Monday, 29 May 2017

Regulator slams troubled Cosmopolitan

Cosmopolitan Housing Group’s development plans left it exposed ‘to unacceptable levels of risk’ according to a damning regulatory judgement published today.

The Homes and Communities Agency’s regulation committee delivered its verdict on the troubled housing association as talks on a proposed takeover deal by Riverside reached a critical stage.

The housing regulator gave the 12,500-home landlord the lowest possible rating for both its financial viability and governance, highlighting ‘major shortcomings’ at the organisation.

These included ‘a failure to recognise and manage operational risks, an overly ambitious approach to development and the emergence of failures in internal control dating back some years’.

Cosmopolitan merged with Chester and District Housing Trust last December but, shortly after, the regulator raised concerns over some of its financial arrangements.

The judgement continued: ‘The group’s approach to risk was based on an over-simplification of presenting issues, coupled with too little scrutiny of new deals taking place after the merger. This, alongside an inadequate control environment, especially in relation to the development function, exposed the group to unacceptable levels of risk.’

It said the board’s decision to finance its investment programme through a sale and leaseback deal ‘was based upon a wholly inadequate analysis of risk and a rudimentary sensitivity analysis,’ adding that the board hadn’t properly considered alternative funding arrangements.

The judgement, by far the most critical of the 18 published today by the regulator, added: ‘The group failed to ensure effective controls to protect assets and public funds. The business planning and control framework failed to ensure access to sufficient liquidity, and the group failed to effectively manage the risks to delivery of its plans. Future financial plans included aggressive and ambitious funding assumptions which proved over-optimistic.’

The judgement was published as Cosmopolitan’s proposed merger with Riverside hit a crucial phase, with owners of at least £100 million of leases for the group’s student housing business locked in negotiations over a settlement. Riverside has said it will not do a deal if its own core business is put at risk.

It is thought unlikely that any agreement will be struck before Christmas.

John Denny, chief executive of Cosmopolitan, said: ‘This regulatory judgement is of course a cause of serious concern, but we should all remain aware that the majority of the group continues to deliver truly outstanding services to its many stakeholders. It is the case that issues inherited in a part of the group are complex but can and will be resolved.

‘There is clear leadership from the executive and our essentially new post merger group board to implement difficult actions in the best interests of both the organisation and the sector through our proposed merger with Riverside.’

The group’s previous regulatory judgement, issued by the defunct Housing Corporation in 2008, indicated that the regulator had no material concerns over performance. Using its old ‘traffic lights’ system, the regulator gave Cosmopolitan four green lights out of four.

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