Decision

Regulatory Notice: Falcon Housing Association C.I.C.

Updated 12 November 2021

Applies to England

RSH Regulatory Notice

• Provider: Falcon Housing Association C.I.C.
• Regulatory code: 4771
• Publication date: 12 November 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) Falcon Housing Association C.I.C. (FHA) is non-compliant with the Governance and Financial Viability Standard. It has failed to ensure 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) FHA has failed to demonstrate that it has managed its affairs with an appropriate degree of skill, independence, diligence, effectiveness, prudence and foresight.

c) FHA has failed to ensure that it has an appropriate, robust and prudent business planning, risk and control framework.

d) FHA 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.

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

The Regulator’s Findings

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

FHA predominately enters into long-term index-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 FHA. A proportion of FHA’s stock was transferred in 2018 from a near-failing organisation.

FHA has entered into a series of long-term lease agreements with no break clauses and 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 FHA has taken a suitably long-term view on assessing, managing and, where appropriate, addressing risks associated with this strategy to ensure its long-term viability, including ensuring that social housing assets are protected. We also lack evidence that FHA undertakes adequate stress testing against a suitable range of scenarios or that appropriate mitigation strategies have been put in place. FHA has provided insufficient evidence that it is able to manage the reasonable risks associated with economic and policy cycles and adverse changes in its operating environment over the life of its contracts.

Our investigations identified that a material number of the lease transaction arrangements FHA has entered into have involved companies which were, at the time, linked to directors and shareholders of FHA. The arrangements have continued to layer long-term risks on to FHA which we lack assurance can be managed under the current terms. Although these arrangements were disclosed to the board, we lack assurance that, before entering into them, FHA’s board adequately considered the implications. This includes the board’s consideration of the risk of leaving FHA open to reputational damage and criticism because of individuals involved, with influence and connections to both parties, being perceived to benefit from those transactions. The weaknesses in these arrangements mean we lack assurance that FHA has adequately ensured that the arrangements into which it has entered have not inappropriately advanced the interest of third parties.

Taken together, these issues mean we lack assurance that FHA 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 make sure their financial viability is maintained while ensuring social housing assets are not put at undue risk. The regulator does not have assurance that FHA’s long-term financial forecasts are based on appropriate and reasonable assumptions. This, combined with the lack of appropriate mitigation strategies in relation to FHA’s risks, and the lack of assurance over FHA’s ability to charge rents at the current level, means that we lack assurance that FHA is managing its resources in such a way as to meet the requirements of the Governance and Financial Viability Standard.

The regulator has also concluded that it lacks assurance and evidence that FHA is compliant with the Rent Standard. To ensure its medium to long-term viability, FHA assumes its material income source (rent) being ‘excepted’ from the requirements of the Rent Standard by meeting SSH 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 FHA 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), FHA 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

Falcon Housing Association C.I.C. (FHA) (4771) was registered in 2013 and is designated as a not-for-profit provider. FHA is a private company limited by shares and a community interest company.

In its 2021 SDR, FHA reported that it provided 952 units of social housing.

Since registration the ownership of FHA has changed twice; most recently in October 2021. FHA’s current business plan is predicated upon its material income source (rent) being ‘excepted’ from the requirements of the Rent Standard by meeting SSH 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.