Meet the inspectors

There are few things more uncomfortable for a board member than your organisation being in serious difficulties. Happily, most never experience that discomfort - the overwhelming majority of the 2,200 registered social landlords perform well. But at any time over the last ten years there have been around 1 per cent of RSLs on the "serious concern" list of the corporation's registration and supervision committee - some for only a few months, others for several years.

What gave rise to the problems, how the corporation reacted and how the problems were resolved has never before been researched. Learning from problem cases is a first attempt to draw lessons from this panifully-accumulated experience, both for the corporation in how it regulates and for RSLs as to how they can avoid problems and how to deal with them if they arise.

A sample of 17 problem cases, some stretching back a number of years, was examined in order to include a range of RSL sizes and types. The corporation's headquarters and regional regulation files were made available so that a chronology of events could be prepared.

The case studies are anonymous for two reasons. First, we are interested in learning lessons, not in trying to apportion blames or rake over the past. Second, it would be unfair to name names without including everyone elses's perspective as well.

All types of problems were evident in the cases, but in the majority weaknesses in financial management were at least partly to blames. In terms of prevention, they offer many lessons. My personal selection of favourites would be:

• Securing and retaining quality managers (both at staff level and on boards) has to be worked at all the time. Few of the prpblem cases had effective senior management appraisal systems and virtually none had board appraisal arrangements. Larger boards seemed to fare less well.
  
• Internal audit is often not at a senior or independent enough level to counterbalance a "go-getting" management culture. Routine compliance checks are not enough.
  
• Development and maintenance remain the areas most vulnerable to alleged fraud or systems failures. The costs can be high and checking needs to be rigorous.

Two lessons stand out in terms of the approaches adopted by the RSLs to coping with serious problems:

• Seeking to minimise the seriousness of problems or giving limited co-operation to the corporation as regulator is like waving a red rag to a bull. The corporation invariably interpreted this as indicating that the RSL did not understand its problems and was not therefore likely to be capable of correcting them without drastic change.
  
• A regulator will invariably see problems in a wider context. A major failure of financial or development control is likely to be a symptom both of executive management weakness and a lack of effective board control. If an RSL does not recognise the link between problems and symptoms, then it will be in for a rough regulatory ride.

The longest list of lessons to be learned from these case studies are for the Housing Corporation as regulator. These have to be seen in context; regulatory systems have moved on apace since the resolution of many of these cases and particularly since the Housing Act 1996. The corporation sees the publication of this report as a key contribution to the debate about strengthening regulation and bringing a greater openness and transparency to a critical area of work.

My personal selection of lessons for the corporation includes:

• Reacting to events rather than seeking to shape them is the occupational hazard of regulation in every sector. Preparing for problems is much harder than closing stable doors after the horse has bolted.
  
• Many of the highest risk deals now being done by existing RSLs do not involve Social Housing Grant. As a result, they are often subject to minimal scrutiny by the corporation. There is a strong case for a redirection of regulatory resources.
  
• New transfer RSLs give the corporation an impossible "gatekeeper" role. At the point of registration you can't tell that something with no track record either definitely will or won't work. A probationary strategy is likely to be more effective.
  
• The full vulnerability of supported housing RSLs is yet to come. They are only the tip of an iceberg. Below the water is a larger mass of care agencies that are not RSLs. They are often in vulnerable and dependent relationships with RSLs and we suspect that this will be a serious cause of problems for the future.

One of the key lessons for the corporation is the obverse of the lesson for RSLs that they should co-operate with their regulator. The time and reulatory resources tied up in problem cases is generally in inverse proportion to the degree of co-operation that is secured. Securing co-operation should therefore be a core objective of regulatory intervention.

The case study style of the report enables you to draw your own conclusions.