses.

What specific measures have you taken, or are you considering, that would encourage landlords to make their tenants aware of the availability of discretionary housing payments?

We have issued a range of advice to all landlords, incorporating a number of articles from landlords who have been to the fore in providing appropriate and relevant advice to tenants. At this stage, we are focusing on providing information and encouragement.

I attended a Welfare Reform Committee meeting a couple of weeks ago at which a number of local authorities gave evidence that, as yet, they are not entirely confident that all those who would be entitled to discretionary housing benefit payments have applied for them. There is still some work to be done to ensure that that assistance is maximised.

We are concerned about the impact of direct payments and the introduction of universal credit when that happens, because it will potentially have an even greater impact on the sector. Given the competing priorities and the financial economic situation, we will have to keep a close eye on rent arrears as a result of that particular event.

Just to be clear, is the issue that the benefit is paid directly to the tenant rather than subtracted at source?

The housing benefit will be paid directly to the recipient rather than what happens at present, which is that housing benefit is paid directly to the landlord. Because that income stream is regular and assured, lenders look on it quite favourably. That is likely to change, and so it is possible that lenders may look on the change as a potential opportunity to evaluate borrowing costs.

That is helpful—thank you.

I want to ask about notifiable events, which are serious events that could bring an RSL into disrepute or threaten its stability. Can you give the committee some examples of the type of event that would be considered as notifiable, and tell us whether you expect those notifications to continue at the current levels for 2012-13?

Yes. Notifiable events cover a range of circumstances of which we would expect landlords to advise us so that we, as a regulator, are aware of issues that might be developing. They can be quite wide ranging; in our guidance to landlords we set out broad themes and give some examples.

Notifiable events can relate to governance—for example, they can arise if one or more governing body members resign for reasons that are not personal in nature, or if the chief executive or a number of senior staff leave. They can involve potential reputational risks, such as significant media coverage that might damage the reputation of the landlord and therefore potentially impact on the reputation of the wider sector. They can involve particular performance issues—for example, if the Health and Safety Executive is engaging with a landlord regarding a failure to appropriately manage gas safety in the housing stock.

There is a wide range of circumstances in which we would expect landlords to keep us advised. We want to be a proportionate regulator; we do not want to place overly onerous demands on landlords for regular and comprehensive data and information. We have set up a system whereby we are alerted to relevant and pertinent issues.

Thank you for that. If I may, convener, I just want to put on record that I found the annual report to be particularly user-friendly and that it presents the information very clearly and understandably.

Thank you.

Thank you.

I agree.

I want to go back to the issue of notifications and our earlier discussion about RSLs’ performance and the insolvency position. I believe that there have been some amalgamations of RSLs. Is that a good trend or a bad one, and is it likely to continue?

We do not have a view on whether further consolidation would be good or bad. As I have said, our objective and duties relate to individual RSLs.

That said, we are aware of more mergers in the sector. More individual landlords need to look at their own situation and ask themselves whether it would be more sensible to share some services or whether there are ways of delivering more cost-effective services in future. Amalgamation might be on the agenda for a number of them, but I have to say that it is not the Scottish Housing Regulator’s agenda. The matter is more for individual landlords and the Government as opposed to us as the regulator.

In your opening remarks, you invited questions on the national panel of tenants and service users, which I believe has been operating for about a year now.

That is correct.

Can you set out the benefits of the panel’s establishment?

Absolutely. We were very keen to reach a more diverse range of people. Although there are a number of excellent tenants organisations throughout the country, we were keen to reach more minorities, younger people and so on and to offer tenants and others different alternatives and options for communicating with us. After all, not everyone wants to come to meetings.

As a result, we were keen to reach a wider audience not to replace anything that we do but to complement what we do. We set up the panel in what I hope was the most cost-effective way; a lot of its work happens online but, in recognition of the fact that not everyone is online, we also engage with people by telephone and post.

We were hoping to get up to about 500 people. To date, we have more than 300 and have conducted our first survey to find out what the issues and top priorities are. The response to that survey has been really interesting. We found people very keen to engage, but we also want to engage proactively and use the panel to ask certain people certain questions. After all, we do not always want to ask 350 people the same questions; we want to divide things up a bit more.

We think that this approach will really help. After all, it is important for a regulator to have good intelligence and to be aware of current themes and issues. Because our statutory objective is to look after the interests of tenants and others—for example, Gypsy Travellers—we are very keen to engage regularly but cost-effectively as a means of complementing our other engagement with tenants. As you know, we engage with registered tenants organisations and have our own tenant assessors, who provide a very valuable service by looking at specific areas of work.

As for the panel’s benefits, we will look at and evaluate the effectiveness of what we are doing as we go along, but the early signs are good.

That is good.

You have partly answered my final question in the course of the evidence session, but what do you think will be the key challenges and issues for social landlords over the coming term? Can you list them in terms of priority?

Our own priorities very much relate to how we regulate. We look at governance and financial health, and clearly with the charter coming into operation next year we will be looking at getting much more information about service delivery.

We see risks and challenges growing because of the current economic situation. As a result, our priorities will be effective financial management by social landlords and to protect and safeguard tenants’ interests. One development in the sector is diversification; that might or might not be good but we are keen to ensure that, when social landlords engage in subsidiary activities, they are aware of the risks and benefits of such activity and that tenants’ assets are protected when subsidiary companies are set up.

There are lots of issues that we as the regulator will have to address to maintain and enhance our scrutiny and deliver an effective and appropriate regulatory remit.

As members have no more questions, I thank the witnesses very much for their evidence. We will be able to discuss your findings on housing options and homelessness in our follow-up work on the 2012 commitments, which I think will happen early next year.

That would be helpful. We also said that we will send you the report when we get it, which will be early in the new year.

Thank you very much. As previously agreed by the committee, we will now move into private session.

12:47 Meeting continued in private until 12:52.