The Regulator’s assessment of housing association’s governance and financial viability are vital in protecting social housing assets and giving assurance to lenders that the sector remains a strong investment proposition.
And with relatively benign operating conditions about to get considerably tougher in the years ahead, we have a new operational approach and greater clarity over our rating straplines.
When the Chancellor delivered his Budget earlier this month, the sector’s operating environment changed in important ways. Welfare reform, rent reductions and proposals to extend the Right to Buy have a big impact.
What is inevitable – given the diversity of the sector and the wide range of markets in which it operates – is that some associations will find this significantly more challenging than others. They need to be thinking hard about the long term implications of the Budget announcements and reflecting them in their business plans and stress testing, to know what mitigating actions they will take.
We are also working to analyse impacts. But while we can model at a sub-sectoral level, it is not our job to work out the implications for each association individually. If their analysis indicates they will have difficulties, then they must let us know.
If we have to warn associations of problems around the corner, then we will not be impressed with their governance.
Our new framework’s emphasis on stress testing, asset and liability registers and board skills is particularly appropriate. I have recently met over 80 associations for small group discussions and it is evident that most ‘get it’.
What’s also encouraging is the flow of stories from those associations who are doing it – in terms of additional things they have learnt about their businesses – as a core way to protect against major adverse scenarios. Organisations that have grown through mergers and groupings are frequently discovering that data integrity can be very uneven across a group. The understanding of risk flows that the centre has can be very different from the understanding that subsidiaries have.
The changes to the framework are part of wider changes to our operational approach. But we are also changing the description of our two compliant viability grades. This is so that they better reflect – and are consistent with – our new standards and our new operational approach.
A V2 rating is a compliant judgement and not, unless it’s due to poor management, a badge of shame.
I know there has been discussion as to whether we have decided that there need to be more V2 judgements and some confusion as to whether it should be regarded as a badge of shame. But we will now clarify the nature of the judgement being made and re-emphasise that V2 is a compliant judgement and not, unless it is a result of poor management, a ‘badge of shame’.
The new straplines will reflect the range of adverse scenarios with which an association can cope. A V1 will have the financial strength to cope with a wide range. A V2 will have the capacity to cope with a reasonable range – but will need to manage a higher level of material risks to ensure continued compliance.
An association can be judged a V2 for a variety of reasons, including being a recent stock transfer, stretching assets hard or having a high re-financing risk. If accompanied by a G1 rating, this is entirely acceptable. But a G2 / V2 rating is less desirable. It means that there are some governance weaknesses in a situation where effective governance of financial risks is required.
By making these changes we are not seeking to shift the goalposts; nor are we starting with an aim to increase the proportion of V2 judgements. But the operating environment is about to get tougher and if that increases the level of vulnerability, it will inevitably have an impact on the proportion of V2 judgements.
The last three years have been pretty benign; the next 3 years are likely to be significantly tougher.
The last three years have been pretty benign. Welfare reform has not been implemented at the speed that was originally planned. Interest rates have been exceptionally low. Rent increases have been high relative to costs and the housing market has helped sales programmes.
In spite of this, we have downgraded over 40 associations. Some of these downgrades have been in the light of quite serious financial problems. The next 3 years are likely to be significantly tougher. We all need to raise our game.