Decision

Regulatory Notice: Auckland Home Solutions CIC (13 August 2021)

Updated 20 April 2023

Applies to England

RSH Regulatory Notice

• Provider: Auckland Home Solutions CIC
• Regulatory code: 4690
• Publication date: 13 August 2021
• Governance grade: N/A
• Viability grade: N/A
• Reason for publication: Economic Standards
• Regulatory route: Reactive Engagement

Other providers included in the judgement

None

Regulatory Finding

The regulator has concluded that:

a) Auckland Home Solutions CIC (Auckland) is non-compliant with the Governance and Financial Viability Standard. Auckland has not ensured its governance arrangements deliver an effective risk management and control framework and has not demonstrated that it has managed its resources effectively to ensure its viability can be maintained.

b) Auckland has not been able to demonstrate that it has managed its affairs with an appropriate degree of skill, independence, diligence, effectiveness, prudence and foresight as part 2.2 of the Governance and Financial Viability Standard requires.

c) Auckland has also failed to ensure that it has an appropriate, robust and prudent business planning, risk and control framework in line with part 2.4 of the Governance and Financial Viability Standard.

d) Auckland has failed to ensure that any arrangements it enters into do not inappropriately advance the interests of third parties or are arrangements which the regulator could reasonably assume were for such purposes (part 2.6 of the Governance and Financial Viability Standard).

e) Auckland has been unable to demonstrate that it complies with the Rent Standard. Auckland has reported a significant majority of its stock is Specialised Supported Housing (SSH) or Temporary Social Housing (TSH) and therefore is excepted from the standard, but we lack assurance on how the board has satisfied itself that it is meeting this exception criteria.

The Case

The regulator has concluded that it lacks assurance and evidence that Auckland is compliant with the Governance and Financial Viability Standard.

Auckland predominately enters into long-term indexed linked lease arrangements with the private sector to acquire homes which are then used to provide accommodation to vulnerable tenants. The properties it acquires are leased on ‘Full Repairing and Insurance’ terms which means that income collection, maintenance and repair and operating cost risks are transferred to Auckland.

A required outcome of the Governance and Financial Viability Standard is that a registered provider shall ensure it has an effective risk management framework. Auckland has entered into a series of long-term lease agreements with no break clauses. Auckland has a concentration risk that comes from having long-term, low-margin, inflation linked leases as a single source of finance. We lack assurance that Auckland has taken a suitably long-term view on managing risks associated with this strategy, nor does it have a long-term financial plan in place underpinned by appropriate assumptions. We lack compelling evidence that Auckland undertakes adequate stress testing against a range of scenarios, with appropriate mitigation strategies in place, to ensure its long-term viability.

Auckland has provided examples of the due diligence it undertakes on new schemes and is in the process of embedding this process. However, the information seen by the regulator demonstrates an inherent lack of financial capacity in Auckland’s operational model to manage downside risk such as repairs, voids or delays in agreeing rent and housing benefit levels with local authorities.

Our investigations also identified that some of the lease transaction arrangements Auckland has entered into have involved companies linked to directors of Auckland, and its shareholder. For these transactions, on more than one occasion, Auckland sought and received shareholder approval to authorise the reported conflict of interests and disapply the provisions in its articles relating to them. The transactions were material and on-going and in doing so, Auckland has layered long-term risks onto the business, for which we lack assurance that they can be adequately managed under the current terms. The evidence we have seen does not demonstrate that the required outcome of the Governance and Financial Viability Standard to safeguard the reputation the sector (1.1(d)) had been adequately considered by the board. Notwithstanding that Auckland had set aside its articles for these decisions, we have not seen evidence that the board had considered the risks of leaving Auckland open to reputational damage and criticism as a result of individuals, with influence and connected to the parties involved, being perceived to benefit from those transactions. The weaknesses in these arrangements also meant we lack assurance that Auckland adequately considered the requirements of part 2.6 of the Governance and Financial Viability Standard about ensuring arrangements do not inappropriately advance the interests of third parties.

Taken together, these issues mean we lack assurance that Auckland is managing its affairs with an appropriate degree of skill, diligence, effectiveness, prudence, and foresight.

The Governance and Financial Viability Standard requires registered providers to manage their resources effectively to ensure their financial viability is maintained while ensuring that social housing assets are not put at undue risk. The information seen by the regulator identifies that Auckland is thinly capitalised. While Auckland has received some short-term cash support and fees for entering new lease arrangements which allow it to meet its commitments when they fall due, it has not demonstrated that its financial viability, or the financial implications if risks crystallise, can be effectively managed or mitigated over the life of its contracts. We note that Auckland’s share ownership transferred in 2019 and Auckland now has an unregistered parent. The information provided by Auckland reports that its parent remains in an embryonic stage of operations. At this point, we lack compelling evidence that Auckland’s board is adequately assured that the governance arrangements in place with its parent would effectively manage and mitigate the financial implications of risks crystallising.

To ensure its medium to long term viability Auckland assumes its material income source (rent) being ‘excepted’ from the requirements of the Rent Standard by meeting SSH or TSH criteria. We lack assurance on how the board has satisfied itself that it is meeting the required outcomes of the Rent Standard and the associated rent-setting requirements.

The Auckland board has committed to work with the regulator to address the issues outlined in this Regulatory Notice.

Based on its most recent Statistical Data Return (SDR), Auckland had fewer than 1,000 units and is classed as a small provider. The regulator does not publish regulatory judgements for providers which 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.

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 is considering what further action should be taken, including whether to exercise any of its powers.

About the provider

Auckland was registered in January 2012 and designated as a not-for-profit provider. Auckland is a private company limited by shares (company number 07345564) and is a subsidiary of The Social Housing Family CIC.

The March 2021 SDR stated Auckland owned and managed 817 units of social housing.

Since registration in 2012 the ownership of Auckland has changed twice; most recently in August 2019. Auckland’s current business plan is predicated upon its material income source (rent) being ‘excepted’ from the requirements of the Rent Standard by meeting either the SSH or TSH criteria.

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.’

Key to Grades

Governance:

• G1 (Compliant): The provider meets our governance requirements
• G2 (Compliant): The provider meets our governance requirements but needs to improve some aspects of its governance arrangements to support continued compliance
• G3 (Non-compliant): The provider does not meet our governance requirements. There are issues of serious regulatory concern and in agreement with us the provider is working to improve its position.
• G4 (Non-compliant): The provider does not meet our governance requirements. There are issues of serious regulatory concern and the provider is subject to regulatory intervention or enforcement action.

Viability:

• V1 (Compliant): The provider meets our viability requirements and has the financial capacity to deal with a wide range of adverse scenarios.
• V2 (Compliant): The provider meets our viability requirements. It has the financial capacity to deal with a reasonable range of adverse scenarios but needs to manage material risks to ensure continued compliance.
• V3 (Non-compliant): The provider does not meet our viability requirements. There are issues of serious regulatory concern and, in agreement with us, the provider is working to improve its position.
• V4 (Non-compliant): The provider does not meet our viability requirements. There are issues of serious regulatory concern and the provider is subject to regulatory intervention or enforcement action.