Decision

Regulatory Notice: Parasol Homes Limited (15 December 2021)

Updated 15 December 2021

Applies to England

RSH Regulatory Notice

• Provider: Parasol Homes Limited
• Regulatory code: 4728
• Publication date: 15 December 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) Parasol Homes Limited (Parasol) (4728) 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) Parasol has failed to demonstrate that it has managed its affairs with an appropriate degree of skill, independence, diligence, effectiveness, prudence, and foresight.

c) Parasol has failed to ensure that it has an appropriate, robust and prudent business planning, risk and control framework. It has also been unable to demonstrate how arrangements it enters into do not inappropriately advance the interests of third parties.

d) Parasol has been unable to demonstrate that it complies with the Rent Standard. Parasol has reported that a significant majority of its social housing 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 the stock meets the exception criteria.

The Regulator’s Findings

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

Parasol’s business model is to enter into long and short-term leases to provide different types of supported housing. The long-term leases Parasol has entered into are index-linked lease arrangements with private head-landlords that are then used to provide accommodation to tenants with additional needs. The properties it acquires on long-term leases are leased on ‘Full Repairing and Insurance’ terms which means that income collection, maintenance and repair and operating cost risk are transferred to Parasol.

Parasol has entered into long-term lease agreements without demonstrating that it fully understands and can mitigate the associated risks. There is a significant mismatch between the lease terms Parasol has entered into and the agreements with care providers. Parasol’s leases do not have break clauses but the care providers do have breaks clauses in their agreements and those agreements do not extend to the length of all of the leases. This leaves Parasol exposed to the risk of long-term liabilities, without certainty over its income in the long-term. We lack assurance that Parasol 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. We also lack assurance that Parasol 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.

Parasol has entered into arrangements with companies that are connected to Parasol and where there is commonality in the ultimate control and shareholding arrangements. This includes the majority of care providers that Parasol has entered into agreements for in respect of its properties designated as SSH. Parasol has not provided compelling evidence that it has acted with independence and fully considered whether it achieves value for money before entering into related party transactions. As a result, we lack assurance that Parasol has adequate controls in place to ensure that arrangements do not inappropriately advance the interests of third parties.

Parasol’s provision of non-social housing on short-term leases has grown rapidly in recent years. The model for this type of supported housing is that Parasol has landlord responsibility for its tenants, and it enters into short-term leasing arrangements with private landlords for the properties. Managing agents contracted by Parasol deliver the landlord and management services on Parasol’s behalf under an agreement. The managing agents also provide support services for tenants. The remainder of Parasol’s stock is the provision of supported social housing on short-term leases.

We lack assurance that Parasol has demonstrated how it manages the risks connected with this model of provision. We have seen evidence of some local authorities withholding payments of housing benefit due to concerns about whether housing benefit rules have been met and the accuracy of information passed to them about tenants by managing agents on Parasol’s behalf. We have seen that this had a significant impact on Parasol’s cash flow requiring a contingency plan to be developed and action to be taken to prevent a liquidity issue. The regulator was not notified of this issue at the time.

We lack assurance that Parasol has adequate oversight of the properties, its tenants and the money passed to the managing agents. The regulator has found this is a significant gap in Parasol’s risk and control framework. While the provider has developed a process for oversight of its managing agents this has only recently been introduced and is not embedded. The model operated by Parasol means that it transfers a very significant amount of the rent and service charge income it receives to third parties on an ongoing basis. Parasol does not have an adequate system or oversight of the money given to third parties or for the service charge monies paid directly by tenants to the managing agents for the provision of support.

The Governance and Financial Viability Standard requires registered providers to ensure that any arrangements they enter into do not inappropriately advance the interests of third parties, or are arrangements that the regulator could reasonably assume were for such purposes. Parasol has not provided evidence of how it monitors and has oversight of the very significant sums of money that are transferred to third parties on an ongoing basis. This means that Parasol cannot evidence controls are in place which would mitigate risks of financial abuse with third party managing agents not providing services being claimed or inappropriate services and housing management practice.

Taken together, these issues mean we lack assurance that Parasol 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 that their financial viability is maintained while ensuring social housing assets are not put at undue risk. The regulator does not have assurance that Parasol’s long-term financial forecasts are based on appropriate and reasonable assumptions. This, combined with the lack of appropriate mitigation strategies in relation to Parasol’s risks, and the lack of assurance over Parasol’s ability to charge rents at the current level, means that we lack assurance that Parasol 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 Parasol is compliant with the Rent Standard. This is in respect of the social housing units it has designated as SSH and those for which it charges formula rent. To ensure its medium to long-term viability Parasol assumes the properties it designates as SSH meet the criteria set by government and thus that its material income source (rent) is ‘excepted’ from the requirements of the Rent Standard. 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.

Parasol 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), Parasol had fewer than 1,000 units of social housing 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

Parasol was registered in 2012 and is designated as a not-for-profit provider. Since April 2020, Parasol has been registered as a community benefit society.

In its 2021 SDR, Parasol reported that it owned and managed 477 units of social housing and 1,256 units of non-social housing.

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.