Statutory intervention at Arklet Housing Association

About this report

1.

This report sets out the reasons for our statutory intervention in Arklet Housing Association (‘Arklet’) and the outcome of that intervention.

2.

Our intervention began in February 2017 and ended in November 2019 when Arklet transferred its homes to Hanover Housing Association (‘Hanover’). We delayed publication of this report due to the COVID19 pandemic.

3.

In December 2018 we published a report on lessons learned from our statutory intervention in a number of RSLs, including Arklet. You can read the report on our website here.

About Arklet

4.

Arklet was registered as a social landlord in 1977. Arklet owned and managed 391 houses and provided factoring services to 41 owners across Glasgow, East Renfrewshire and South Lanarkshire. It had charitable status and employed 11 people. Arklet had an un-registered subsidiary, KolCare Ltd which provided advice and support to Arklet’s tenants and was wound up on 18 August 2018.

5.

As at 7^th November 2019, Arklet’s turnover for the year to date was £1,831.4k and the debt per unit was £23,927.

Our regulatory requirements

6.

Prior to February 2019 our then Regulatory Framework contained six Regulatory Standards of Governance and Financial Management for RSLs to comply with.

1. The Management Committee to lead and direct the RSL to achieve good outcomes for its tenants and other service users.
2. The RSL is open about and accountable for what it does. It understands and takes account of the needs and priorities of its tenants, service users and stakeholders. And its primary focus is the sustainable achievement of these priorities.
3. Management of resources by the RSL to ensure its financial well-being and economic achievements.
4. Decisions based upon good quality information and advice which identifies and reduces the risks to the RSL's purpose.
5. The RSL to conduct its affairs with honesty and integrity.
6. The Management Committee and senior officers to have the skills and knowledge they need to be effective.

Our intervention in Arklet

Our initial engagement

7.

In March 2016 Arklet informed us that its senior officer had left the post and the interim Housing Manager was appointed as Interim Director. Arklet advised us it would carry out an options appraisal for its future strategic direction.

8.

Just prior to this announcement we were contacted by a whistleblower. We met with Arklet’s governing body to discuss its progress with the options appraisal exercise and also advised the governing body about the serious allegations we had received from the whistleblower. Arklet agreed to carry out an independent investigation into the allegations made by the whistleblower to establish the facts.

9.

The investigation into the whistleblowing allegations reported in July 2016 and found:

• improper procurement and management of a contract with an external consultant;
• payments to a consultant which were not in line with good governance and exceeded budget;
• failure by Arklet to charge its subsidiary KolCare for all services rendered;
• company cars were leased and made available to senior staff but there was no policy in place for the provision of leased cars and it was not included in the terms of employment;
• making redundancy payments which were over and above the sums due and failure to comply with statutory guidance on Notifiable Events in relation to redundancies;
• a pattern of discontent amongst staff which was not reported to the management committee; and
• high staff turnover with the majority of staff leaving with a settlement payment. Between 2011 and 2016, 16 members of staff had left, 10 with a settlement payment, either redundancy or compromise agreement or both. Arklet incurred significant costs, paying a total of £158,421 to former employees plus legal fees of £4,350. There was a lack of evidence to confirm appropriate advice had been taken by Arklet before entering into all settlements. And in some cases it appeared settlements were reached to avoid complaints being raised by staff members.

10.

The investigation also concluded that Arklet did not comply with a number of the Regulatory Standards. We met the Governing body in August 2016 to discuss the findings. The gravity of the issues identified by the investigation raised serious questions about Arklet’s systems of internal control and its overall compliance with Regulatory Standards. In the light of our concerns the Governing Body commissioned an independent review of its compliance with Regulatory Standards (the governance review).

11.

At our request Arklet agreed to co-opt two members with governance experience to the governing body to provide support to address its problems. The co-optees were John McMorrow (Director of Easthall Park Co-operative) and Stewart Mackenzie (Chief Executive of Partick HA).

12.

The options appraisal was completed in September 2016 and the recommendation was that Arklet should seek a constitutional partnership. However due to the governance issues which had come to light the governing body decided to delay its decision on Arklet’s future strategic direction.

13.

The governance review found a number of serious governance issues. These included;

• two Governing Body members had been elected at the AGM in 2016 but the Share Membership was not approved until two months later;
• one Governing Body member had not attended a meeting for two years before resigning;
• one Governing Body member was listed in the Financial Statements back to 2013 but shareholder membership not approved until September 2016;
• one Governing Body member elected in 2016 missed five meetings in a row however no leave of absence was recorded in the minutes and therefore in terms of the rules, the member in question had ceased to be a member of the Governing Body and this ought to have been addressed by Arklet;
• a review of the rule change process confirmed Arklet had not held an SGM to adopt its rules so it was operating with rules which had not been properly approved;
• incorrect information on the Financial Statements 31 March 2016;
• not complying with due dates for submissions to its lenders, such as approved budgets, on all four of its loans;
• failing to manage the risks arising from its subsidiary KolCare.

We met Arklet to discuss its proposals to address these serious issues. Arklet agreed to seek further advice from its legal advisors on the findings of the governance review. 

14.

Arklet’s governing body had not been properly constituted, this included the Chair and the Vice Chair not having been appointed in accordance with the constitution and taking part in decisions without the authority to do so. The early findings of the governance review raised serious concerns about Arklet’s governance. When the governance review concluded in January 2017 it found widespread non-compliance with Regulatory Standards. In particular it found that Arklet did not comply with Standards, 1, 3, 4, 5 and 6. Our engagement with Arklet raised concerns about its capacity to address its problems.

Why we intervened

15.

The identified weaknesses in governance and financial management presented a serious risk to tenants’ interests. The range of weaknesses which had been identified by the initial investigation and the governance review showed Arklet did not comply with Regulatory Standards or essential parts of its own governance and financial management framework, including its rules for electing governing body members, its procurement rules, and its loan agreements.

16.

We had serious concerns about Arklet’s oversight of its subsidiary KolCare. There was no agreement in place to govern the relationship between the parent and subsidiary despite this being raised in two consecutive management letters from external auditors. The subsidiary Board rarely met, and it had failed to manage a conflict of interest between the parent and the subsidiary.

17.

In addition we had concerns about how Arklet had discharged its employer role. This included failing to appropriately manage the provision of company cars to employees, not acting on staff feedback, and there was a lack of arrangements for the appraisal, management and support of the senior officer.  

18.

The governance review also found poor financial management. There was a lack of strategic planning and required policies and procedures to provide an appropriate financial management framework and no internal audit provision.

19.

We were not assured Arklet had the governance or operational capacity to effectively tackle and resolve the serious failures in governance and financial management which had come to light. The governance review found the Governing Body needed assistance and support to implement the necessary improvements and to consider its future strategic options. The Governing Body had only seven members including the two co-optees, the co-optees brought strong skills but we considered the governing body required further strengthening.

20.

We decided that it was proportionate and reasonable to use our statutory powers of intervention under section 58 of the Housing (Scotland) Act 2010 (“the Act”) to appoint a statutory manager and under section 65 of the Act to appoint three members to the Governing Body; two would be the co-optees, who both were very experienced senior officers in the sector. The third appointee was also an experienced senior officer from the sector.

21.

The statutory manager was Paul Rydquist. His remit was to:

• support Arklet to implement the governance improvement action plan to address the serious and urgent risks to Arklet’s governance and financial management and meets Regulatory Standards;
• support the governing body and senior team to deliver effective governance;
• engage with tenants, lenders and other key stakeholders; and
• support Arklet to implement the outcome of the strategic options review.

22.

The governing body appointees were:

• John McMorrow, Director at Easthall Park Co-operative (appointed 21 February 2017 to 8 November 2019)
• Stewart Mackenzie, Chief Executive at Partick Housing Association (appointed 21 February 2017 to 8 November 2019)
• Helen Murdoch, Chief Executive at Hanover Housing Association (appointed 21 February 2017 to December 2017)

23.

The governing body appointees’ remit was to:

• address the serious risks to Arklet's governance and financial management position by ensuring the full and effective implementation of the Governance Improvement Plan;
• deal with the outcome of the recent options appraisal ensuring that the interests of Arklet’s tenants were protected;
• assist and support the governing body to ensure that Arklet met the Regulatory Standards of Governance and Financial Management;
• support the statutory manager to deliver the overall strategy for the organisation;
• deal with any other issues that may arise in the course of their appointment and in the normal course of governing body business; and
• exercise the powers given under section 65(6) as they consider appropriate.

24.

We informed the Office of the Scottish Charity Regulator and the Care Inspectorate of our intervention.

Weaknesses  identified

25.

Arklet’s failure to comply with the regulatory standards led to our statutory intervention. The serious governance and financial weaknesses at Arklet included:

• failure to put in place a properly constituted governing body and serious weaknesses in the management of Annual General Meetings and Special General Meetings;
• it did not have an up to date strategic and financial plan, its last agreed Business Plan was for financial year 2011/12;
• no governing body member induction process or training provided to equip governing body members with the knowledge they needed to perform their role;
• serious weaknesses in the governance framework such as no annual review of the Declaration of Interest Register and no register of Gifts and Hospitality;
• a number of key policy documents were not in place, not fit for purpose and not adhered to. Others, such as the standing orders, had not been reviewed or updated for a substantial period of time;
• failure by the governing body to effectively discharge its employer role;
• failure to exercise oversight and control over its subsidiary, KolCare;
• no Financial Regulations in place and lack of monitoring of loan covenants;
• there was no system of internal audit in place;
• failure to act on recommendations in the Auditor's Management letters;
• inadequate management of risk by the governing body; and
• poor quality reports to the Governing body which did not provide the information required to allow informed decisions and lack of evidence of governing body challenge.

Improving governance and transfer of engagements to Hanover

26.

Arklet’s governing body and staff worked openly and constructively with the statutory manager and governing body appointees to address the governance failures. Arklet made good progress in a number of areas including:

• ensuring the governing body was properly constituted;
• carrying out an open governing body recruitment exercise and further strengthening the board with new appointments;
• better management of its relationship with key stakeholders such as lenders;
• developed and implemented a comprehensive governance improvement programme to restore compliance with regulatory standards;
• improved strategic planning and oversight for example developing an interim business plan including KPIs and operational plans;
• introduction of financial regulations and an internal audit function;
• review of its subsidiary KolCare;
• reviewed the accuracy of regulatory returns; and
• carried out a review of compliance with tenant and resident health and safety duties.

27.

The Association’s relationship with, and the governance of Arklet’s subsidiary KolCare, was one of the key concerns raised in the investigations into governance and financial management. The Association decided to withdraw financial support from KolCare. Consequently the governing body of KolCare decided to wind-up the subsidiary. Arklet’s Governing body in July 2017 agreed the write-off of the remaining debt owed to the Association from KolCare of £37,077. KolCare was wound up on 18 August 2018.

28.

Arklet’s review of its compliance with its tenant and resident safety duties identified an absence of records to demonstrate compliance with these, and further, that Arklet did not comply with a number of its duties. Weaknesses were identified in areas such as electrical testing, legionella assessments, asbestos assessments and fire risk assessments. Arklet recognised the seriousness of these weaknesses and developed and implemented a comprehensive plan to restore compliance.

29.

Before our intervention Arklet had carried out an options appraisal which recommended Arklet should seek a constitutional partnership. An updated options appraisal was considered by the Governing body in August 2017 and Arklet agreed to take forward a partnership with another RSL. The main reasons for this decision were:

• Arklet’s inability, if it continued as an independent organisation, to address rent fairness and affordability concerns;
• inability to fund timely planned maintenance programmes, due to a risk of breaching loan covenants;
• concerns about remodelling of housing schemes whose specialist service models were no longer supported by commissioners;
• significant year-on-year reductions in cash, leading to further borrowing requirements to support the business within 7 years;
• inability to respond to local development opportunities, to meet needs of prospective future tenants.

30.

One of the appointees, Helen Murdoch, resigned in December 2017 when her employer, Hanover Housing Association, expressed an interest in becoming a potential partner.

31.

In December 2017, Arklet received 16 expressions of interest from a mix of local, specialist and larger RSLs, and four went on to submit full proposals.

32.

Arklet worked closely with its tenants on its partnership proposal. Arklet developed a Tenant Communication Strategy for the partnership process which was agreed by its Tenants Forum which set out how Arklet would work with tenants throughout the process. Arklet appointed the Tenant Information Service (TIS) as Independent Tenant Advisor (ITA) at an early stage to provide support to the Tenants Forum and independent advice and support to all tenants. Arklet’s Tenants Forum played a central role in the partnership process including:

• helping to develop and approving the standards Arklet asked potential partners to provide for tenants;
• mystery shopping visits to the potential partners' offices and housing estates;
• taking part in the selection of the ITA; and
• taking part in the interview panel of potential partners.

33.

Arklet set up a board sub-group, including the Chair of the Tenants’ Forum, to review the proposals received, and decided to seek further, final submissions from three of the RSLs. Arklet carried out a thorough evaluation of the three proposals against its pre-agreed strategic objectives for partnership, including seeking independent financial analysis of the bids. In May 2018 the decision was made to progress a transfer of engagements to Hanover.

34.

Arklet’s governing body was satisfied that Hanover’s proposal met its objectives and that there was a good fit between the two organisations in relation to compatible values, culture and range of housing in management. The tenants who were involved in the selection process were particularly impressed with Hanover’s housing, in terms of its quality, size and range of needs met. The main elements of Hanover’s offer to tenants were:

• improved rent fairness and affordability including a rent cut, a rent freeze for some tenants, and future lower rent increases to bring Arklet’s rents in line with Hanover’s;
• improvements in the quality of Arklet’s homes including specific commitments for planned investment and modernising homes;
• access to Hanover’s services including a volunteer framework, telecare services, 24 hours repairs reporting service, an online tenant portal and low cost contents insurance;
• better opportunities for tenant engagement;
• overhead cost savings – these were from, for example, integration of back office functions, access to Hanover’s service contracts and reduced borrowing costs which were estimated to save £50m over 30 years compared to the projected outcomes for the two RSLs operating independently; and
• increased opportunities to develop new homes and a commitment to a put in place a joint development strategy.

35.

Arklet continued to work through the essential elements of its Governance Improvement Plan. Despite Arklet’s plans to transfer to Hanover it was important that Arklet continued with its governance improvements to ensure it had the governance capacity to lead the transfer process and make sound strategic decisions on behalf of its tenants. The partnership was also prospective and at any point in the process either party could have decided it did not wish to proceed, this was particularly a risk whilst the due diligence process was ongoing,

36.

In August 2018 the Interim Director left and Arklet appointed a new Interim Director until the completion of the transfer of engagements to Hanover.

37.

The statutory manager supported Arklet to effectively manage the transfer process and ensured tenants interests were protected. The manager also helped Arklet to maintain a positive relationship with all of its lenders (Bank of Scotland, Nationwide and Royal Bank of Scotland).

38.

For their part Arklet’s lenders adopted a constructive approach throughout the intervention. And, following the decision to progress a transfer of engagement to Hanover, Arklet and its lenders worked effectively together on the necessary consents and agreed new terms which would protect tenants’ interests.

39.

Arklet’s historic governance and financial management issues meant that the due diligence process took time as both parties worked through the range of complex issues involved.

40.

Arklet carried out a tenant ballot, and 98% of Arklet’s tenants who voted approved the transfer of engagements to Hanover. Arklet held an SGM in September and the transfer of engagements was completed on 8 November 2019, the stock transferred to Hanover on that same day.

41.

We removed Arklet from the register of social landlords on 15 September 2020.

42.

Since the transfer Hanover has made good progress delivering on the commitments to tenants. This includes cutting rents by £12 per month in April 2020, rolling out a range of services such as 24 hours repairs reporting, and enhanced opportunities for tenant engagement such as ex-Arklet tenants being part of tenant scrutiny panels. Hanover’s plans for investing in and modernising homes were affected by the pandemic, but it is reprofiling this work and is working on two remodelling projects for former Arklet homes.

Cost of intervention

43.

Arklet met the costs for the statutory manager's services and expenses.  This covered a period from February 2017 to 8 November 2019 and amounted to £276,795 including VAT and expenses.