The Cave Review of Social Housing Regulation: Terms of Reference

Aims and outputs of the Review

1. The Review is asked to:

establish a clear set of objectives for the regulation of social housing to underpin any new regulatory system
present a limited number of options for reform of the regulatory system with a full assessment of the pros and cons of each
make a clear recommendation for a preferred option for a reformed regulatory system and describes how that regulatory system would operate in practice, including its detailed legal and financial implications
allocate regulatory roles/make recommendations as to the institutional arrangements that would best support such a system

2. Any system recommended by the Review will need to:

ensure a clear system of accountability and responsiveness to tenants
be robust
be able to adapt to future policy demands
be capable of dealing with different organisational forms as the future market develops
minimise regulatory burdens to encourage innovation and encourage new providers and increased investment into the social housing sector

and
not impede the future flow of private finance into the Registered Social Landlord sector

Timing

3. The review is asked to make recommendations to Ministers by Spring 2007.

Scope of the review

4. Although the Housing Corporation's powers apply only to registered housing associations, the review should be open to considering systems that encompass the whole social housing "domain".

5. The review should also cover the inspection function currently carried out by the Audit Commission as part of the overall regulatory system.

6. In doing its work, the review should recognise that different social housing providers have different constitutional bases. So for example, certain regulatory approaches that were appropriate to housing associations as non-profit making corporate bodies, might not be appropriate for local authorities or Arms Length Management Organisations (ALMOs) which are subject to democratic oversight.

7. In considering the regulatory system, it may be useful to break down:

the types of social housing activity (development, management, and ownership of stock)

and
regulatory activity (tenant/ consumer regulation, grant compliance, fiscal/ financial regulation, constitutional/ governance regulation) as different regulatory activities might apply to different social housing organisations and/or activities

8. All possible regulatory tools should be considered. The review should not confine itself to conventional regulatory tools such as registration, intervention on boards, but should be open to wider tools such as contractual regulation or incentive based approaches.

Background - historic regulatory functions and recent changes

1. The Government is committed to improving standards of regulation. Through the work of the Better Regulation Task Force and Commission, the Government has established key principles to guide the development of all public regulatory systems, including greater proportionality and transparency.

2. The Housing Corporation has regulated the housing association sector since 1974. The model of regulation is one of registration and supervision. Social landlords registered with the Corporation are eligible to receive public grant and are subject to oversight through a regulatory code with statutory underpinnings (now defined in the Housing Act 1996.) Failure to comply with the regulatory code may lead to the Corporation's use of statutory powers of intervention to protect the interests of tenant and tax-payer.

3. In regulating associations, the Corporation is concerned with viability, governance, management and, where relevant, development. It operates a transparent traffic-light system in grading associations, published as a Housing Corporation Assessment (HCA.)

4. The Corporation's regulatory role was last reviewed in the Financial, Management and Policy Review that took place in 2000 and following this, the current system based on compliance with the 'regulatory code' was established. Although there have been some significant policy changes, including the recent move to a 'risk-based' system of regulation, the changes that have taken place to date have to a large extent been incremental, with no significant legislative change to the regulatory framework.

5. In assessing management standards the Corporation works with the Audit Commission as the statutory inspector of housing management provision across the social housing sector. The Audit Commission and Housing Corporation agree a programme of inspections each year and results from Audit Commission inspections feed into the Corporation's regulatory assessments. The inspection regime was introduced in 2002 with the intention to drive improvements in service delivery. Initially carried out by the Housing Corporation, this function was transferred to the Audit Commission in 2003 to introduce a consistency of approach across all social housing providers.

6. Since 1974, the housing association sector has grown rapidly through a mix of new development and large scale stock transfer from local authorities. Today, the sector consists of about two million homes and is growing at an average rate of about 100,000 homes a year.

7. In 1988 the Government moved to a funding model based upon the provision of capital grant as gap funding to enable subsidised rental levels. Housing associations are responsible for raising the remainder of necessary capital finance, mainly though private loans. At the present time, there is about £30 bn each of public and private funding embedded within RSL assets.

8. In 2004, the Government legislated to enable the Corporation to pay capital grant to organisations that were not registered bodies under the 1996 Act. From April this year the Corporation has started allocating grant to non-registered bodies. As a result, funded organisations are now operating under two regulatory systems - RSLs under the original registration system and non-RSLs under a contract and accreditation system.

Case for examining reform now

9. There are a range of factors which make it appropriate that a fundamental review of the regulatory system be conducted at the present time. In particular, Ministers have become increasingly concerned that there is insufficient clarity within the current system about the ways in which accountability and responsiveness to tenants can be ensured. This has strong links to the community and neighbourhood empowerment agenda which is a key strand of Government policy.

10. Following the Large Scale Voluntary Transfer (LSVT) process, more social housing is in the hands of RSLs than local authorities. This has significant implications for policy-makers in central Government and for local authorities in how they fulfil their strategic housing role. Significant changes to the structure of the RSL sector have also occurred since the regulatory system was developed and in particular this has led to the increasing stratification of the sector, in particular by mergers. At one end of the sector there are 1500 small community based RSLs with less than 250 units, while at the other end there are national bodies with large assets and turnover. Ministers are concerned that associations should stay connected to the communities in which they operate.

11. The LSVT process means that in some areas a particular housing association may be the dominant landlord of both the social housing stock and the community as a whole. This implies a wider role and responsibility of the RSL than arise through a simple landlord function.

12. A mixed economy for the provision and management of new social housing is developing following the introduction of the new powers in the Housing Act 2004. RSLs and non RSLs are subject to different levers under this system, while the Government is keen to increase the role of private developers in providing affordable housing to bring innovation and a degree of competition for grant with traditional providers.

13. There is now also a growing awareness of the significant level of unused RSL development and financial capacity and Government would like to utilise this to contribute to the provision of affordable housing. This is in the context of a drive for efficiency and value for money provided by RSLs, particularly following the Gershon efficiency review.

14. More specifically Government is concerned that the Housing Corporation's mode of regulation on an organisational basis is outdated, and is not in line with a wider Government push for regulatory modernisation and relieving burdens on both public and private sector bodies.

15. Recent years have also seen the introduction of a range of overarching policy objectives for the whole social housing domain, including decent homes, rent restructuring, the Respect agenda and Choice Based Lettings. There are questions about whether the current system is the most effective/ appropriate means of delivering these and future policies.

16. Finally, we need to ensure that the independent status of the sector and in particular its private sector status for the purposes of national accounts is maintained and strengthened.

Context

17. There are two key reviews that the review will need to take into account. The first of these is the recent independent Review of Regulatory and Compliance requirements on RSLs, chaired by Sir Les Elton which was jointly commissioned by the Housing Corporation and Communities and Local Goverment last year. The focus of that review was upon reducing administrative burdens on the RSL sector within the constraints of the existing framework for regulation.

18. The second review is that of the Future of Social Housing currently being undertaken by Professor John Hills. This is due to report to the Secretary of State shortly.

19. There are also a range of broader contextual developments which will impact on the review to varying degrees, including:

the Local Government White Paper and the proposals to establish a Local Services Inspectorate
the Comprehensive Spending Review 2007 and the need to secure further efficiencies
proposals by the Law Commission for a single form of social tenure in their report Renting Homes
the Review of Housing and Regeneration Delivery Structures, which is examining whether there is a case for creating a new agency which merges the current functions of the Housing Corporation, English Partnerships and some Departmental functions
the Housing Revenue Account high performing self financing pilots
the establishment of a social housing inspectorate within the Audit Commission which operates across the whole social housing domain