The risks we will focus on - November 2022

Background

Our statutory objective is to safeguard and promote the interests of tenants and others who use the services of social landlords. We do this by monitoring, assessing and reporting 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. Here we set out our approach for this year’s annual risk assessment. We have developed this approach to reflect the current challenges facing the sector. Given the level of volatility and uncertainty facing the sector and its tenants, we will keep this approach under review and if new risks emerge or there is a change in the policy context, including possible restrictions on rent increases after the end of March 2023, we may need to consider the focus of our risk assessment. We will publish further information on any planned changes to our approach. 

The challenges landlords face includes rising energy costs, higher inflation, rising interest rates, recovery out of the pandemic and new legislation such as the extension of the Unsuitable Accommodation Order (UAO).   The Bank of England forecasts a recession starting in the immediate term and persisting throughout 2023 and into early 2024 which may lead to rising unemployment and falling employment in the short to medium term.  Within this challenging context, landlords continue to have obligations in policy areas such as rent affordability and net zero.  

Moreover, the Scottish Government’s rent policy may mean that landlords have limited capacity to increase rents to mitigate inflationary pressures within the business and to help meet the cost of policy obligations.    

We say more about some of these challenges and the broader risk landscape in Appendix B. 

The main risks we will focus on

This year we will focus on:  

• 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 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 in delivering services – 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.  

• Tenant and resident safety – How local authorities and RSLs meet their statutory obligations on health and safety.  

• Development – How RSLs manage the delivery of any plans for building new homes, and whether they have a good understanding of their stock.  

• 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 run. 

Within this we will pay close attention to affordability for tenants, planned rent increases and levels of arrears given the economic background.  

Why and how we focus on these areas

Homelessness 

Homeless people are some of the most vulnerable in Scotland.  Given this, we will firstly engage with all Local Authorities to aid our understanding of their performance in delivering effective and efficient homelessness services, including discussing with Local Authorities how they are working with RSL partners to provide settled accommodation.   

These structured conversations will also help us in this year’s risk assessment and provide qualitative intelligence on the key areas we focus on:  

Our conversation with landlords focused last year on the impact of the pandemic and progress in recovering from the impacts.  This year we will speak to local authorities more broadly about their performance, the risks they face and the opportunities for improvement. 

These conversations will enrich the quantitative element of our assessment.  This is largely based on Scottish Government official homelessness statistics which uses data it collects directly from Local Authorities.  

We will have a particular focus on Local Authorities’ statutory duties to provide temporary and settled accommodation.  For example, we will consider landlord compliance with the Unsuitable Accommodation Order.  See the appendix further below for details.  We will though consider the outcomes of our structured conversations and data analysis in these four key areas of access, assessment, temporary accommodation and outcomes.   

Performance in delivering services 

We know from our research and speaking to tenants that they have a number of priorities in terms of the services they receive from landlords.  For example, in the quality of the repairs service and response times; management of the local neighbourhood; rent affordability and maintaining good quality homes.  Landlords are also required to meet the obligations placed upon them by the Scottish Government’s Scottish Social Housing Charter.  The 22 indicators we will consider take these tenant priorities and obligations into account.  See Appendix A for list of these performance indicators.  

We will assess risks across these indicators and agree where we will target our regulatory engagement in light of the performance in the sector.  We will pay particularly close attention to those that relate to rents and affordability. 

We intend to supplement this data on service quality with the intelligence we have from notifiable events and our on-going engagement with landlords. We will also review all the Annual Assurance Statements and consider any areas of non-compliance.  

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.  This required social landlords to make sure their tenants’ homes were: 

• energy efficient, safe and secure; 
• not seriously damaged; and 
• had kitchens and bathrooms that were in good condition. 

In 2021/22, compliance with SHQS fell from 87% to 75%, with around 70,000 fewer homes meeting SHQS than in 2020/21.  Most of those reporting drops in SHQS compliance cite the new requirement to carry out electrical safety inspections (which generates EICRs – electrical installation condition reports) every five years.  For both the electrical safety inspections and the smoke and heat detectors, landlords told us that they had experienced difficulties both gaining access to tenants’ homes – largely because of the pandemic – and in securing materials to complete the work, or even the capacity or availability of a suitable contractor. 

When we assess risk to the quality of tenants’ homes we will consider as part of this year’s risk assessment:   

• how landlords are addressing houses which fail SHQS and EESSH; and 
• whether landlords have good quality, up-to-date information about the quality of their existing homes and future survey plans. 

We will also look at a landlord’s ability to meet its maintenance obligations in general.  Where a landlord is not meeting the requirements of the SHQS or EESSH or there are other potential issues highlighted from the stock quality risk assessment, we may seek additional assurance from the landlord. 

We will analyse the following Charter and EESSH indicators: 

• the level of SHQS fails and abeyances; 
• Stock condition survey – coverage;  
• Stock condition survey – age of information; and 
• the level of EESSH fails.   

The Scottish Government will undertake a review of EESSH and report around the middle of 2023.  We have therefore paused our data collection of the EESSH indicators until the outcomes of this review are clear. We will then consider whether new indicators are required and consult with landlords.  

Tenant and resident safety 

Landlords have a range of statutory obligations in this area.  For our assessment of tenant and resident safety we will use the data we collect in relation to gas safety and emergency repairs from landlords’ Annual Returns on the Charter (ARCs).  We are in discussions with the sector about the potential scope and timing of a tenant and resident safety survey. 

Given the importance of gas safety we carried out a detailed exercise in July 2022 looking at the ARC data for every landlord with any fails to meet the statutory duty to complete a gas safety check in 2021/22.  We contacted landlords to follow up on fails to get assurance all fails had subsequently been addressed.  In addition, we are continuing to engage with a small number of landlords about their approach to ensuring gas safety checks are completed on time. 

We will supplement this with information we obtain from landlords in their Annual Assurance Statements and from other sources, including from Scottish Government colleagues with building safety measures on fire safety. The Scottish Housing Quality Standard (SHQS) also includes several elements which relate to safety which we consider including compliance with the requirement for interlinked heat and smoke alarms and electrical safety checks (EICRs). 

We will also consider landlords’ compliance with the minimum site standards for Gypsy/Travellers sites with a particular focus on compliance with fire safety requirements.  The Scottish Fire and Rescue Service is the enforcing authority for fire safety at Gypsy/Traveller sites.  It is the responsibility of site providers to comply with their statutory obligations in terms of Fire Safety Legislation because they are the duty holders. Of the 28 Gypsy/Traveller sites in Scotland:                                                                                                             

• 20 currently comply with Scottish Government’s minimum standards and with fire safety requirements;  
• six comply with the minimum standards but have yet to meet fire safety requirements;  
• one site complies with fire safety requirements but has yet to meet minimum standards; and 
• one site, provided by Aberdeen City Council, does not comply with either the minimum standards or fire safety requirements.  

Development 

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 which, if inadequately managed, have the potential to seriously impact on an RSL and its tenants, in terms of its ability to deliver its strategic objectives and ensure its future financial viability.  

The additional risks and challenges which developing RSLs currently face include labour and material shortages, exposure to the increased risk of contractor business failure, severe cost inflation and the requirement to meet more stringent building standards.  These may or are resulting in significant build cost increases and programme delay.  

It is critical that landlords adequately assess the specific risks associated with their development intentions and ensure that they have robust plans and mitigation strategies in place to manage risk. 

We have set out Regulatory Standards and further advisory guidance in relation to development.  The Standards set out the following requirements which are of particular relevance to development:   

• 1.1 “the governing body sets the RSL’s strategic direction. It agrees and oversees the organisation’s business plan to achieve its purpose and intended outcomes for its tenants and other service users”; and 

• 3.3 “the governing body has a robust business planning and control framework and effective systems to monitor and accurately report delivery of its plans”.  

When we consider development, we especially look at the risk that an RSL will not comply with these Standards.   

We gather a range of information about RSLs’ development plans and our assessment of development risk will continue to be based on information from:   

• SHR’s Five Year Financial Projection Return (FYFP) which includes information on individual RSL plans for the delivery of new units, the tenure mix and funding sources;  
• the Scottish Government Affordable Housing Supply Programme. The information which Scottish Government provides includes details of the committed programme for a three year period and includes details of individual projects, tenure mix, project costs and funding sources; 
• local authority Strategic Housing Investment Plans (SHIPs) which cover a five year time frame and although to an extent are aspirational, provide early notice of where RSLs are being considered as development partners;  
• information from RSL returns to SHR including, business plans and development updates provided through our on-going regulatory engagements; and  
• information from Annual Assurance Statements.  

Given the increased risk exposure that development activity brings we will assess the following development risk indicators which we have considered in previous development risk assessments:  

Financial health of RSLs 

One of the key functions of SHR is to monitor, assess and report on the financial well-being of RSLs to ensure that they comply with Regulatory Standard 3 (RS3) “The RSL manages its resources to ensure its financial well-being, while maintaining rents at a level that tenants can afford to pay.”  We undertake a Financial Risk Assessment (FRA) to monitor, assess and report on RSLs’ financial well-being.   

We will complete a financial health summary (FHS) for each RSL as part of the FRA process.  The FHS pulls information from financial data sent to us by RSL.  Following our analysis of that data we make a financial risk rating to each RSL which helps inform the overall level of engagement required for each of those RSLs.   

The financial risk ratings we will use are defined in the table below. 

 Financial risk ratings definitions 

So for this year’s risk assessment – and considering the increasing financial challenges that RSLs are facing – we will prioritise those RSLs which are classified as high and medium risk.  

Rent affordability is a high priority for us so we will therefore have a strong focus on current and future rent levels.  In general, RSLs managed arrears well last year; however, this area continues to present an increased risk to the financial health of RSLs as the long term effects of the pandemic unwind and given cost of living challenges.  We will look at these areas closely once again this year, though there is uncertainty in what rent increases landlords will implement from March 2023 given the Scottish Government’s intervention on rents. 

Another key financial risk is the possible lack of provision within business plans to meet the emerging requirements in relation to the zero-carbon agenda, so last year we asked landlords for the first time to provide us with estimations of any costs.  We will continue focusing on this area. 

Governance 

In light of the uncertain and volatile context in which landlords are working, it has never been more important for RSLs to have strong governance to ensure that the continue to deliver for current and future tenants. Good governance underpins the delivery of good financial health and services and ensures that when they are faced with difficult decisions they have accurate and robust information about the efficiency and effectiveness of their organisations and their compliance with statutory and regulatory obligations. 

We have therefore said to landlords that they should identify in this year’s Annual Assurance Statement (AAS) any instances of this.  We have also said that any remaining non-compliance with regulatory requirements that is directly due to the pandemic should be distinguished from non-compliance for other reasons. Landlords should also set out in the AAS further information about any non-compliance which is not directly attributable to the pandemic but has been exacerbated by it. 

Given the importance of tenant and resident safety we have updated our AAS FAQs to highlight information on electrical safety checks. Here we have asked landlords to tell us in their AAS if the landlord has not carried out EICRs for all its properties at the time of submission. The landlord should also explain the reasons for being unable to complete all due EICRs including any external factors such as the pandemic, contractor issues or supply chain problems. We also asked landlords to set out a timeframe for completing all due EICRs. 

In addition to the AASs our assessment of an RSL’s governance will also be informed by the following additional intelligence: 

• ARC submissions received in June 2022; 
• notifiable events (number and nature of notifiable events and the governing body’s response.  We will also consider whether the fact that we have not received any notifiable events from some RSLs indicates potential risk); 
• any reports by auditors under S72 of the Housing (Scotland) Act 2010; 
• Annual Financial Statements; and 
• regulatory intelligence from current engagement.  

We will evaluate all the information that we hold using a structured judgement approach to determine the level of risk and therefore the level of engagement we need to have about governance.  

We will use all this information in this year’s risk assessment.  We will also use the quantitative and qualitative information we gather from landlords in relation to: 

• group structures (number of subsidiaries, complexity of arrangements and nature of subsidiary activity); and 

• qualitative information including complaints about landlords, whistleblowing and significant performance failures.  

We will consider staff turnover and absence rates as these, based on our experience, may indicate a governance risk. This may have been exacerbated this year given the ongoing labour market shortages and challenging economic situation.  And we will consider how frequently the RSL rotates the appointment of its external auditor as we again know from our recent statutory interventions that this can pose challenges in ensuring that the auditors maintain independence and objectivity with clients when they have been in post for extended periods of time. 

We will also carry out a review of the minutes of governing body meetings which should be published on landlords’ website.  We will assess the extent to which governing bodies are exercising appropriate oversight of the organisation and meeting our Regulatory Standards especially in response to the significant economic challenges facing organisations.   

Further information on 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 

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

Appendix B: Strategic context and risk landscape

Cost of living 

Cost of living challenges have clearly become more acute since our last risk assessment.  For example, inflation has accelerated with two key drivers being energy and food prices.  This cost of living squeeze is incredibly challenging for many people especially poorer households.  They spend more of their budget on essentials – such as energy and food – than richer households, leaving them the most exposed to high energy and food inflation.  

The UK Government has announced an “Energy Price Guarantee” which will ensure the typical household will pay no more than £2,500 a year on their energy bill until the end of March 2023.  This is in addition to a £400 energy rebate already announced, and further support packages available to pensioners, those on benefits and the disabled.  The Energy Price Guarantee moves to £3,000 from April to 2023 to the end of March 2024.  

Rent affordability 

In October 2022, the Scottish Government introduced legislation which means a rent cap of 0% and a moratorium on evictions until 31 March 2023.  The Scottish Government has the option to extend this cap at 0% or a different level beyond that date.  A rent freeze or cap would give some immediate financial relief to those tenants who pay some or all their rent, but it is important to acknowledge that rent freezes and caps are not necessarily or always in the best interests of all tenants. 

While the rent freeze as it stands will have no immediate impact on almost all social landlords, a freeze or low cap in rents that extends beyond March 2023 would inevitably result in social landlords having significantly less money to spend.  This means they may have to make difficult choices in what they prioritise.  Though challenging we have advised landlords to proceed with the work to determine what level of rent increase they require for 2023/24 if any, including engaging with tenants to ensure that landlords understand what is important to tenants and what they want, and can afford, to pay for. 

RSL finances and business planning 

Interest rates are rising in a policy effort to reduce inflation back to the BoE’s target of 2% which in turn is contributing to a slowing of the wider economy.  Rates recently rose to 3% from 2.25% and many forecasters expect them to rise further.   

Landlords are not immune to higher inflation.  They are having to handle significant cost pressures, whether for example in: 

• materials and labour for repairing, maintaining and improving existing tenants’ homes;  
• pressure for pay increases for staff and other staff costs;  

• energy costs for offices, costs for other office supplies, and vehicle fleet costs; and  
• Increased costs of new and variable borrowing flowing from interest rate increases. 

Most landlords look closely at how they can manage their business efficiently before passing costs on through higher rents.  Some are currently updating business plans given the current economic and operating environment. All landlords should consider updating business plans given current pressures and challenges including stress testing for a range of scenarios.  It is now even more vital that landlords vigorously challenge every element of their expenditure to ensure that it is necessary. Landlords will also need to be able to demonstrate – principally to their tenants – that they are operating as efficiently as possible. Any planned increase in rents that is permitted needs to represent value for money. 

Decarbonisation 

Social landlords lead the way for energy efficiency and decarbonisation in homes. The Energy Efficiency Standard for Social Housing (EESSH) was introduced in 2014 with an initial milestone set for December 2020.  Landlords have largely delivered on this – the vast majority of social homes met that EESSH milestone.    A second milestone (EESSH2) was set requiring all social housing to meet EPC Band B (Energy Efficiency rating) or is as energy efficient as practically and technically possible, by the end of December 2032. 

In addition, the Scottish Government’s Heat in Buildings Strategy outlines the ambition that by 2045, emissions of greenhouse gases from heating homes and buildings will have all but disappeared, with demand for energy reduced and space and water heating provided by zero emissions alternatives.   

In March 2021, the Zero Emissions Social Housing Taskforce (ZEST) was convened by the then Minister for Local Government, Housing and Planning.  It was asked to look at the opportunities, barriers and solutions required of social housing to maximise its contribution to climate change targets.  

ZEST’s recommendations, which it made last summer, include: 

• there should be clear metrics and sufficient budgetary investment to ensure this is successfully realised; 
• promotion of a Fabric First approach; 
• the Scottish Government should work with social landlords to ensure capital investment for social housing is adequate; and 
• Social landlords and the Scottish Government must work together. 

ZEST also said that Scottish Government should consider reviewing the EESSH2 standard, and it has agreed to do this.  Scottish Government has recently published interim guidance on EESSH2 which will supersede existing guidance.  And this interim guidance will be replaced in mid-2023 when the Scottish Government anticipates completing its EESSH2 review.   

Much of the policy landscape is therefore evolving with some decisions still to be taken, and funding requirements and sources unclear.   Landlords have many challenges in delivering net zero, particularly those operating in rural areas and the islands.   

Provision and quality of temporary accommodation for homeless people 

Through our engagement with local authorities’ and in our annual risk assessment, we monitor, assess and report local authorities’ compliance with their statutory obligation to offer temporary accommodation when they should.  They should offer temporary accommodation when they assess a person or household as unintentionally homeless.  Most local authorities meet this obligation.  There may be pressures in the short and medium term on services flowing from an economic downturn and refugees from Ukraine.  Local authorities should ensure that their services have resilience to handle any increase in the number of applications, and the provision of temporary accommodation.  

Local authorities also have obligations in terms of the quality of temporary accommodation such as those in the UAO and the Scottish Social Housing Charter.  The Scottish Government intends introducing a temporary accommodation standards framework which will place further obligations on local authorities.  

Tenant and resident safety 

Some landlords face real challenges in meeting the new obligations in relation to connected fire alarms and smoke detectors and electrical safety compliance checks. And this impacts on the overall level of compliance with SHQS. It is now more important than ever that landlords are assured about their compliance with these requirements. 

Data accuracy 

Data accuracy has been an issue in a number of our intervention cases and in other engagements. In a number of cases incomplete, misleading and inaccurate information had been provided to governing bodies and to us.  It is necessary for landlords to have complete and accurate information 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.