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Inclusion vs the regulator: thoughts from the courtroom
Last week saw the Regulator of Social Housing (RSH) and housing association Inclusion go head-to-head in the High Court, with the association trying to get a non-compliant regulatory judgement quashed. Inside Housing’s deputy news editor Nathaniel Barker was there throughout – here is his take on proceedings
One of the most interesting moments from last week’s hearing at central London’s Royal Courts of Justice came during submissions from Monica Carss-Frisk QC, representing the regulator.
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She was arguing that while the regulator did not consider an action plan put forward by Inclusion sufficient to satisfy its concerns, it also did not have to specify how the association could return to compliance.
Judge Martin Chamberlain interrupted. “Well, the logical answer is: ‘You will have to adopt a different business model,’” he posited. But Ms Carss-Frisk was quick to distance the RSH from the suggestion that this was its position.
This spoke to some of the context behind this landmark legal challenge. Since First Priority nearly went bust in March 2018, the regulator has regularly judged lease-based supported housing providers like Inclusion to be non-compliant. The problem, however, is how these organisations can be led back to dry land; there is no easy answer.
In Inclusion, we have a housing association which is clearly very eager to achieve compliant status and therefore is effectively forcing the issue of how it can do this.
One may doubt the wisdom of mounting a costly judicial review over a regulatory judgement, but others may sympathise with the association’s frustrations, too.
They might ask: how can the organisation have been deemed compliant in 2015 when the business had apparently reached a nadir, and now be regarded non-compliant despite implementing a raft of improvement measures across three years? Those frustrations were palpable in the language of Inclusion’s counsel Daniel Stilitz QC, who accused the regulator of being “Kafkaesque”, “passive aggressive” and “weaselling” at various points.
The RSH was firm in its assertion that its fundamental issue was Inclusion’s “mismatch” between the certainty of its income stream and its lease liabilities to investors.
Whatever the court decides, there may be some learning for the RSH.
It would be wrong to see this case as the High Court’s assessment of the lease-based model. This is strictly a test of whether the February 2019 judgement issued to Inclusion satisfied legal requirements.
Justice Chamberlain’s decision could come down to whether the court has the power to second-guess the regulator’s findings – and technical legal arguments on this point took up a good chunk of the debate. The sector will await his ruling keenly.
Nathaniel Barker, deputy news editor, Inside Housing
Regulatory judgements in England explained
The Regulator of Social Housing publishes regulatory judgements for all providers owning 1,000 or more social housing homes.
These judgements set out whether the provider is complying with the regulator’s governance and financial viability standards.
The regulator carries out an assessment either through a scheduled in-depth assessment, or reactive engagement (in which the regulator acts following information about a provider).
It then awards the provider a rating from one to four for financial viability (V) and a separate rating from one to four for governance (G).
Providers must score two or higher in both categories to be judged as complying with the standards.
As providers have increasingly taken on more risk to cross-subsidise social and affordable housing delivery through market-facing activity, the regulator has changed a number of associations’ viability ratings from V1 to V2.
The regulator often categorises this kind of regulatory action as ‘regrades’ rather than downgrades. Click here to read more.
Key to ratings:
V1/G1: Compliant
V2/G2: Compliant
V3/G3: Non-compliant and intensive regulatory engagement needed
V4/G4: Non-complaint, serious failures, leading to either intensive regulatory engagement or the use of enforcement powers
Rating straplines in full:
Governance ratings:
G1: The provider meets our governance requirements.
G2: The provider meets our governance requirements but needs to improve some aspects of its governance arrangements to support continued compliance.
G3: The provider does not meet our governance requirements. There are issues of serious regulatory concern and in agreement with us the provider is working to improve its position.
G4: The provider does not meet our governance requirements. There are issues of serious regulatory concern and the provider is subject to regulatory intervention or enforcement action.
Financial viability ratings:
V1: The provider meets our viability requirements and has the financial capacity to deal with a wide range of adverse scenarios.
V2: The provider meets our viability requirements. It has the financial capacity to deal with a reasonable range of adverse scenarios but needs to manage material risks to ensure continued compliance.
V3: The provider does not meet our viability requirements. There are issues of serious regulatory concern and, in agreement with us, the provider is working to improve its position.
V4: The provider does not meet our viability requirements. There are issues of serious regulatory concern and the provider is subject to regulatory intervention or enforcement action.
