Effective governance and risk management are key to viability – HCA publishes Sector Risk Profile

The context for social housing continues to change, meaning that providers need the skills and capacity to manage these risks effectively to ensure viability. This is the key message from the HCA’s second Sector Risk Profile, published 19th September. While the Regulator believes the sector to be in good financial health and should be able to manage risks, the publication is designed to raise awareness of the key risks facing the sector.

The Sector Risk Profile supports the Regulator’s role by communicating with the sector what it considers to be the biggest issues that could affect providers’ compliance with the Regulator’s economic standards.

The publication emphasises that strong governance and effective risk management underpin well run organisations and the HCA remains firmly committed to a co-regulatory approach, where boards and providers are responsible for managing their own businesses. Whilst it is for boards to manage their own risks, a key part of the Regulator’s economic regulation role is to gain assurance that boards are aware of and actively managing the risks that they face.

The full range of risks identified in the 2012 publication still apply. The operating context and strategic risks sections reflect the fact that there are a number of key risks the sector has always had to manage, including exposure to housing and financing markets. However, there are two areas where the scale and nature of the risks facing the sector are evolving particularly rapidly – the potential impact of welfare reform and the different risk profile of diverse activities.

The areas discussed in the publication include:

  • Asset related risks – including risks associated with development, diversification into other activities and exposure to the housing market
  • Liability related risks – including risks associated with existing debt, mark to market exposure and new forms of debt
  • Income related risks – including risks associated with Affordable Rents and Welfare Reform
  • Cost related risks – including risks associated with impact of component accounting, pension issues, differential inflation rates

The document also highlights that boards and providers must not only fully understand the risks they face, but be appropriately skilled to manage them – providers need to ensure that they have an appropriate strategy in place to ensure they have access to the expertise to constructively challenge and make sound business decisions.

Julian Ashby, Chair of the Regulation Committee said:

“We are highlighting some of the underlying issues affecting the sector and the ways in which providers can mitigate some of their risks and carry on complying with our economic standards.

“Whilst our Global Accounts show that the sector is in good financial health, it also faces some major challenges and risks. Boards need to understand the interaction between the various risks and their overall ‘portfolio’ impact.

“We have dealt with a number of cases where poor governance has led to ineffective risk management. This has resulted in boards receiving poor quality or incomplete information, when making key business decisions.

“They did not have sufficient skills to challenge or did not recognise the need for specialist or professional advice. Even when any resulting financial loss is minimal, there can be significant reputational damage either to the individual provider or the sector as a whole. Where the Regulator believes that organisations are sub optimal in their risk management, we will continue to reflect it in our judgements and take action if necessary.”

The Sector Risk Profile is being highlighted at the NHF Conference in Birmingham, setting the context for a breakfast briefing being held by Julian Ashby and HCA Director of Regulation Matthew Bailes on Friday 20 September.