The new face of regulation

Julian Ashby has made a career out of troubleshooting for housing associations in difficulty - that’s more than three decades of getting to grips with the finances of organisations, experience that will serve him well in his new role.

The softly-spoken racket sports enthusiast was last month appointed chair of the new Homes and Communities Agency regulatory committee which from next April will take over the social housing watchdog role from the soon-to-be abolished Tenant Services Authority.

He’s taking on this new position in the midst of turmoil in the global capital markets and major upheaval in the way housing providers are regulated, so it’s a good job he knows what he’s doing.

‘My career in housing began in 1974, that was the year when the register [of providers] was first established and the regulation of housing associations began. I’ve seen it from its very inception all the way through,’ says Mr Ashby, spelling out his credentials.

A new beginning

Our conversation takes place in the ornamental garden at the back of the London headquarters of the TSA, where 64-year-old Mr Ashby is currently deputy chair. Despite his experience he knows the challenges the new regulatory committee is likely to face will be different to anything he’s seen before.

First though, we start with the finer details - how will this new committee work, and what will it mean for social landlords and their tenants?

The six individuals who will be joining Mr Ashby on the committee are currently being recruited - the closing date for applications was on Monday, he explains.

The TSA has nine board members and in 2009/10 - before it started to be wound down - a budget of around £38 million. The new committee will have three fewer brains to mull over regulatory problems, and around £18 million less to spend per year. Its budget is expected to be around £20 million for 2012/13 - meaning a 47 per cent reduction in resources available for the regulation of the English housing sector.

‘What has made that manageable has been the withdrawal of proactive consumer regulation,’ Mr Ashby explains.

Unlike the TSA, the HCA committee will not deal with tenants’ complaints. It will expect attempts to resolve complaints to take place locally, between tenants and landlords - or, alternatively, through a ‘democratic filter’, a tenant panel, MP or councillor.

After a period of eight weeks the matter can be referred to the housing ombudsman, and only if it deems there has been a major failure, or ‘detriment’ - meaning there is actual, serious harm to tenants - will the regulator step in.

‘This is a major change, it puts a further onus on providers to have effective arrangements for resolving problems with their tenants,’ says
Mr Ashby in his slow, precise manner.

The focus for the new chair and the rest of the committee will instead be on economic regulation, monitoring governance, viability and rents, as opposed to ‘consumer’ regulation.

When the scrapping of the TSA was first announced last summer, many in the sector, including lenders, were concerned that plans to incorporate regulation into the HCA might erode the regulator’s independence. At the time, Piers Williamson, chief executive of the Housing Finance Corporation, stated that the role of an independent regulator was important to investors.

Mr Ashby insists the Localism Act, which became law last month, ensures that regulatory powers can only be exercised through the committee and its delegated staff. The main HCA board, on which Mr Ashby also sits, will not be able to intervene, he says. There is a ‘straightforward separation of responsibilities’, he states - but, when pushed, he admits there are also clear areas of overlap.

‘The HCA board naturally has an interest in what happens to all of its activities, it could suffer reputational damage if we make a mistake, so it has a legitimate interest in what we do’ he says. Ultimately, though, Mr Ashby says, it is HCA chief executive Pat Ritchie’s responsibility to ensure the independence of the regulatory committee.

He also insists social landlords will experience a great deal of continuity under the new system. For example, the committee will pick up where the TSA left off and continue to publish regulatory judgements, he says, and organisations will largely be dealing with the same staff members they are currently in contact with - around 120 employees will move from the TSA to the new committee.

Value for money

One major change, though, has been the amendment of regulatory standards to increase its focus on value for money and efficiency. The new regulatory framework for social landlords, which is out for consultation until 10 February, will require housing providers to publish annual self-assessments of their value of money.

‘All the landlords I talk to are also worried about the shortage of affordable homes. They are keen to do more, but that is not likely to come from significant increases in grant resources, at least in the short term. Therefore, how associations make better use of their assets, how they can become more efficient, is important,’ Mr Ashby explains.

It is not the regulator’s job to tell organisations how to run their businesses, he adds. ‘If they know why they are doing something, and it is a coherent reason and they can afford it, it is not an issue for the regulator’.

However, ‘if they are simply not using their assets very well, or are making substantial surpluses and they are sitting in the bank doing nothing, we would start questioning whether they are fulfilling their objectives’, he states firmly.

Mr Ashby does not rule out the introduction of fees for regulation, allowed under the Housing and Regeneration Act 2008. He points out that the regulatory committee would need secretary of state approval and a lengthy consultation period to begin charging for its services, but admits this ‘might come into play if there are serious resource issues’.

Now our conversation moves on to the bigger, gloomy picture. Mr Ashby told a select committee of MPs in October that it would be a ‘considerable achievement’ if no associations suffer financial problems in the next few years. This pessimism is based on a number of concerns.

He’s worried about welfare reform and how the ending of direct payment of housing benefit to landlords in most circumstances will affect organisations. On top of this, he’s concerned about proposals in the Welfare Reform Bill, which is going through parliament, to restrict benefit payments for social housing tenants underoccupying properties.

‘These things can make cash flow uncertain and are very often uneven in their impact. For example a number of northern associations are concerned about the way underoccupation is treated,’ states Mr Ashby.

In some parts of the country there is little demand to re-let homes if underoccupying tenants are forced to move out, reducing landlords’ rental income, he adds.

Financial turmoil

Of much greater concern to the new regulatory committee chair, though, is the prospect of more turbulence in the global financial markets.

‘We are already noticing that lending margins are increasing, bank lending is increasingly on a medium-term basis, rather than a long-term basis.’ This, Mr Ashby explains, means associations will have to get to grips with refinancing every five or 10 years.

As if sweeping changes to the benefits system and negotiating the ups and downs of global financial markets aren’t enough for landlords to contend with, they are also adjusting to a new funding system based on lower capital grant and more revenue to support increased borrowing.

Although the TSA has vetted bids under the HCA’s £1.8 billion affordable homes programme, Mr Ashby says the move to revenue subsidy, in the form of increased rental income through housing benefit, as opposed to grant, creates risk for landlords. ‘It has an indirect impact because lenders look at the sector, look at the level of borrowing, the gearing [which measures debt to equity] creeping up and can then be concerned about their exposure,’ he says. Rating agencies may look at gearing levels and change their view on the robustness of the sector, he adds.

And then there are proposed changes to international accounting regulations. The international financial reporting standards, which will be phased in from April 2013, will require more transactions to go through landlords’ income and expenditure accounts, which could potentially affect their bottom line, increasing volatility and leading to breaches of lending agreements.

Problems like these are sometimes only picked up when accounts are audited, meaning figures can change after the financial year has ended. ‘We clearly don’t like a situation where an association has breached its covenants that arises after year end, because it is too late to do anything about it,’ says Mr Ashby gravely - pointing out this could lead to banks repricing loans.

To put this situation into context though, he adds that currently there aren’t any landlords in supervision. ‘There have not been any significant additions [to the most serious category] in the past three years which is reassuring,’ he states.

The regulatory committee will encourage organisations to approach it with their problems early on, meaning its direct involvement in organisations is kept to a bare minimum, its chair explains. ‘It is really last resort if we have to start using powers, because the implication is that the problems are extremely serious or there is a lack of willingness to accept them,’ he adds.

Before catching what he describes as ‘the regulation bug’ when working with Martin Cave on his Review of social housing regulations, published in June 2007, Mr Ashby was chair and managing director of housing consultancy HACAS Chapman Hendy and associate director of Tribal Consulting. These experiences will be important in his new role, believes John Bryant, policy officer at the National Housing Federation. But he warns,’there have been some real changes to the way the sector operates, the committee will need to be careful to keep its eye on its objectives’.

Mr Ashby and his fellow committee members will hope the need for landlords to display value for money in a rapidly changing financial and regulatory environment will not lead to more organisations requiring close monitoring.

It’s fair to say that the seasoned regulation expert, who spends around five hours a week playing a number of different racket sports, including badminton and tennis, will be glad of the chance to blow off some steam. He, the committee, and the sector as a whole, will have their work cut out.