Risky business

The report of the Financial Services Authority into the failure of the Royal Bank of Scotland concluded that, had the regulator proposed the measures that in retrospect appeared appropriate to the situation, it would have been accused of pursuing a “heavy-handed and gold-plated approach.”

“This is an opportune time for RSLs in Scotland to be considering the risk landscape.”

So a regulator acting in a manner that is proportionate and timeous may face accusations of over-regulation, regulatory creep and perhaps, most commonly, being unduly risk-averse. And the argument is sometimes made that a regulatory aversion to risk, in turn, forces regulated bodies to be risk-averse.

My view is that risk and risk appetite are for individual organisations to determine. No regulator should ever ask regulated bodies to be risk-averse.

But successful organisations – whether regulated or not – are always risk aware.

This is an opportune time for Registered Social Landlords (RSLs) in Scotland to be considering the risk landscape.

Many landlords in Scotland are currently reviewing their business plans following an announcement by the Scottish government of a substantial increase in the subsidy available for building new social housing. RSLs which have been out of development for some time are considering their position anew. And those RSLs which have continued to develop over the years are asking themselves if they can and should do more.

As well as the challenges arising from development, a possible change to the way in which landlords are regulated means that prudent RSLs will be paying attention to the whole question of risk and how it is managed. Following on from the decision to reclassify English Registered Providers as Public Non Financial Corporations, the Office for National Statistics is now reviewing the status of Scottish RSLs. The Scottish government has given a clear lead in saying that it is committed to ensuring that RSLs continue to be classed as within the private sector. If this follows experience in England, it seems likely that there will be changes to the statutory role of the regulator.

Lenders have made it clear that their confidence to invest in the sector is underpinned by the ability of the Regulator to exercise its professional judgement and regulatory discretion. Lenders will therefore take a view on any changes to the role of the regulator and decide if they have implications for how the sector is viewed.

Effective risk management is important at any time. But given an increase in development activity and the potential for changes in how the sector is regulated it is particularly important at this time.

In December 2015 we published details of our expectations around risk management and business planning in the form of Business Planning Recommended Practice (BPRP).

In doing this we drew heavily on the experience and expertise of regulated organisations and consulted extensively with sector bodies.

The BPRP runs to around 5,500 words, but can perhaps be summarised in three simple – and hopefully uncontroversial – statements.

First, tenants’ interests should be at the centre of an RSL’s business planning.

Second, regulated bodies should comply with regulatory standards.

And finally, risks need to be managed.

Of course, sensible leaders in any organisation would always seek to conduct their business in this way. So for the most part regulated and non-regulated organisations should not be so different. But the value of regulation lies mainly in the assurance that is provided to stakeholders that standards will be observed and, where they are not, effective action will follow to ensure compliance.

We know that lenders take assurance from regulation, and they tell us that the availability of funding and the terms on which funding is available will continue to be influenced by effective and proportionate regulation. We will always propose proportionate measures that are appropriate to the issues in hand, even at the risk of being accused of taking a heavy-handed and gold-plated approach.

Ian Brennan, director of finance and risk, Scottish Housing Regulator