Ambitious provider fails regulatory tests of governance and financial viability

Regulator sees insufficient assurance in risk management and mitigating actions being commensurate with risk profile.

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An ambitious not-for-profit supported housing specialist currently meets neither governance and financial viability requirements, the Regulator for Social Housing (RSH) has ruled.

Inclusion Housing Limited is said by RSH to be “working to improve its position”.

But right now there are “issues of serious regulatory concern”.

RSH says Inclusion has provided insufficient assurance that its current risk management and mitigating actions are commensurate with its risk profile.

As such, RSH “lacks assurance” that steps within Inclusion’s control should risks crystallise would ensure its on-going financial viability and protection for tenants.

Owning around 1,540 units and managing 274 for others, Inclusion’s main operation involves entering into long term lease arrangements with the private sector, which is used to provide accommodation to tenants meeting Inclusion’s allocation criteria.

Inclusion’s lease arrangements with its head landlords vary in terms and are often for periods between 20 and 25 years.

The arrangements are index linked, with the leases on ‘Full Repairing and Insurance’ (FRI) terms which means that income collection, maintenance and repair and operating costs risks are transferred to Inclusion.

RSH recognises Inclusion has ambitious plans to expand its operating model, with a 2017-22 Business Plan envisaging growth of about 350 units a year.

Within its current portfolio, while Inclusion is contractually committed to meet the index linked lease premium payments over the long term, it does not benefit from the same level of protection on its income or associated costs incurred.

The information seen by RSH is said to demonstrate that Inclusion’s stress testing and scenario planning identifies that the crystallisation of key risks and the combination of risks identified, on a reasonable range of adverse scenarios has “profound effects” on the organisation’s ability to operate over the long term.

Should the risks identified crystallise, Inclusion’s scenario planning has measures and mitigation plans designed to provide a period in which it would aim to achieve successful renegotiation and amendments to multiple agreements with its private sector landlords to enable it to continue to operate.

However, to RSH, this approach demonstrates that Inclusion is reliant on the goodwill of third parties to agree to renegotiation and amendments to agreements.

If this strategy was unsuccessful Inclusion indicated to RSH that, as mitigation, it may explore insolvency procedures.

This, said RSH, could result in the potential loss of the homes from the regulated sector, with inadequate consideration of the re-housing needs of the vulnerable client group housed.

The regulatory judgement is the first published assessment of Inclusion’s governance and financial viability.

Registered providers are expected to have governance arrangements that ensure they have an effective risk management and internal controls assurance framework, which protects social housing assets and manages their resources effectively to ensure financial viability is maintained, while ensuring that social housing assets are not put at undue risk.

Though RSH recognises Inclusion has some limited protection within some of its contracts which would enable it to meet some of the adverse impact, mitigations which might be required would “fundamentally require significant change” to the underpinning assumptions in the current business plan.

And the realisation of those mitigations “would be reliant on multiple third party agreements being reached”.

Inclusion has explained to the regulator that its current business plan is predicated upon its material income source (rent) being ‘excepted’ from the requirements of the Welfare and Work Act 2016 by meeting the specialised supporting housing criteria.

RSH says consideration of the provider’s approach to rents had not informed the regulatory judgement, but application of the rent requirements is an area that RSH regulator may explore with Inclusion in the course of on-going engagement.

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