Code of Governance for Welsh housing associations. Response by the Council of Mortgage Lenders to the Community Housing Cymru consultation paper

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1 Code of Governance for Welsh housing associations Response by the Council of Mortgage Lenders to the Community Housing Cymru consultation paper Introduction 1. The CML is the representative trade body for the first charge residential mortgage lending industry, which includes banks, building societies and specialist lenders. Our 121 members currently hold around 95% of the assets of the UK mortgage market. In addition, in terms of commercial funding, CML members have invested over 60 billion in the housing association sector UK-wide for new build, repair and improvement of social and affordable housing. 2. We welcome the opportunity to respond to the CHC consultation on a Code of Governance for housing associations in Wales. Our response provides general comments on the role of the code and its content, and specific comments on areas where we would like to see amendments. General comments 3. Effective, competent governance of any housing association by an appropriately skilled board with full cognisance of key risks to the organisation and the sector as a whole is fundamental to its financial viability and its ability to deliver excellent services to its customers. 4. We welcome the proposed Code of Governance for Welsh housing associations, provided the regulator is absolutely firm in the expectation that it will be adhered to, and the principle of comply or explain (amplified in the attached 2 July letter to association chief executives) is fully understood and consistently applied across the sector. 5. Adherence to the code will be fundamental to ensuring funder confidence in governance standards and, through this, should provide comfort and confidence that issues which could impact financial viability are capable of effective resolution by boards before they become critical. 6. As a result, we would like clarification about what the regulator will do if the code is breached or if there is inadequate explanation for non-compliance in any areas. We expect the regulator to demonstrate robust action in holding associations to account in relation to code requirements. Failure to do so from the outset could undermine the value of the code. Specific comments Citizen-centred governance 7. We acknowledge that the code, as with the previous charter, is informed by the Welsh Government s citizen-centred governance principles. In rooting the proposed code in these principles, we think there is a danger of losing sight of the fact that Welsh associations are fundamentally private businesses which serve a public function. 8. We would like to see explicit acknowledgement of this in the code so that it is clear, particularly to tenants and their representative bodies, that their landlords are not public authorities and that tenants expectations will be set and managed accordingly. As such, the references to putting the citizen first and living public service values should be qualified along these lines: Putting the citizen first: An additional qualifying sentence should be added: For housing associations, their citizens are their immediate tenant customers, and those in the wider community to whom they might owe a contractual or other legal duty. Living public service values: An additional first sentence should be added, and text amended: Housing associations are private businesses providing a public function. They are value-driven organisations, rooted in Nolan principles, demonstrating high standards of public life address North West Wing Bush House Aldwych London WC2B 4PJ telephone fax website

2 Achieving value for money: insert and private funders between taxpayers and resources to read Looking after taxpayers and private funders resources, and using them carefully to deliver high quality, efficient services which meet the needs of their tenant customers. The Board s roles and responsibilities 9. Citizens needs, aspirations and experiences: References in A1, A1.1 and A1.2 to boards being required to understand the needs, aspirations and experiences of citizens they serve are too broad and open-ended. Similarly, the requirement for boards to receive and discuss feedback about what citizens want is too broad. The context of associations as private businesses serving their tenant customers is lacking, as is the legitimate need for boards to manage their customers reasonable expectations. 10. We would like to see references to aspirations and experiences removed, and for needs to be those which have been identified. References to citizens should be changed to customers. This would bring consistency with A8.2, which refers to services to tenants, and more accurately reflects what associations do and who their customers are. We suggest the text be changed to: A1 Boards must ensure that their organisations operate with a sound understanding of their customers identified needs. A.1.1 Boards must have a clear picture of who their customers are, and their needs. A.1.2 Boards must ensure relevant key feedback from their customers is provided at board level, where appropriate, so that this can inform decisions on current and future services. 11. In A4 and A4.1 on group structures (parents and subsidiaries), the code should reflect the need for parent boards to be fully aware of and understand where risk lies in subsidiary businesses and the extent to which risks and liabilities of a subsidiary could impact on assets of the parent. 12. We strongly suggest that CHC ensure the code reflects key learning points from the Cosmopolitan near-insolvency case in England, as these are highly pertinent in this area. We suggest the text in A4.1 be changed: At the first bullet, insert relevant between meeting and statutory to read and satisfy itself that all group members are meeting relevant statutory and regulatory requirements Insert a new second bullet to read Have and maintain a full understanding and knowledge of risk in subsidiary businesses, and the extent to which risks and liabilities of a subsidiary could impact on the assets of the parent. Insert a new third bullet to read Be capable of putting in place arrangements to protect the assets of the parent from liability in the event of default by the subsidiary. 13. In A.5, we would like to see explicit reference to the board s responsibility to ensure the organisation meets its business plan obligations and commitments. We suggest the text be changed: A.5 Boards must assume ultimate responsibility for ensuring the organisation meets its business plan obligations and commitments. This responsibility includes developing positive and constructive relationships with key stakeholders, including funders, partners and the regulator. Board composition, recruitment, renewal and review 14. On the maximum number of board members, B1.2 refers to no more than 15 members. The maximum number in England is 12. We are keen to understand why a higher number should apply in a smaller sector. In relation to maximum terms of office, the proposal is to limit this to two or three terms covering no more than nine years for non-executive members. We welcome the clarification provided in the attached 5 August letter from CHC and the regulator to sector chief executives. The code should be adjusted to reflect this. Openness and accountability 15. In E1, the text should be amended to reflect our earlier comments about citizens :

3 E1 Boards must demonstrate accountability to their customers, shareholders and wider stakeholders. 16. In E1.1, the text should be amended to reflect performance against agreed published plans and targets: E1.1 Boards must publish an annual report of the organisation s activities and performance against agreed published plans and targets. 17. In E1.2, the text should be amended to reflect our earlier comments about citizens : E1.2 Boards must ensure that the organisation s communications with its customers, shareholders and wider stakeholders are appropriate and accessible and offer, where appropriate, opportunities for customers to provide feedback which could inform service delivery and development. 18. In E2.3, the text should be amended to provide clearer focus: E2.3 Effective communication, reporting and feedback mechanisms must be in place with relevant key stakeholders. 19. In E2.5, the requirement for publication and access to information is unnecessarily wide, and should be amended: E2.5 Boards must ensure performance information is regularly published and easily accessible. 20. In E3, the text should be amended to reference the guidance on notifiable events being developed by the regulator: E3 Boards must ensure the regulator is notified of significant events, in accordance with the regulator s guidance on this 21. In E3.2, the requirement should be to comply with relevant current legislation 22. In E4.5, Large and medium-sized organisations should be defined in the context of the Welsh housing association sector as a whole. 23. In E5, the reference to audit going beyond traditional financial audit to all aspects of the organisation s work is too wide and open-ended, and should be removed or qualified to provide reasonable parameters within which audit should function. Appendix 24. In Essential Functions of the Board, we would like to see explicit reference as the first point, to the board being ultimately responsible at all times for safeguarding and maintaining the financial viability of the organisation, meeting its business plan obligations and obligations to its funders. Contact 25. Please contact John.Marr@cml.org.uk if you would like to discuss this response further. 22 August, 2014

4 2 July 2014 Dear Chief Executive Code of Governance: the principle of comply or explain We thought it might be helpful to provide some clarification on one of the main tenets of the code of governance, the principle of comply or explain and how the Regulator would use the code of governance. One of the defining principles of a code of governance, be it the Community Housing Cymru s sector specific one, or another recognised code such as the UK Corporate Governance Code, is the need to comply with the code or explain any areas of noncompliance. One either complies with the principles and provisions and is able to demonstrate compliance or one provides an explanation as to why there is no compliance and that non-compliance is appropriate. This may include an explanation around when compliance will be achieved, or a valid reason why compliance with a specific element of the code is not necessary. In general, any noncompliance will be against the provisions rather than the overarching principles. The Regulator expects all housing associations to comply with the Code of Governance. Non-compliance, if backed up with an agreed process to achieve compliance or alternatively, a valid reason why compliance is not considered necessary may not necessarily lead to an adverse opinion, or regulatory action, in relation to governance by the Regulator. It will ultimately be up to the Regulator to decide if those reasons are adequate/valid. Taking board renewal as an example, while the contribution of experienced board members is vital, boards also need new members who can provide an independent challenge to long-standing practices and thinking. Maximum terms of office must be agreed and, where practical and for the best interests of the organisation, should comply with current best practice. To support board renewal, maximum terms of office should be two to three year terms, with an overall maximum period of board service, for non-executive board members, of no more than nine years. Having a maximum term of office for board members has been included in the CHC s code of governance. It is included to encourage a managed turnover of board members; to maintain a freshness of thought and views at the strategic level of the organisation, so that the board adds value to the organisation and acts in its best interest as the organisation develops. The maximum term of nine years, which has been included in the code of governance, provides associations with the time and opportunity to adopt this part of the code, to ensure stability and good

5 governance. Whether associations, in adopting the code, set the clock at zero for existing board members or not, boards will be allowed time to put in place managed succession arrangements to ensure consistency is maintained at board level, as well as the independent thought and skills that the organisation needs. We hope this letter clarifies issues for organisations in relation to the application of the principle of comply or explain and how the Regulator would use the code of governance. If there are any queries on any aspect, please contact Amanda or Darshan. Yours sincerely, Amanda Oliver Head of Policy and Research Community Housing Cymru Darshan Singh Matharoo Head of Regulation Welsh Government Tel: Tel: Cc: Regulatory Board for Wales Tenant Advisory Panel Regulatory Advisory Group Finance Advisory Group Learning and Development Advisory Group

6 5 August 2014 Dear Chief Executive Code of Governance: the principle of comply or explain You may recall the attached joint letter sent to the sector by Community Housing Cymru and the Welsh Government on 3 July. Since the letter was sent, we have received a number of queries about the implementation of maximum terms of office and, more specifically, when the clock starts. The intention is to provide associations with sufficient flexibility to ensure that there is no risk to the business with implementing 9 year fixed-terms and that there is effective succession planning in place for boards. In the letter, there is a reference to associations that may consider setting the clock at zero for existing Board members. To clarify, this does not mean that Board members that have served more than 9 years should serve for another nine years. The purpose of the fixed-term is to allow the membership of boards to be refreshed. To set the clock at zero would simply delay the effect, and benefits coming into play. The expectation is that their last term will be served after three years any variations on this will need to be explained. It is also intended that board members in group structures, which have served maximum terms, will not be appointed to another board in the Group. In addition, it might be helpful if we take this opportunity to clarify the position in relation to Schedule 1. One of the prominent subjects of discussion between CHC and the Welsh Government is remuneration of board members. Schedule 1, in its current form, does not prevent this as the change could be introduced through revision to the circular RSL 005/10 on permitted payments and benefits and making a new determination in relation to the value of that payment or benefit that should not be exceeded. The Welsh Government will be issuing a consultation document on this subject. It is hoped that the consultation document will be issued later this month. We recognise that there are other subjects of interest to associations including Executives on Boards, staff being shareholders and Board diversity. Current developments, such as, Code of Governance are relevant to these issues, which are the subject of a continuing dialogue between CHC and the Welsh Government.

7 We hope this letter clarifies issues for organisations in relation to the application of the principle of comply or explain and how the Regulator would use the code of governance. If there are any queries on any aspect, please contact Amanda or Darshan. Yours sincerely Amanda Oliver Head of Policy and Research Community Housing Cymru Darshan Singh Matharoo Head of Regulation Welsh Government Tel: Tel: Cc: Regulatory Board for Wales Tenant Advisory Panel Regulatory Advisory Group Finance Advisory Group Learning and Development Advisory Group