Decision

Regulatory Notice: Auxesia Homes Limited (8 December 2022)

Updated 8 December 2022

Applies to England

RSH Regulatory Notice

• Provider: Auxesia Homes Limited
• Regulatory code: 4765
• Publication date: 8 December 2022
• Reason for publication: Economic Standards
• Regulatory route: Reactive Engagement

Other providers included in the judgement

None

Regulatory Finding

The regulator has concluded that:

a) Auxesia Homes Limited (Auxesia) is non-compliant with the Governance and Financial Viability Standard.

b) Auxesia has failed to demonstrate that it has an appropriate, robust and prudent risk and control framework in place which requires that there is access to sufficient liquidity at all times.

c) Auxesia has failed to assess, manage, and address risks to ensure the long-term viability of the registered provider including ensuring social assets are protected by carrying out detailed and robust stress testing, and before taking on new liabilities, ensuring it understands and manages the likely impact on current and future business and regulatory compliance.

d) The Auxesia board has not demonstrated that it is managing its affairs with an appropriate degree of skill, independence, diligence, effectiveness, prudence and foresight.

The Case

The regulator began an investigation into potential viability issues at Auxesia following a review of its latest Financial Statements for the year ended 30 September 2021, which disclosed an insolvent balance sheet and significant capital commitments.

The Regulator’s Findings

Financial information received by the regulator in response to its investigations revealed that there were several liquidity pinch points identified leading to a requirement for additional working capital in the short term. To meet this requirement Auxesia was reliant on a significant sale of rental assets to another registered provider.

At this stage, Auxesia had limited capacity within its finance function and the systems in place were not adequate to provide financial information, over a sufficient timeframe, for the board to accurately assess its short-term funding requirements. There were no contingency plans in place to identify alternative sources of funding should the asset sales be delayed or fail to materialise which would place further pressure on Auxesia’s working capital position.

Independent advice was sought by Auxesia during this period that confirmed the dependence on the cash receipt from the sale to maintain working capital and that given the short timeframes, there were limited options available to the board to secure alternative funding. The report identified that the pinch points were foreseeable and other options may have been available if the board had acted sooner.

The liquidity issue was averted as Auxesia secured an additional facility from Matter Real Estate LLP, the manager of the fund which represents the majority shareholder Auxesia Lux SCSp, which provided the funding via its subsidiary Auxesia FinCo SARL. However, to complete this transaction an emergency waiver was required from one of Auxesia’s other funders. While this was eventually obtained, and the new facility has eased the immediate liquidity pinch point, this has highlighted deficiencies with the effectiveness of the governance arrangements and the robustness of the information the board is receiving to inform its decisions.

Business planning and risk management frameworks failed to ensure that the board were in receipt of accurate information to allow it to proactively manage its key risks and to put in place effective mitigations. Auxesia’s stress testing was also underdeveloped and did not cover some of its key risks.

As a result of this the regulator has concluded that Auxesia has failed to demonstrate that it has an appropriate, robust and prudent risk and control framework in place. Auxesia has failed to assess, manage, and address risks to ensure the long-term viability of the registered provider including ensuring social assets are protected by carrying out detailed and robust stress testing, and before taking on new liabilities, ensuring it understands and manages the likely impact on current and future business and regulatory compliance.

This lack of effective board oversight and management of its key risks is a fundamental failure of governance. As a result, the regulator has concluded that the Auxesia board has not been able to demonstrate that it is managing its affairs with an appropriate degree of skill, independence, diligence, effectiveness, prudence and foresight.

The Auxesia board has acknowledged the regulator’s concerns and has put forward a plan of proposed improvements. The proposals include engaging external consultants to identify additional board members to strengthen the governance arrangements. It has now recruited a permanent Finance Director who is developing enhanced financial monitoring and reporting, including more effective, longer term cash flow forecasting and stress testing as a key priority.

The regulator welcomes the Auxesia board’s commitment to address the issues and obtain independent assurance that any improvements are effective.

Section 220 of the Housing and Regeneration Act 2008 states that the regulator’s regulatory and enforcement powers may be used if a registered provider has failed to meet a standard under section 194 of the Act. The regulator will keep any further action, including whether to exercise any of its powers, under review.

Based on the most recent Statistical Data Return (SDR), Auxesia had fewer than 1,000 units and is classed as a small provider. The regulator does not publish regulatory judgements for providers that fall into this category. Instead, in the interests of transparency, the regulator publishes a Regulatory Notice where it has evidence that a small registered provider is not meeting the regulatory standards. This notice is published under those arrangements.

About the provider

Auxesia is a small for-profit provider. Its parent is Auxesia TopCo Ltd, which is 60% owned by Auxesia Lux SCSp via its fund manager Matter Real Estate LLP, and the remaining 40% is owned by 11 Group Holdings, which is a company wholly owned by one of its directors, who is also the Chief Executive Officer.

Its business model is to acquire Section 106 affordable homes from house builders and offer them on shared ownership, affordable rent or rent to buy tenures to its core client group of former and serving members of the British Armed Forces, NHS and Emergency Services.

The 2022 SDR showed that Auxesia held 98 shared ownership and 43 affordable rent properties.

About our Regulatory Notices

Regulatory notices are issued in response to an event of regulatory importance (for example, a finding of a breach of the Rent Standard or of a consumer standard that has or may cause serious harm) that, in accordance with its obligation to be transparent, the regulator wishes to make public. More detail about Regulatory notices is set out in Regulating the Standards.