In this blog Peter Hardy discusses consultation published by the Department of Communities and Local Government on social housing regulation. 

Who regulates?

The Department of Communities and Local Government (CLG) has recently announced a "compelling case for change of the [social housing] Regulator’s structure, given the way the HCA has evolved since it assumed responsibility for social housing regulation". As a result, it is consulting on the replacement of the regulatory arm of the Homes and Communities Agency (HCA) with a new social housing regulator for England. This raises a few questions:

1. What does the regulator do?
2. Why is the HCA as currently set up not the right body to regulate the social housing sector?
3. Is this the answer to any regulatory problems?

The social housing sector has always been regulated by statute so as to promote supply and investment in the sector and to protect the taxpayer by ensuring registered providers are well-managed and financially viable. There are separate consumer standards for their tenants. Currently approximately 40% of all new housing in England is delivered by registered providers and much of this development is delivered by private finance. Housing associations are increasingly diverse in what they do (such as building market-sale or rental housing and entering into highly complex regeneration joint ventures) but they remain ultimately funded by the taxpayer and have a unique status amongst housing providers in England.

It has to be said that in many ways this is a solution that is looking for a problem. There do not seem to be many views saying that registered providers are badly regulated and, unlike our friends in the financial services sector, there is no outside perception of regulatory failure. The question is a bit more esoteric as it relates to the potential for conflicts of interest arising.

Why should we care?

Whilst this is all of general interest, regulation of the sector is something that is vital for the banks and other funders who lend to registered providers. In the context of the recent move to housing association mega mergers, having a robust regulator who will be able to ensure that the providers do not become over-stretched will be important for the lenders. Others are concerned to ensure that, as their central function, the associations do not start to view themselves as public companies rather than companies with a heart in the provision of social housing.

Since regulation was brought within the HCA, CLG believe that it has changed its function and is now more of a driver of house building and a direct investor in it via its investment arm (which this firm has recently derived the benefit from in the buy to rent sector). The HCA is now itself both a secured creditor and the regulator of registered providers which leads to the strong possibility of a conflict of interest in these roles. Hence why CLG have reached the conclusion that they need to think about going back to a separation of the regulatory functions.

Bonfire of the Regulators

The Coalition government arrived in power in 2010 with a policy to abolish what they saw as an abundance of regulators across government, of which the old social housing regulator, the Tenant Services Authority (TSA) was one. As a result, the HCA inherited this regulatory role, in part as a cost saving measure but also to meet the political expectation of the new government's bonfire of the regulators.

CLG is now keen to make a distinction between the TSA and the new regulator, though as the TSA was also, according to the then housing minister Grant Shapps in 2010, able to make "little difference on the ground with far too many tenants still frustrated by their lack of real power to drive up standards". There was a view that the monetary saving made by having the regulator within the HCA was a worthwhile saving.

That means that going back to a separate regulator has to be justified not just for better regulation but also for cost. This has been done in the consultation document on the basis that the regulator will remain part of the HCA sitting within the same Board structure and having the same accounting officer. But the new Regulation Committee that will be set up by statute will stand alone with existing regulatory staff transferred to it and the need to appoint only three new staff. So the extra cost will presumably be quite low (there is no pretence of making a cost saving).

Our view

On balance, I think that the creation of a separate regulatory entity to deal with regulation of the sector is a positive thing and will lessen the possibility of a conflict of interest actually arising. I am not aware of any evidence that a conflict has in fact arisen but one could. That would be a disaster for the regulators whose independence would be compromised.

However, I would have preferred (even at a cost) for there to be a complete separation of the functions of the HCA and the regulator. The recent debate over how Openreach fits into BT has some similarities. Whilst it is independent, how independent is it really? If the regulator is called upon to make a finding against a registered provider in whom the HCA has an investment, will it either pull its punches or regulate more harshly than it might otherwise if there was no such relationship? Either would be wrong. Even if it makes the right decision in that circumstance (and in regulation there is no such thing as "right" only "balanced"), they are likely to be criticised by someone just because the HCA link has not been completely broken.