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Legislative Reform (Regulator of Social Housing) (England) Order 2018

Volume 791: debated on Wednesday 23 May 2018

Motion to Approve

Moved by

That the draft Order laid before the House on 28 February be approved.

Relevant document: 18th Report from the Regulatory Reform Committee

My Lords, the draft order we are considering today is, I hope, a largely uncontroversial one. Indeed, it passed through the other place without a debate. It seeks to establish the Regulator of Social Housing as a stand-alone body. It implements the recommendation in the Tailored Review of the Homes and Communities Agency to establish a stand-alone regulatory body for social housing. In so doing, it removes any possibility of a potential conflict by separating out the regulatory function from the organisation, which is also responsible for investment. It will not, however, change how registered providers of social housing are regulated or how they operate on a day-to-day basis.

That is not to say that this change is insignificant. The change will ensure the continuation of independent and robust regulation of the social housing sector. At the moment, the regulation of social housing is the responsibility of the regulation committee, a statutory committee of the Homes and Communities Agency. While the organisation responsible for undertaking this function refers to itself as the Regulator of Social Housing, it remains legally part of the Homes and Communities Agency. It is independent from government and is crucial in underpinning investor confidence in the social housing market.

In 2016, the then Department for Communities and Local Government conducted a tailored review of the Homes and Communities Agency. The review was forward-looking and focused on the challenges faced by the agency. In respect of regulation, the review found there was a compelling case for change of the regulator’s structure. In recent years, the Homes and Communities Agency has expanded into commercial investments. This makes the agency, in some cases, both a secured creditor and regulator of registered providers. This potential conflict of interest did not exist when the decision was made to incorporate social housing regulation within the Homes and Communities Agency as, at that time, the agency’s funding predominantly focused on grant-making.

I should make clear that existing governance arrangements and an operational “ethical wall” have ensured that information has not been inappropriately exchanged between the regulation and investment functions. However, the financial landscape of the sector continues to evolve and become more complex. Because of that, it becomes ever more important that the Homes and Communities Agency and the regulator are best positioned to adapt to such changes and that commercially sensitive information is safeguarded. Moreover, it is crucial that the regulator is perceived to be adept at handling such complexities, so as to uphold lender confidence.

The regulator’s role and functions are set out in the Housing and Regeneration Act 2008, as amended by the Localism Act 2011. As a result, changes to primary legislation are needed to deliver a stand-alone regulator. We have used the powers in Section 2 of the Legislative and Regulatory Reform Act 2006 to deliver these changes through a legislative reform order. The order ensures that social housing regulation is made more consistent with better regulation principles by providing for greater accountability and transparency for regulatory activities.

I should also make an important point about legislative reform orders. They are intended to be used either to reduce the overall burden of regulation or to ensure that regulation is carried out in a more transparent or proportionate manner. They cannot be used to create new, or vary existing, regulatory functions. That means the current provisions on the regulatory and enforcement powers of the regulator contained in Sections 192 to 269B of the Housing and Regeneration Act 2008 remain effectively unchanged by this legislative reform order. These provisions set out the regulatory framework, for example around the economic and consumer standards that can be set and how they are monitored. They also cover enforcement powers at the regulator’s disposal, for example, to impose penalties or to award compensation in the event of failure by a housing association. So—to anticipate points that noble Lords may wish to make—changes to how the sector is actually regulated are better considered as part of the forthcoming social housing Green Paper. What this legislation will do, however, is to put in place the arrangements for a robust and independent regulator ready to adapt to any policy changes that may arise from these reviews.

A crucial part of the process of delivering changes through a legislative reform order is that there is public consultation on both the changes proposed and the use of a legislative reform order to deliver them. The department conducted a consultation in early 2017. While the number of responses was relatively small, they were overwhelmingly in favour of the move, including from the sector and investors.

I turn briefly to the specifics of the LRO. In effect, this order reverses the changes made by the Localism Act 2011 and removes the regulator from the Homes and Communities Agency, thereby making it a stand-alone, independent body. The detailed provisions that do this are set out in Schedule 1 to the order. Part 1 of the schedule establishes the regulator and transfers functions from the HCA to the regulator. Part 2 makes amendments to other legislation consequent upon the creation of the regulator. Part 3 provides for the transfer of property, rights and liabilities from the HCA to the regulator. Finally, Part 4 of the schedule provides for transitional and savings provisions consequent upon the transfer of functions.

To conclude, the creation of a stand-alone Regulator of Social Housing is a necessary change that will ensure that the sector continues to be regulated effectively. This is essential if we are to ensure that the financial markets continue to have confidence in the sector and to allow housing associations to invest in providing the homes that we need. I commend this order to the House, and beg to move.

My Lords, the argument over whether the grant maker for social housing and the regulator for social housing should be the same government body has raged for 45 years. I was in the midst of the argument back in 1973, representing the housing associations as chief executive of the National Housing Federation. The Housing Corporation was being greatly enlarged by the Housing Act 1974; it had been created 10 years earlier, but only to promote cost rent and co-ownership housing. My federation concluded that that the Housing Corporation, as the body responsible for paying out housing association grants—which frequently covered 90% of the capital costs in order to keep rents low—should also be the body responsible for regulating these organisations. Regulation meant registering each housing association as fit and proper and then visiting it to monitor performance, ensure probity, and so on. These regulatory processes to ensure good governance were of critical importance to the funding agency before it could allocate substantial government subsidies to the fledgling housing associations. It was natural then for the grant-making and regulatory functions to be combined.

With the arrival of housing benefit—the personal subsidies to tenants—charging higher rents created fewer problems and the Housing Corporation could reduce grants somewhat without those on lower incomes having to be turned away. The Minister was Housing Minister at the time. When it fell to him to oversee cuts to the Housing Corporation’s grant making, he could declare, with some justification, “Let housing benefit take the strain”. Moreover, loans from the Housing Corporation became increasingly less relevant after the Housing Act 1988, under which the housing associations could borrow the money they needed on the private market. So the dominant funding rule of the Housing Corporation was changing.

Increasingly, the combination of funding and regulatory functions within the one agency looked less relevant, and the earlier requirement for combining the roles in one body was becoming strained. The Labour Government, with Yvette Cooper as Housing Minister, in 2007 appointed Professor Martin Cave from Warwick University to review the position. Professor Cave argued convincingly that these were two different roles, requiring different skills. Indeed, Cave pointed out the potential conflicts of interest if the funder and regulator were one and the same.

The result of the review was the Housing and Regeneration Act 2008, with two bodies: the Homes and Communities Agency, which took on the investment duties of the Housing Corporation, and the separate Tenant Services Authority, which was there to regulate housing associations, with an extended remit to cover local authority housing, too. However, the Tenant Services Agency was short lived. Its role in respect of the governance and financial regulation of housing associations passed back to the Homes and Communities Agency in 2012, when the Housing Minister, Grant Shapps, joined the fashion for reducing the number of quangos. Chinese walls were erected within the HCA to enable the one organisation to try to undertake the two separate functions. Staff and their overseeing boards have done well, but this was not a logical approach.

Today, we are back to the future, with the Homes and Communities Agency dividing into, on the one hand, Homes England—the investment side—helping to get more of the 300,000 new homes built, and, on the other hand, the new Regulator of Social Housing. This will avoid the potential problem of conflicting objectives between the funder, when it has invested in a housing association and wants to get the maximum return, and the regulator, when it may need to discipline, penalise or even close down that same housing association. The new arrangements will remove these tensions. They will allow Homes England to concentrate on the big job of supporting the provision of more, and more affordable, new homes. With a Green Paper on social housing due for publication later this year, they pave the way for the regulatory function to be refined and enhanced. It is surely time for history to repeat itself: the separation of functions, once again, must be right. I support the order.

My Lords, I remind the House that I am a vice-president of the Local Government Association. I thank the Minister for his explanation and the noble Lord, Lord Best, for reminding us of the history of this matter. We support the order to create a stand-alone regulatory authority. It seems a logical and necessary step, given the changed nature of the Homes and Communities Agency, now Homes England, and the potential conflict of interest that could arise if a housing association was in financial difficulty. It should not be a secured creditor of organisations that it regulates, and the regulatory framework should be robust and seen to be robust by third parties and private investors. There is strong public support for the proposals and, as a consequence, these proposals should command our support, too.

My Lords, I remind the House of my registered interest as a vice-president of the Local Government Association. The order before the House is one I support. I am grateful to the noble Lord, Lord Best, for reminding us of the history of this and of the bonfire of the quangos—I remember the debates we had in the House about that. Clearly, the phoenix has now risen from the fire and we are back where we started. I am very happy with that and with the explanation that the noble Lord has given us. I am happy to support the order.

My Lords, I will respond very briefly. I am very grateful to the noble Lord, Lord Best, for his nostalgic journey through the history of social housing, its regulation and funding. I pay tribute to the key role he has played in a variety of ways in the development of social housing and the role that he still plays today. If I may say so, he made the case for what is before the House even better than I did. I am grateful to both noble Lords who have spoken in this debate for their support.

Motion agreed.

Sitting suspended.