Helen Shaw - Highland and Islands Liaison Group - 2 March 2023
Thank you for asking me along today. I’m sorry that I can’t be there in person but other diary commitments made the logistics of that tricky.
The remit I have been given to talk to you about three things:
- Our upcoming priorities as regulator
- Our planned review of our regulatory framework; and
- Our work on tenant and resident safety.
There is a lot of overlap between these topics so I thought it would be helpful to say a few words about the context which social landlords are operating in and then talk about how that has shaped our very early thinking on our proposed approach to the review of the regulatory framework.
There has been extensive commentary both from us as regulator and others about the challenges which have emerged over the last 2-3 years and I won’t dwell on these too much today. Suffice to say that:
- Brexit
- The pandemic
- The war in Europe
- The cost of living crisis
These are all factors which social landlords have to respond to and the degree of volatility and uncertainty which has arisen as a result of these does, we understand, make the day job quite difficult.
And the policy context is also quite uncertain and in places a little hazy. So the position on rents and the decarbonisation agenda for example have posed and will continue to pose some quite significant challenges.
On rents, we have now had the announcement from Scottish Ministers that the rent cap on social rented housing will expire on 31 March 2023.
This is in response to the voluntary agreement which the representative groups have made with SG that for RSLs the average rent increase which tenants are being consulted on is 6.1% and local authorities have committed to keeping rent increases to an average of no more than £5 per week.
Now an average obviously means that some will be more than that while others will be less. And we asked all social landlords to tell us what their planned rent increase will be as soon as they have decided that. We asked that all social landlords provide us with that information by 28 February and we will be publishing our findings from this over the next few weeks.
And while the position has moved on social rents, the government has still continued some of the formal restrictions on the private rented sector around rent increases and we know that this will affect Mid Market rent properties.
In the meantime, our annual risk assessment continues to have a strong focus on rent affordability.
The cost of living crisis continues to particularly affect some of the most vulnerable people in our society and we know that social landlords are on the front line, helping where they can to support their tenants with the real financial hardship they are facing. That has been the case since before the pandemic but is even more so now. We appreciate that there are real pressures on tenants eg around heat vs eat. And that some of those challenges affect landlord staff as well.
We also know that the pressure on costs also affects landlords’ financial position. That is why we have continued to emphasise the importance of having a robust business plan which is regularly tested for various stresses and scenarios including increasing interest rates, above-inflation cost increases, increasing levels of arrears, sustained high inflation, and sub-inflation rent increases.
In terms of other priorities, there has been a strong spotlight put on the issue of mould and dampness following the coroner’s report into the death of Awaab Ishak in Rochdale which highlighted the clear link between mould and damp in houses and serious health conditions. That probably wasn’t news to anyone working in the sector if we are being honest but it has brought an important and increased focus on stock condition and tenant and resident safety in particular.
For us, stock condition/housing quality has always been an important part of our annual risk assessment and that’s why we have recently updated our Recommended Practice on Asset Management.
And we worked with CIH, SFHA, and ALACHO to produce the briefing note which was published last week to help support landlords deal with cases of mould and dampness.
This briefing follows on from an ALACHO masterclass on damp and mould in February which was attended by more than 300 housing professionals, with future member events from the SFHA on 3 March and the CIH Housing Festival on 7 and 8 March.
The briefing recognises that issues of damp and mould are often multi-layered, and solutions can include both tackling problems with the property and supporting tenants with any issues that may affect the experience of living in that home, particularly with the rising cost of energy and other living costs. It sets out a check list for practitioners so they can ensure they are taking all required steps to address the issue.
We also wrote to landlords before Christmas to ask all governing bodies and committees to consider the systems they have in place to ensure their tenants’ homes are not affected by mould and dampness and that they have appropriate, proactive systems to identify and deal with any reported cases of mould and damp timeously and effectively.
The current cost of living crisis, and in particular rising energy costs, will mean that many tenants face difficulties in heating their homes. So it is now more important than ever that all social landlords have robust procedures for managing reports and instances of mould and dampness.
And we have asked social landlords to talk to us if they identify any concerns with their current systems to discuss how they will plan to make necessary improvements.
Tenant and resident safety, again has been a priority for us in our annual risk assessment and you would expect that to be the case when you remember our statutory objective is to protect the interests of tenants.
That is why last year we carried out a survey of all landlords as part of our annual risk assessment to help us address gaps in the information and assurance that we get routinely from landlords on this very important issue.
Last year’s survey provided us with valuable assurance about how landlords satisfied themselves their systems, policies and procedures and working practices ensured compliance with health and safety requirements. We provided more information on the outcomes from this in the Summary Outcomes document that we published at the end of March 2022 following the conclusion of our annual risk assessment.
We were considering carrying out this survey again this year as part of our annual risk assessment, again to help us address gaps in the information that we currently routinely receive from landlords. To reflect feedback we had from the sector last year around the timing of the survey, we had hoped to be able to carry out the survey before Christmas. However, our discussions on the scope of the survey with some stakeholders have meant that this was not possible.
We have therefore considered our position on this further and decided not to carry out the survey this year. Tenant and resident safety however remains a critical priority for us so we intend to take forward a number of strands of work both in the short and longer term to ensure that we are able to get the appropriate assurances that we need from landlords on this issue:
We will contact individual landlords as part of this year’s annual risk assessment where we have identified gaps in the assurance we need and we will seek additional information from these organisations where appropriate.
For example, in the last ARC return, we asked landlords to tell us in the comments box if they are not complying with EICR regulations and to tell us what their plans were to address this. A number of landlords told us that they were not compliant but did not provide the detail that we had asked for so we will follow this up.
We are also planning to recommence our programme of Annual Assurance Statement visits during 2023/24 and as a key focus of these visits we will consider how governing bodies have assured themselves about tenant and resident safety. We will publish a lessons learned report on these visits which will hopefully share any good practice we find with all landlords on this issue.
I’ve mentioned already our letter to all landlords before Christmas on the issue of mould and dampness. As I highlighted, if you identify any concerns with your current systems please contact your lead regulator to discuss how you will plan to make necessary improvements.
We will also ask all landlords to make an explicit statement in their Annual Assurance Statements that should be submitted to us by 31 October 2023 on their compliance with their obligations in relation to tenant and resident safety. We will provide advice to landlords on the information that should be submitted in the Annual Assurance Statement.
In the 2022/23 ARC form due to be submitted to us by 31st May 2023, we will make the Housing Quality and Maintenance comment field mandatory. This means we will expect landlords to provide detailed comments on their performance. We are particularly interested in any non-compliance with electrical, gas and fire safety and plans to address this. We will update the technical guidance to reflect the requirements.
We are actively considering how we can collect relevant tenant and resident safety information through the ARC return going forward and will consider this as part of our forthcoming review of the Regulatory Framework.
I wanted to say a few words about decarbonisation.
The Scottish Government has set a target of net carbon zero by 2045. In order to help achieve this, significant investment will be required by social landlords into their existing housing stock to both improve the energy efficiency levels and to move away from fossil fuel based heating systems.
In recognition of the importance of this area, we added 2 additional questions to the FYFP which RSLs submitted to us last year. I am conscious that this information is only for RSLs and not LAs but I think it gives helpful context. The first question we asked was if de-carbonisation had been considered and the second asked for an estimate of any costs that had been included if it had.
A total of 35 RSLs have indicated that they have considered de-carbonisation as part of their business planning process representing 25% of all RSLs. The flip side of this suggests 75% have not considered this. Of those 35 who said they had considered this, 10 have not yet considered the cost impact on the forecasts. In addition, a further 14 RSLs have selected “No” as the answer, but have added a comment to explain the reason for this.
Of the 25 RSLs who included an estimate for costs, these range from £23 to £2,607 per unit with a median figure of £684 per unit. These estimates fall well short of the estimates from studies which have tried to estimate the additional investment required to meet the net carbon zero target.
We also don’t yet know the outcome of the Scottish Government’s review of EESSH2.
Pre-1919 tenements will be one of the more difficult property types to achieve net carbon zero on. RSLs in Scotland own over 25,000 pre 1919 tenements. The latest aggregate figure included in the five year financial projections for total capital and revenue expenditure on pre-1919 properties is £40.4 million. Only taking into account the energy efficiency measure costs incurred in a recent project to retrofit tenement flats to Passivhaus standard, the total cost to the sector would be £932 million.
But we also know that rural areas also face significant challenges in delivering net zero. There is uncertainty and significant and new costs for investing in energy efficiency and to achieve the decarbonisation of heating. And many of you will continue to invest in building new homes at a time when costs continue to increase for labour and materials and when there are also supply shortages in labour and materials.
So achieving net carbon zero is likely to be one of the key drivers for social landlords in determining investment requirements in the medium term. But the relatively low response rate to the questions included in this year’s FYFP suggests that the thinking is still at a very early stage.
We have today published our analysis of RSL’s audited financial statements. I know that there are both RSLs and LAs in the audience today so apologies again for focussing for a moment only on RSLs
Our analysis is based on returns which cover the period to 31 March 2022.
In general RSLs’ withstood difficult economic and operating conditions in 2021/22. Their robust financial performance and strong liquidity means they remain in a relatively strong position to respond to the financial challenges ahead, although those challenges are significant.
At an aggregate level in 2021/22, RSLs’:
- turnover increased;
- operating costs increased well above both inflation and average rent increases during the period;
- planned and reactive maintenance costs rose significantly,
- operating surplus dropped marginally;
- affordable lettings surplus was lower than the prior year as RSLs began to catch up on maintenance and development delayed by the COVID-19 pandemic;
- despite challenges from the pandemic, RSLs continued investing in new and existing homes,
- voids, arrears and bad debts at 31 March 2022 either remained around the previous year’s levels or showed some improvement, demonstrating the positive impact of the work done by RSLs to mitigate these;
- in aggregate, the average rent increase for RSLs rose well below both CPI and RPI.
- the number of employees in defined benefit schemes continued to reduce.
If we are to think about what all of that means looking ahead
- Since 31 March 2022 the complex and uncertain economic environment that social landlords operate in has worsened. Inflation rose to more than 11% in October 2022 and while it has started to fall, it remains high with food and energy prices continuing to put pressure on household incomes. Interest rates are currently 4%, having risen from a record low of 0.1%, and supply chain disruption and labour scarcity has added to the volatility. And I’ve already mentioned the position on rents.
- It is in that context, that all social landlords are looking to deliver on investment in their existing stock, building safety and, decarbonisation and stock quality commitments as well as continuing to invest in building new homes. We expect landlords will require’ to adjust their business plans as appropriate to ensure they continue to manage their resources to ensure their financial well-being, while maintaining rents at a level that tenants can afford to pay.
In terms of other priorities, I wanted to say a few words about homelessness. You will have seen that we published a recent report on homelessness. In this we found that some councils are finding it increasingly difficult to fully meet their statutory duties on homelessness, particularly providing temporary accommodation to people experiencing homelessness.
The report highlights that councils are making considerable efforts in very challenging circumstances to deliver effective services and some have had success in moving toward an approach with rapid rehousing at its centre. We also found that there is an emerging risk of systemic failure in their homelessness services.
The report sets out three main strategic challenges facing councils in providing services to people experiencing homelessness: dealing with the number of people in temporary accommodation; maintaining an adequate supply of temporary accommodation; and ensuring homeless people have sufficient access to permanent housing.
Over the last two years we have engaged with every council about their homelessness services. We did this principally to allow us to focus on their response to the challenges in delivering these services during the Covid-19 pandemic.
Our thematic review draws on the evidence from these structured conversations with every council and from the information we gather to inform our annual risk assessment.
We also considered information from a range of external stakeholders, including from a roundtable discussion with homelessness advice agencies in December 2022.
We found that some councils are finding it increasingly difficult to meet these challenges, and so to fully meet their statutory duties. We saw evidence of increasing, and more widespread, breaches of statutory duties around the provision of temporary accommodation, and that some households with particular equality characteristics do not always receive a service that meets their specific needs.
There is considerable pressure on councils in the provision of homelessness services, and there are actions councils should and can take to respond to these challenges and to meet their statutory obligations; however, for some there is an emerging risk of systemic failure.
It is in this context that we said the Scottish Government may need to consider what further urgent measures it can take to support councils to respond to the immediate challenges they face in delivering services for people who are homeless.
All of that is important background for the work we are now progressing on our review of our Regulatory Framework.
We are required to review our regulatory framework every five years. So that means we are required to review our Regulatory Framework ready for implementation on 1 April 2024. And when we talk about the regulatory framework, these are the areas we cover in our framework:
» How we regulate
» Regulatory requirements
» Gathering & publishing data in ways that tenants and other can use
» Getting assurance
» Taking action where we need to
» Thematic work
» Inquiries and information
» Register of social landlords
» Appeals, reviews and complaints
Underpinning our regulatory framework there is also a range of :
- Statutory guidance
- Advisory guidance
And all of that has to be considered as part of our review of the regulatory framework.
Our starting point for the review based on some early discussions with our stakeholders and our Board is:
» Our current approach is still relevant and works
» Much of current Framework also remains relevant and appropriate
» Landlords assuring themselves, tenants and us remains at heart of regulatory approach
» Even greater emphasis on landlords listening to tenants?
» Even stronger focus on quality of services, quality of homes and tenant & resident safety?
Some of our early thinking has been looking at the framework and associated guidance.
So in terms of the Regulatory Framework for example, landlords have told us that the current operating context is very challenging and that most landlords are looking for as much certainty as possible at the moment.
We have also had some feedback that there is a fair degree of support for the Annual Assurance Statement which has supported effective consideration by Landlord governing bodies and committees on their compliance levels.
We have found notifiable events an important source of intelligence but is there ways that we can deal with these more effectively?
We are considering the need for a suite of Charter indicators on tenant and resident safety
We have also been considering whether we should we seek greater assurance on the veracity of AASs?
And how should we use our programme of thematic work and is there scope for us to make greater use of this type of work for general messaging / influencing?
These are only some aspects of the Framework and it would be good to hear any views today either on these or on other areas that could be explored?
In terms of our planned approach to the review, we got positive feedback on the approach we took last time. That involved us issuing a discussion paper ahead of the formal consultation and we used the conversations and feedback we got from this discussion paper to finalise the formal consultation documents. We propose that we replicate that approach again this time.
We are still firming up the timeline for this but anticipate that we would issue the discussion paper in June and take forward our discussions with stakeholders over the summer, with a view to commencing the formal consultation towards the end of October. The consultation would then close just before Christmas and we would aim to publish the new framework in February ahead of implementation on 1 April 2024.
It’s a significant piece of work and it will be really important that landlords feed their views into this.
I will stop there and thank you for listening. I am happy to answer any questions.