The risks we will focus on - November 2021

Background

Our statutory objective is to protect the interests of tenants and others who use the services of social housing landlords. We do this by carrying out our statutory functions which are to monitor, assess and regularly report on all landlords’ performance of housing activities and the financial well-being and standards of governance of Registered Social Landlords (RSLs).

The annual risk assessment is one of the principal ways in which we carry out our statutory functions. Last year we amended the approach to our annual risk assessment to take into account the unprecedented context of a global pandemic. We adjusted our risk assessment to focus on the immediate key risks facing social landlords. The pandemic continues to pose a number of additional risks and issues for landlords and there continues to be an unprecedented level of uncertainty in their operating context. And issues such as rising energy costs, the planned increase in national insurance contributions, rising inflation and changes in universal credit present new challenges to both landlords and their tenants and service users.

This year we are moving towards a more comprehensive annual risk assessment, similar to our approach before the pandemic. But we know that landlords are still building back the services they provide to tenants and are addressing backlogs that came about due to the restriction landlords had to operate within in response to the pandemic.

On top of that, landlords will have to respond to the climate emergency and the drive to decarbonise heating in homes, they will need to manage growing problems in supply chains for materials and labour, and they will need to fund likely increases in pension deficits.  And that’s not an exhaustive list of the challenges ahead. We have set out in Appendix 2 an overview of the strategic risk landscape. Many of these risks will affect both local authorities and RSLs but in light of our role to monitor, assess and report on the financial health and governance of RSLs, we have focussed in particular on the risks facing RSLs.

The coming period may be the most testing that social landlords have had to face. Good governance is therefore critical to ensuring that landlords are sufficiently resilient to help them respond to all of the challenges they face. It will also be vital that landlords have good quality information on their stock, have robust business plans which take into account this information on stock condition and have the flexibility and capacity to respond to these challenges.

Here we describe which risks we will focus on in this year’s annual risk assessment.

The main risks we will focus on

The main risks we will focus this year are:   

• Homelessness - How local authorities deliver services for people who are threatened with, or experiencing, homelessness. This includes providing people who need it with suitable temporary accommodation (particularly during the pandemic) and how they are working with their RSL partners to provide settled homes. We will also consider RSL performance in responding to requests for assistance, limiting the time people spend in temporary accommodation.
• Performance – How local authorities and RSLs deliver services for their tenants and meet the standards and outcomes from the Scottish Government’s Social Housing Charter. This will also include how landlords that provide Gypsy/Travellers sites ensure minimum site standards and fire safety requirements to meet the needs of residents.
• Stock quality – How local authorities and RSLs ensure that their homes meet the Scottish Housing Quality Standard and the Energy Efficiency Standards.
• Development – How RSLs manage the delivery of any plans for building new homes.
• Financial health of RSLs – How financially healthy RSLs are and how well they manage their money with a focus on financial planning and compliance with Regulatory Standard 3.
• Good governance of RSLs – How well run RSLs are.

We will take into account the impact of the pandemic when we consider all of these risks and landlord’s performance.

Why we focus on these areas

Homelessness services    

Local authorities have legal duties towards people who are threatened with, or experiencing, homelessness. This includes offering suitable temporary accommodation and providing settled accommodation. Prior to the pandemic local authorities were working to deliver their Rapid Rehousing Transition Plans (RRTPs) which helped to ensure they were complying with these duties.

Following our last risk assessment, we engaged with all local authorities to develop a better understanding of the extent of the impact of the pandemic on their ability to deliver homelessness services and consequently on outcomes for people who are homeless or at risk of homelessness. We also discussed with Local Authorities how they are working with RSL partners to provide accommodation. These conversations with Local Authorities have helped us to understand their plans to manage the consequences of the pandemic. And we will use this insight to inform this year’s risk assessment where we will focus on:

We will have a particular focus on local authorities’ statutory duties to provide temporary and settled accommodation.

We will also consider landlord compliance with the Unsuitable Accommodation Order which was introduced in 2014 to prevent local authorities placing homeless households with pregnant women and/or children in unsuitable accommodation. Following a recommendation from the Homelessness and Rough Sleeping Action Group and a consultation exercise on improving temporary accommodation standards, in 2019 the Scottish Government announced that the Order would be extended to cover all homeless households, and this would come into force during that parliamentary term.  However this was paused in light of the pandemic but the temporary exceptions ended on 30 September 2021 and the Order now applies to all homeless households from 30 September 2021.    

The indicators we will consider in relation to Homelessness are set out in the Technical Appendix.

Performance

The national lockdown in March last year in response to the escalating coronavirus pandemic had an immediate impact on social landlords’ ability to deliver services as normal. Landlords had to operate within changing levels of restrictions throughout 2020/21.

Unsurprisingly, this has had an impact on the performance of landlords, and so on the annual performance data they reported to us. This is unquestionably the most significant contextual factor in assessing the performance of landlords in the last year.

We know that the pandemic affected landlords ability to carry out essential work such as repairs and safety checks. It is important all social landlords meet their legal duties around tenant and resident safety. So we will focus on areas such as the management of asbestos, as well as gas and electrical safety and fire regulations. Social landlords must be able to get the assurance they need that they meet these duties and act quickly to address any non-compliance. When we consider this we will however take into account the impact of the pandemic.

Social landlords that provide Gypsy/Travellers sites must make sure those sites meet the minimum site standards set out in Scottish Government guidance as well as meeting the legal requirements relating to fire safety.

The indicators we will consider in relation to Performance are set out in the attached Technical Appendix.

Stock quality

In February 2004, the Scottish Government introduced the Scottish Housing Quality Standard (SHQS) as the main way it measured housing quality for social landlords in Scotland at that time. 

We will prioritise stock quality in our risk assessment, while recognising that the pandemic has severely impacted the delivery of landlords’ asset management strategies and resulted in a backlog of repairs, investment and development activity which landlords are currently working through.  We also recognise that landlords face a range of emerging challenges, risks and uncertainties from the ongoing impact of the pandemic, Brexit, evolving regulatory and legal requirements and meeting tenants’ needs.

Landlords had until December 2020 to meet the first milestone for the Energy Efficiency Standard in Social Housing (EESSH) and further milestones will apply in the years ahead. However one of the recommendations from the Zero Emissions in Social Housing Taskforce is that the Scottish Government should bring forward its review EESSH to ensure that this appropriately reflects the proposals for a Fabric First approach as a first step towards addressing the decarbonisation agenda. The Scottish Government has yet to formally respond to the Taskforce’s recommendations, but has indicated that it is minded to bring forward the review of EESSH.

In the light of all of the above, social landlords need to have robust asset management strategies and plans and have good quality information in place to inform planned investment costs, liabilities and projected spend. Therefore when we assess risk to the quality of tenants’ homes and decide upon the level of assurance that we need we will consider:

• whether landlords have good quality, up-to-date information about the quality of their existing homes and future survey plans and how this is reflected in their business plans and financial projections;
• a landlords compliance with regulatory and legislative requirements including SHQS and EESSH;
• how landlords are addressing houses which fail SHQS;
• how landlords are managing the application of exemptions and abeyances;
• compliance with health and safety regulatory and legislative requirements;
• tenants’ experience of stock quality; and
• exposure to the greater risks presented by pre-1919 tenements.     

We will analyse the following Charter indicators:

• the level of SHQS fails;
• Stock condition survey - coverage; and
• Stock condition survey - age of information.

We will set out our approach to EESSH as soon as possible after the Scottish Government has confirmed its plans for the review of the Standard.

Through our recent engagement with landlords we have identified that some landlords are not always aware of all of their responsibilities in relation to health and safety and as a result have inadequate compliance programming, monitoring and quality assurance processes in place. We will carry out a short survey of landlords to better understand levels of awareness of compliance responsibilities and the robustness of their quality assurance processes. 

Development

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The Scottish Government has announced plans to deliver 110,000 affordable homes by 2032 with almost £3.5 billion available in the current parliamentary term. At least 70% of the 110,000 homes are intended to be for social rent.

For many RSLs, the decision to develop new homes is key to delivering their strategic objectives of meeting housing need, tackling homelessness and providing affordable tenure choice. The development process, however, carries a significant range of additional operational risks that RSLs require to understand and manage. Development risk can potentially have a serious impact on an RSL and its tenants, in terms of its ability to deliver its strategic objectives and ensure its future financial viability. It can also bring serious consequences for the sector as whole, should its reputation with key stakeholders, including funders, be damaged. Continuing supply chain disruption, staff shortages and buildings materials inflation are likely to increase costs and delay works for social landlords.  It is important that RSLs have appropriate plans in place to mitigate these risks.

Developing RSLs face a greater range of challenges and risks than those who don’t develop and it is, therefore, critical that RSLs are clear about why they are developing and how development fits within their overall business strategy. RSLs need to understand the specific risks associated with development and ensure that they have robust plans in place to manage those risks.

When we assess risk in relation to development, we will consider:

Financial health  

At the aggregate level, RSLs’ finances remain strong and lenders and investors remain willing to lend to RSLs. That said, landlords and their tenants continue to operate in an uncertain economic environment and are facing a growing range of financial challenges and uncertainties.

The financial impact of the pandemic combined with the necessity for increased spending on energy efficiency and safety improvements, repair catch-ups alongside general price increases, means there could be less financial capacity to deal with adverse events and development. 

Managing lender and investor relationships and complying with covenants is also essential if RSLs want to maintain or increase levels of capital investment and new development. Failure to do this can threaten financial health.

Landlords also need to consider an increasing range of factors when deciding rent increases for tenants. Landlords need to critically question whether they have done everything possible to be efficient and drive costs from their business, before passing costs onto tenants and service users. Ensuring financial well-being while maintaining rents at a level that tenants and service users can afford to pay is a key requirement for RSLs. Where we are engaging with an RSL about its business plan, we will discuss how it has satisfied itself that its rents are affordable.

As part of the financial risk assessment this year we will consider the following themes:

• General financial well-being: we use a range of ratios and trend information to measure an RSL’s financial performance. We also consider each RSL’s ability to provide accurate forecasts of its financial performance;
• Rent levels and the impact of Universal Credit changes: we measure the impact and potential impact of changes in the welfare system by considering the trends in voids, bad debts, arrears and rent increases;
• Pensions: we consider each RSL’s pension position and the impact and potential impact upon the RSL’s financial well-being;
• Other activities and group structures: we consider the risk that diversification into non-social housing activities (for example factoring or care and support activities) may present to each RSL. And where the RSL has a parent, we will also consider its performance;
• Development: we consider the impact of any programme to build new houses;
• Treasury: we consider the degree of complexity of each RSL’s funding strategy and debt repayment profiles; and
• Other regulatory information: we consider other relevant information including auditor reports under S72 of the Housing (Scotland) Act, notifiable events, whistleblowing and auditors’ management letters.

The main financial information we use is the information we collect annually from RSLs which is available on our website here and on our social landlord directory.

Good governance   

Good governance underpins the delivery of good financial health and good services. We collect a range of information which allows us to come to a regulatory judgement on whether an RSL is complying with our Regulatory Standards of Governance. We appreciate the impact the pandemic has had on RSLs governance. RSLs had to quickly adapt their governance arrangements to respond including conducting their governing body meetings and general meetings virtually with all of the challenges that brings. As part of the risk assessment we will take into account the impact of the pandemic when considering RSLs compliance with the Regulatory Standards.  

We will consider a combination of the statistical data we collect on governance alongside other evidence and intelligence from our engagement with landlords. We consider whether this information could indicate a risk to the governing body:

• delivering good outcomes for tenants;
• demonstrating strong and effective leadership;
• managing and mitigating risk sensibly;
• being open and accountable;
• meeting its legal obligations in relation to equalities; and
• maintaining ethical standards.

Our assessment of an RSL’s governance will be informed by the following intelligence:

• Annual Assurance Statement submitted by 30 October 2021;
• ARC submissions received in June 2021;
• Notifiable events;
• Annual Financial Statements;
• Reports under Section 72 of the Housing (Scotland) Act;
• qualitative information including complaints about landlords, whistleblowing and significant performance failures;
• information from statutory auditors;
• broader performance or financial issues that raise concern about an RSL’s governance; and
• Intelligence from our current regulatory engagement with a landlord.

We will also consider the information relating to governance which we gather from the ARC and financial returns including:

• governing body membership;
• the length of tenure of governing body members;
• the length of tenure of the Chair;
• the number of members on the governing body;
• staff turnover; and
• the use of internal and external audit, including the frequency with which the external auditor is rotated.

Our risk assessment incorporates a mixture of qualitative and quantitative measures across all aspects of our assessment, however consideration of qualitative data is critical in relation to our assessment of governance.

Find out more about how we assess risk

You can find out more about how we assess risk and our regulatory priorities in our publications on:  

• How we assess risk in RSLs
• How we assess risk in local authorities
• Our Regulatory Framework
• Our Corporate Plan for 2019-22

5. Technical appendix for landlords: the information and indicators we use to assess risk in relation to homelessness and performance

Appendix 2

The Risk Landscape

Here we set out our view of the major and strategic risks that face RSLs. This list is not exhaustive but governing bodies should review these risks and ensure that they are appropriately reflected in their corporate risk register.

For an organisation to be effectively governed it must have an understanding of the risk landscape that it faces. It must have a clear understanding of the major and strategic risks that it faces and have effective mitigation in place through a risk register which is subject to regular review.

A well governed organisation will achieve this through an effective system of internal control which is subject to regular review by its internal audit function. It is for each governing body (or an appropriate committee with delegated authority) to determine which risks and which element of its internal control is subject to internal audit.

Access to appropriate expertise

Since the pandemic and the exit of the United Kingdom from the European Union, many landlords have reported increased difficulties in getting access to the materials and expertise that they need to perform landlord functions.

Governing bodies should seek to assure themselves that they fully understand this challenging operating environment and how this impacts on the delivery of services for tenants.

Stock Quality & Decarbonisation

The Zero Emission in Social Housing Taskforce (ZEST) was convened by the Minister for Local Government, Housing and Planning to consider and provide practical recommendations on what is required of the social housing sector to maximise social housing’s contribution to the Scottish Government's ambitious climate change targets.

ZEST has recommended a “fabric first” approach for social housing. Landlords should ensure that they have up-to-date, complete and accurate information on the condition of their stock. This will enable landlords to take an informed view of the implications of “fabric first” and decarbonisation for their tenants, their stock and their long term business plan.

Development

The pandemic has presented particular challenges for landlords who are developing new stock.

Our analysis shows evidence of a considerable gap between forecast delivery and actual delivery of new homes, with many landlords consistently forecasting that they would build more homes than they were actually able to deliver. While the lockdown as a result of the pandemic is partially responsible for this, it is the case that, even prior to the pandemic, there was a substantial shortfall in actual versus planned outputs.

Failure to deliver planned homes can have a serious impact on tenants and the landlord’s business plan. We recommend that landlords measure their development function and practice against the benchmarks which were set out in our development thematic which was published in 2017.

And landlords should consider whether development should be reviewed by internal audit.

Tenant Safety

Tenant safety has been an issue in a number of our recent intervention cases and in other engagements. Landlords that had thought they were compliant with all of their legal duties around the safety of their tenants later discovered that they weren’t.

All landlords should use the annual assurance process to get comfort that they are complying with statutory duties and responsibilities in relation to tenant safety.

Landlords should assure themselves that they have the necessary training, skills, experience and knowledge in place to recognise danger and take appropriate action to ensure tenant safety.

Rent Affordability

The current economic climate presents an increased challenge to landlords ability to keep rents affordable. The recent removal of the Universal Credit uplift and rapidly increasing energy costs present challenges for tenants. We are also seeing a backlog of homeless people in temporary accommodation. And landlords themselves are reporting that they are facing increased costs to access the materials, services and expertise that they need to carry out landlord functions.

In reviewing rent affordability landlords should consider Regulatory Standard 3 on rent affordability and financial sustainability when completing their annual assurance statement. And consideration should be given to what will be required to ensure future compliance with Standard 3.

Cost Control

In the current economic climate landlords are facing increasing costs and should be doing everything possible to control costs and deliver value for money for tenants. Our advisory guidance on business planning provides good practice guidance for landlords in this area.

Arrears

Following increases in 2020/21, RSLs are forecasting reductions over the next four years of their projections. RSLs continue to work hard to manage and mitigate the effects of changes in the welfare system and COVID-19 upon tenants and the RSL itself. Governing Bodies should ensure arrears and voids are closely monitored in view of the sensitivity of these measures to changes in the welfare system. Governing Bodies should also ensure there is stress testing against falls in rental income as a consequence of arrears and establish any mitigations necessary.

Data Accuracy

Data accuracy has also been an issue in a number of our recent intervention cases and in other engagements. In a number of cases incomplete, misleading and inaccurate information had been provided to governing bodies and to ourselves.

It is necessary for landlords to have complete and accurate information in order to comply with regulatory standards and the Scottish Social Housing Charter. Landlords should seek to assure themselves that their decisions are based on good quality data and that they are providing complete and accurate information to the Regulator.

Cybersecurity

Cybersecurity is the practice of protecting critical systems and sensitive information from digital attacks. A number of RSLs have suffered cyberattacks in the past year. Cyberattacks represent a serious risk to the ability of landlords to deliver for their tenants and residents. And there is also a risk to the data that landlords hold in relation to their tenants.

Landlords should use the annual assurance process to ensure that they have adequate controls and governance in relation to cybersecurity. Landlords should consider accreditation such as Cyber Essentials Plus. And landlords should consider whether they wish to get independent assurance, for example through the internal audit function, in relation to their system of internal control in this area.

Treasury Management

An effective approach to Treasury Management is essential if RSLs are to comply with Regulatory Standard 3. Governing bodies should have a clearly expressed strategy which reflects their risk appetite and wider operating environment and also possess the necessary skills and experience to allow them to understand and effectively challenge any advice given. The importance of relationships and communication with funders remains vital.

Pension Affordability

We know that a number of landlords are adjusting their business plans based on the likelihood that providing defined benefit pensions will cost more in the future than it does currently.

It’s for each landlord to take a view on whether it wishes to provide defined benefit pensions.

From a governance perspective its vital that landlords consider pension affordability in the context of Regulatory Standard 3.

Fraud

A small number of RSLs have told us they have been the subject of fraud and/or attempted fraud. Fraud remains a problem for RSLs and as the operational environment changes, many traditional types of fraud still exist but others are becoming more sophisticated. Many RSLs have effective risk management arrangements, however given the targeting of the sector, it is appropriate for RSLs to review the adequacy of the procedures in place to minimise the risks of any attempts at fraud from being successful.