Welcome to our first snapshot of 2024! No doubt the festive period is now a distant memory but we hope you had a good one nonetheless.
If you are new to the snapshot, it is a monthly digest of key changes and current affairs for Company Secretaries working in social housing. This month we’re looking at the new UK Corporate Governance Code, updates to the Economic Crime and Corporate Transparency Act 2023 and our usual summary of trends arising from regulatory judgements. Enjoy!
FRC publishes Revised UK Corporate Governance Code 2024
On 22 January 2024, the Financial Reporting Council (FRC) published a revision to the UK Corporate Governance Code (the 2024 Code). The 2024 Code will apply to financial years beginning on or after 1 January 2025. However, Provision 29 (see below) relating to risk management and internal controls will apply to financial years beginning on or after 1 January 2026 to allow companies additional time to prepare.
It is worth noting that, although most registered providers of social housing (RPs) adopt the National Housing Federation’s Code of Governance, looking at wider governance trends is a good indicator of where best practice is moving.
The most relevant changes to the 2018 Code brought in under the 2024 Code, include:
- Confirmation that investors and their advisers must consider explanations for departures from the Code thoughtfully, taking into account the company’s circumstances.
- Section 1 – Board leadership and company purpose
- Boards should ensure that the necessary resources, policies and practices are in place for the company to meet its objectives and measure performance against them.
- Companies should focus on activities and outcomes to demonstrate the impact of governance practices when reporting on their governance activities.
- Boards should not only assess and monitor culture, but also how the desired culture has been embedded.
- Section 3 – Composition, succession and evaluation
- Appointments to the board and succession planning for the board and senior management should promote “diversity, inclusion and equal opportunity”. The list of diversity characteristics has been removed to indicate that diversity policies can be wide ranging and should be adapted to the business.
- Consideration should be given to the performance of the board as part of its annual evaluation as well as composition, diversity and how effectively members work together.
- Boards should “commission” a regular externally facilitated board performance review.
- Section 4 – Audit, risk and internal control
- Boards should not only establish but also maintain an effective risk management and internal control framework. The FRC has devised a principles-based approach which makes clear the board’s accountability for effective internal controls, through a declaration, reflecting the need for flexibility, proportionality, and consideration of the particular circumstances of individual companies. The FRC has indicated that further guidance will be issued shortly in relation to compliance with this requirement (Provision 29).
Economic Crime and Corporate Transparency Act 2023: changes being introduced
Companies House has confirmed that certain changes under the Economic Crime and Corporate Transparency Act 2023 will be introduced in March 2024. These include:
- Greater powers for Companies House to query information, such that it will be able to scrutinise and reject information that appears incorrect or inconsistent with information already on the register. In some cases, it will be able to remove information. This is a huge change from the current approach taken.
- Stronger checks on company names that may give a false or misleading impression to the public.
- New rules for registered office addresses which will mean that all companies must have an appropriate address at all times. Companies will not be able to use a PO Box as their registered office address.
- A requirement for all companies to supply a registered email address.
- A requirement for all companies to confirm on incorporation that they are forming the company for a lawful purpose and annually that the company's future activities will be lawful.
- Annotations on the register to let users know about potential issues with the information that has been supplied to Companies House.
- Taking steps to clean up the register, using data matching to identify and remove inaccurate information.
In preparation for the changes it is worth reviewing the records of any of your companies at Companies House to ensure that they are comprehensive and up to date.
Access to Information Scheme
The Social Housing (Regulation) Act 2023 came into force on 20 July 2023. One part of this wide ranging piece of legislation is a new “Access to Information Scheme”, which will allow tenants of private RPs to request information from their landlord. Tenants of local authority owned social housing can already get information from their landlord through the Freedom of Information Act route.
Under the Scheme a private RP will have to provide information to their tenants about: their rights in connection with their homes and with the facilities and services provided in connection with those homes; how their tenants can make a complaint against them; and any relevant regulatory requirements in connection with their homes and with the facilities and services provided in connection with those homes. The process for tenants accessing information, as proposed, is:
- Landlords make information available to residents through a publication scheme
- Tenants request information they can’t find through the publication scheme from their landlord
- If a tenant is not happy with the outcome above, they may complain to the landlord
- If the tenant is still not happy, they may then complain to the Housing Ombudsman
The Direction on the Regulatory Standards (Provision of Information) 2024 was published on 19 January 2024. The Regulator for Social Housing will set the required standard for RPs to provide accessible information to their tenants.
For more information, please watch our video digest on this issue.
The RSH continues to find that the current economic uncertainty in relation to inflation and interest rates alongside investment requirements in existing stock means that many RPs now have less financial headroom and reduced capacity to respond to adverse events. It is believed that approximately two-thirds of the sector has now been graded as ‘V2’.
Our review of regulatory upgrades/downgrades in the sector has also highlighted the following themes:
- Upgrades to Financial Viability resulting from:
- Re-profiling and reducing development activity and reliance on non-core social housing activity following disposal of care homes.
- Improved financial forecasts due to: strengthened business plan, updated capital programme to improve existing homes and reduced exposure to liquidity and interest rate pressures.
- Strengthening of forecast interest cover profile, informed by recent stock condition surveys and the clarification of liabilities for required fire and building safety work.
- Completion of fire safety programme resulting in enhanced asset costing and lifecycle information.
- Governance downgrades resulting from:
- Rent setting arrangements not operating effectively, highlighting underlying weaknesses in risk management and data quality.
- Board not adequately managing the financial position in a timely or thorough manner following changes to a group structure, equity holding and intragroup charging arrangements. The risk management, internal controls and assurance framework were not considered to be sufficiently robust to systematically drive the board to identify and manage all of its key risks. Data was not robust and systems and processes were not in place to ensure plans and key information were monitored and accurately reported.
- Breaches of the Governance and Financial Viability Standard resulting from:
- A failure to ensure appropriate monitoring, reporting on and compliance with funders’ covenants. There was inadequate resourcing and data errors in financial reporting to the board.
- Breaches of the consumer standards resulting from:
- Failure to meet statutory health and safety requirements in relation to gas safety as a result of having more than 1,000 overdue gas safety checks.
- Failure to meet statutory health and safety requirements in relation to fire safety as a result of 60 overdue fire risk assessments and more than 400 overdue fire remedial actions (with over 150 categorised as high risk).
- Failure to install carbon monoxide detectors in around 10,000 homes for one Council and in 8% of properties for another Council.
Our take-aways from the above are a reminder:
- of the importance of accurate and up to date information being reported to the board to enable it to perform its role – but also as a powerful tool in informing financial plans.
- that group structure arrangements should be reviewed regularly to close any ‘risk’ gaps and to ensure that everyone (including the board) understands the structure and any underlying weaknesses.
- to review and monitor funding arrangements and covenants – you should make sure this isn’t just the job of the treasury team, it is important that key colleagues such as governance and development understand the key covenants and restrictions.
The Social Housing Regulation Act 2023 and consumer standards reforms continue to develop – see above re the Access to Information Scheme. In addition, on 9 January 2024, the Department for Levelling Up, Housing and Communities issued a new consultation regarding the proposals and implementation of Awaab’s Law. The consultation will close on 5 March 2024. For more information about the consultation please read our article.