Draft Insolvency of Registered Providers of Social Housing Regulations 2018

Tony Lloyd Excerpts

Wednesday 21st March 2018 General Committees

[Tony Lloyd (Rochdale) (Lab)]

May I, too, say what a joy it is to serve under your chairmanship, Mr Evans?

I reflected, as the Minister was speaking, that it is always good to be a lucky politician. The Minister will probably count himself as lucky. All his predecessors in the housing brief did not have the advantage of serving in a Government that have at last stumbled on the political importance of housing. In that sense, we all enjoyed the romantic introduction to what could otherwise have been a technical but important speech.

This is an important issue, and I reassure hon. Members—as much those on my own side as the Government’s—that we will certainly not seek to divide the Committee on this occasion. Nevertheless, I will probe some of the issues that the Minister raised. While the draft regulations are technical and sensible, we need to know that they will actually do the job that we and the Minister want them to do.

In that context, the Minister rightly raised something that the Department tells us in the impact assessment: that a failure to protect the social housing assets of an insolvent provider would mean that tenants were at risk of losing their homes or having their rents increased to market levels; that much-needed affordable housing would be lost; and that the taxpayers’ investment, through affordable housing grant, could be lost. We agree with the ambition to avoid that situation. In fairness, as was raised by my hon. Friend the Member for Poplar and Limehouse and the hon. Member for Harrow East, the protection of tenants is fundamental in this.

In that context, will the Minister clarify the operation of objective 1 on financial stewardship and objective 2 on the protection of tenants’ rights? It is right and proper that we have those two objectives, but my concern is that if objective 1 takes precedence over objective 2, and if realising market value, possibly for taxpayers but certainly for creditors, becomes the dominant issue under it, how will we operationalise objective 2—the protection of tenants’ rights and the transfer of any assets to another social housing provider? That will be the nub of the statutory instrument when it comes into operation. That is a technical point, but it would be helpful if the Minister talked us through exactly what that means.

Under any sensible structure, one of the duties placed on lenders is that they operate due diligence. Those lending to one of the companies caught under the statutory instrument have an obligation to protect their shareholders and owners—that is a legal duty—and to ensure that the housing company operates in a prudent fashion. Of course, the more we insure lenders against risk, the less due diligence is part of their motivating force, so it is important that creditors know they are responsible for ensuring that their lending to housing companies is prudent. I hope the Minister will comment on that.

My third point is perhaps the most important. When Cosmopolitan Housing Group almost failed in 2012, the regulator acted promptly and in a way that secured advantage both to the public weal and to the tenants of Cosmopolitan, who were transferred to the Sanctuary Housing Trust. That is the way the system ought to operate, and I congratulate those who were involved with it at the time. The best thing in such a situation is to ensure that we do not repeat Cosmopolitan’s journey to self-destruction.

In 2014, Altair published a report, which was commissioned by the Minister’s Department, looking at the lessons to be learned from Cosmopolitan, and it asked how we prevent housing associations from operating in an imprudent way that puts their organisation, and more importantly their tenants and public assets, at risk. That would potentially lead to the use of powers in this statutory instrument. Of course, we do not actually want the statutory instrument ever to be brought into operation. We want prevention, rather than remedy.

Altair’s report came to a number of conclusions about how the regulator and the boards of housing companies should operate, and about what duties should be imposed on those companies. My question to the Minister—he may not have chapter and verse on this—is, how far can we be assured that the governance regime that let people down in the Cosmopolitan situation is not being replicated by housing associations up and down the country? That touches on the point that my hon. Friend the Member for Poplar and Limehouse made. One of the drivers of this problem, to the cost of my erstwhile constituents, is housing associations that see their corporate objective to be growth, rather than growth that is consistent with their original purpose, which is to provide social and affordable housing for their tenants. We need to guard against such wrong ambitions, and we need to ensure that corporate structure and governance of housing associations is secure enough to guarantee that we protect tenants’ rights and public assets.

[Sir Oliver Letwin (West Dorset) (Con)]

I am following the hon. Gentleman entirely. Does he agree that the biggest exposure is one that the report does not dwell on—I am not quite sure why not—which is that housing associations that match liabilities to rent are doing so on the basis of an unusually low interest environment? They have quite large roll-overs of their debt, which occur at various times. One could imagine not just one, but a swathe of housing associations, if they have not managed their financing portfolios correctly, hitting a moment when interest rates, for some reason or other, rise unexpectedly. I am quite worried—I do not know whether the hon. Gentleman is—that that is not one of the things on which the regulator for social housing appears to be focusing at the moment.

[Tony Lloyd]

The right hon. Gentleman raises a very important point, because that is where risk comes in. Frankly, not every housing association has the same depth of experience as the right hon. Gentleman on these issues. There has to be the capacity to ensure that the regulator is in a position to secure the public interest against precisely that.

There is another risk. Although the right hon. Gentleman is right that borrowing against rental income is one form of exposure, a lot of housing associations have been asked to put themselves in this position. They accept that, in order to advance the interests of the housing association, they will build for sale and invest part of those proceeds in social housing. That is a legitimate and necessary operation for housing associations, but, of course, it is a different kind of risk from those that housing associations have been asked to consider in the past. Some will absorb the new culture well, but some may not. The question of financial risk is very real and that emphasises the point I was trying to make to the Minister. Given that prevention is better than remedy, we need guarantees that the regulator has absorbed the lessons of Cosmopolitan a few years back. In fairness, the regulator performed well at the time. However, having absorbed those lessons, we now know that across the whole piece of the housing association family we are measuring risk and are in a position to blow that early whistle, where appropriate.

There are three issues, essentially, for the Minister to address. First, how does objective 2—the transfer to another social housing landlord—operate with respect to the duties under objective 1? Secondly, how can we guarantee that tenants maintain tenancy rights, in terms both of the rent they pay and of the longevity of tenancies and so on? How do we guarantee that financial risk is being properly measured to prevent the need to use these regulations? Thirdly, the issue of due diligence is important. I look forward with interest to hearing the Minister’s comments.

--- Later in debate ---

[Dominic Raab]

We have had a good debate with some interesting technical interventions, and I am grateful to hear from hon. Members with a great deal longer experience of the sector than I have. The hon. Member for Rochdale made some kind remarks at the beginning and I appreciate his support of the regulations. He asked three specific questions, which I will endeavour to answer as best I can.

First, the hon. Gentleman asked how objective 1 and objective 2, as I described in the regulations, interact. Objective 1 is to rescue the business and service the creditors. Objective 2 is to look after housing, including social tenants. It is right that in one sense, the overriding objective 1 takes precedence over objective 2, because it is an insolvency proceeding. As a result, the housing administrator cannot do anything that results in a worse distribution to the creditors.

In all cases to date, the creditors have recognised that it was of the best value to them to save the properties in the sector. Having a social housing regulator and a specific regime for insolvency proceedings in the sector ensures that objective 2 shapes and influences the way in which objective 1 is delivered, which will provide materially greater protection for social tenants. If I understood correctly, that was key to what the hon. Gentleman was getting at.

The hon. Gentleman asked about lenders’ responsibility and due diligence, which is an important point. It is crucial that lenders take the initiative and ensure that their due diligence is in place, not only in relation to commercial transactions but in the social housing sector.

There has been a swathe of new regulation since the financial crash. I do not think it is a zero-sum game—I know the hon. Gentleman was not suggesting it was—and we need to do both. The protections in relation to due diligence and the regulation of lenders are in place, and lenders support the extension of the 2016 Act through the regulations. We can do both of those things, and that will create an increased tier of protection for tenants.

The hon. Gentleman asked about the lessons learned from Cosmopolitan, and the previous report commissioned by my Department. The Cosmopolitan Housing Group was a large private registered provider of social housing. It owned or was managing more than 13,000 homes in the north-west. It had serious financial difficulties, as described by the hon. Gentleman, in part as a result of its involvement in non-social housing activity. None the less, the regulator at the time, the Homes and Communities Agency, carried out intensive regulatory engagement with Cosmopolitan to resolve the situation. That engagement concluded with Cosmopolitan being taken over by Sanctuary Housing, which was a large and more financially robust provider. The specific situation was dealt with, and afterwards, in terms of the lessons learned—the crux of what the hon. Gentleman was getting at—the Homes and Communities Agency carried out an independent review of its handling of the Cosmopolitan case. As best as possible in the aftermath of such a financial challenge, lessons have been learned. I certainly agree with the hon. Gentleman that prevention is better than cure, and that is what the regulations will help achieve.

[Tony Lloyd]

Can we be clear, though? In the end, it is the regulator who acts as the public eyes and ears with respect to the housing associations, to make sure that their behaviour is consistent with common sense and prudence. Are we certain that the regulator has the capacity to do that? That is not a malicious question. These are new duties on the regulator, but the general duty to cover the extraordinary range of different types of housing associations is a real one. It is important that we know that the regulator has both the competence and the capacity. I am confident in the competence, but I do not know about the capacity.

[Dominic Raab]

That is a perfectly legitimate question. Of course, the regulations are partly about making sure that the regulator has the capacity and the legal powers to deal with the whole sector. I hope that was addressed in my opening remarks.

The hon. Member for Poplar and Limehouse spoke about the history of housing associations in his constituency with great knowledge and insight. He also spoke about the pressures on rent. I accept that, particularly in London and urban areas. In the past year, we have seen 217,000 new homes delivered, which is the highest number in all but one of the past 30 years. That is important not just if someone wants to own their own home, but because supply is a key factor in bringing down the affordability of rent. There is other proposed legislation coming down the pipeline on the quality of rented accommodation as well.

The hon. Gentleman asked whether this is a protective measure. It is. It cannot be entirely dislocated from what is happening in the social sector and the evolution of that sector, so I suppose it is a response to both the regulatory gap and the evolving nature of the sector, making sure that as it grows and the structure of the sector changes, and we see the dividends in terms of supply and the economies of scale that build up, we also make sure that we have a careful safety net in place. Hopefully that is the right balance and the prudent course to take.

In conclusion, I say again that we imagine that the occasions when this legislation would be necessary, if ever, will be very rare. The introduction of the regime reflects the nature and the scale of the sector, which has changed and will continue to change. It is not a commentary on the state of the sector as it currently stands. Housing associations continue to be key partners in fixing the broken housing market that this Government are absolutely dedicated to addressing. It is right that we ensure the regulator has the tools and the capacity to do the job to maintain lender confidence and to protect tenants as far as possible should a potential insolvency occur.

Question put and agreed to.

Resolved,

That the Committee has considered the draft Insolvency of Registered Providers of Social Housing Regulations 2018.