The Regulatory Framework for Social Housing in England Governance and Financial Viability standard requirement: Governance Annual Assessment

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1 East Thames Group The Regulatory Framework for Social Housing in England Governance and Financial Viability standard requirement: Governance Annual Assessment 1 Context 1.1 Under the Regulatory Framework, Registered Providers are expected to ensure that they have effective governance arrangements that deliver their aims, objectives and intended outcomes for tenants and potential tenants in an effective, transparent and accountable manner. In particular Governance arrangements should ensure they: adhere to all relevant legislation; comply with their governing documents and all regulatory requirements; are accountable to tenants, the regulator and relevant stakeholders; safeguard taxpayers interests and the reputation of the sector, and have an effective risk management and internal controls assurance framework. 1.2 In 2012/13 following an enquiry made by the Homes and Communities Agency, the Group identified that 146 tenants were paying rents higher than the target rent at the date when rent convergence should have been completed (31 st March 2012 for general needs dwellings and 31 st March 2013 for supported housing dwellings). Following internal investigations, reviewed by an external firm of auditors, it was concluded that improvements were needed in the rent setting system and that the total amount that should be refunded to tenants was no more than 31k. This breach in the Regulatory Framework s Rent Standard resulted in the Group s Regulatory Judgement being downgraded to a G3 in April In addition to the issues raised around rents the regulatory judgement also picked up concerns around aspects of financial management including: procedures; systems; and working practices in the finance function 2 Improving our Regulatory Position 2.1 As part of remedying this breach of the Regulatory Framework and providing assurance to the Board, the Group has undertaken a number of actions aimed at tightening controls across the business. 2.2 Immediately the breach was notified Altair Limited was commissioned to undertake a full review of our compliance with the Regulatory Framework. In terms of the Governance & Financial Viability standard this concluded that the Group was nearly compliant. A number of actions were agreed arising from their review. A project team was established to oversee the delivery of identified actions and improvements and these have now been completed. 2.3 Separately the Group established two further projects aimed at improving our governance & internal controls and also our finance function. 3 Governance and Internal Controls Project 3.1 The project consists of 3 strands aimed at improving: 1

2 Internal Controls Governance Data Governance 3.2 Internal Controls strand: This strand included a number of components including: - Developing a new internal controls framework. This has been completed and the Group has adopted a new approach based on the COSO model and its 17 aligned principles. This new approach has been used in the formulation of our Internal Controls Statement for 2013/14. - Implementing a new internal controls assurance regime. This has been completed. A new framework document has been agreed. The new regime is based on responsibility for internal controls resting with Group Operations (consisting of Operational Directors and Assistant Directors) with peer challenge at Group Operations and Group Executive prior to an annual Internal Controls statement being signed off by Group Risk Management and Audit Committee and Board. This is seen as an important step in ensuring our controls are improved. - Linking risks and controls to our strategic plan. This is work in progress following development of our directorate plans for 2014/15. It is expected that this will be completed in autumn Reviewing our internal audit function. An external review of our internal audit service has been undertaken by the Chartered Institute of Internal Auditors. This has been completed and was reported to the Risk Management and Audit Committee in July 2014 along with an associated improvement plan. Longer term options for the service will also be reviewed later in the year. 3.2 Governance strand: This includes a number of components including: - Reviewing our code of governance and amending internal policies and procedures as appropriate. This has been completed (see below). - Reviewing and embedding a new regime for compliance with the HCA Regulatory Framework. A line by line review of the Framework has been undertaken and a new evidencing regime put in place. The result of this review has been considered by our Governance and Remuneration Committee and Board. The review concluded that the Group generally meets the standards required by the framework and there are no red rated areas. Some areas have been identified as areas of continuous improvement which need to be taken forward to strengthen our compliance. These actions will continue to be monitored over the course of the coming year. - Reviewing board delegations: This work has started and is expected to be completed by autumn Compliance Review of Articles and Rules. This has been completed. There were no non-compliance issues raised from the review. Our board induction and other processes have been strengthened to highlight provisions within the rules, for example specifically emphasising object clauses. - Review of Charity Commission requirements and best practice. Work on this element has not started as yet but is scheduled for completion within 2014/15. - Review of CQC governance requirements: Work on this element has not started as yet but is scheduled for completion within 2014/ Data Governance strand: This includes: - The introduction of spreadsheet protocols to ensure controls are effective. All spreadsheets have been reviewed and 125 have been identified as business 2

3 critical. A peer review of these including show me the controls verification meetings for 43 of the most important have begun. - Penetration testing of our systems to ensure these are secure. The initial stage of this has been completed with an external provider attempting to hack into our systems. Some improvements have been identified however none of these are deemed to be critical. - An external review of our card data environment. Work on this element is scheduled and due for completion in autumn Data integrity is a key business imperative. As a result of improvements to our rent setting regime; the introduction of a new HR system and the move to our new maintenance provider, a great deal of data cleansing has been undertaken across the Group. This improvement drive will continue as part of the new proposed IS Enterprise Architectures project. 4 Finance Improvement Project 4.1 This project aimed to strengthen procedures, systems and working practices within the finance function and particularly: - To establish a new staffing structure - To introduce a new chart of accounts - To implement and deliver the initial training of the recommended self- service portal and the budget tool. 4.2 Work in these areas has been completed. 5 Specific expectations of the Regulatory Framework 5.1 Requirement 1: Registered providers shall adopt and comply with an appropriate code of governance. Governance arrangements should establish and maintain clear roles, responsibilities and accountabilities for their board, chair and chief executive and ensure appropriate probity arrangements are in place. Areas of non-compliance with their chosen code of governance should be explained. Providers boards should assess the effectiveness of their governance arrangements at least once a year As of 1 st April 2014 the Group adopted the UK Corporate Governance Code as its Code of Governance. As part of its introduction a line by line review of compliance with the new code has been undertaken. As a result we have: - Introduced the role of Senior Independent Director on the Board - Reviewed board roles and responsibilities - Adopted a new policy around the appointment of board members - Adopted a new Board and Committee Member Remuneration policy - Amended our Corporate Governance Framework to reflect provisions within the code The Group is confident that it meets the main principles of the code but has identified some areas of best practice which need strengthening. An action plan is in place to ensure these are addressed during the course of the year. There are four specific provisions which are not applicable to the Group and in the spirit of the comply or explain principle these are published within our annual review. The areas of non-compliance relate to: Engagement with shareholders (East Thames Group does not have independent 3

4 shareholders) and The requirement to publish details of a company s going concern in 6 monthly accounts (the Group is not under any legal or regulatory obligation to publish 6 monthly accounts) The Group has also adopted the NHF Code of Conduct for Members. A thorough line by line review of compliance with the code has been undertaken and some minor areas have been identified which we are in the process of strengthening to ensure full compliance. An action plan is in place to address these during 2014/ The Group has undertaken an externally supported review of board remuneration in line with its commitment to review this periodically. A review was scheduled for 2013/14 following the governance changes implemented in The review has resulted in agreement to marginally increase levels of remuneration, however the Board have agreed not to implement these until such time as there is an improvement in our regulatory status. The Board & Committee Remuneration Policy has been updated in the light of the review and the new Code of Governance. Going forward the Governance and Remuneration Committee will consider whether there is a case for a reassessment of board remuneration every two years and, where this is agreed, an externally facilitated review will be undertaken The Board undertakes an annual review of its effectiveness and members review their collective and individual performance through 1-1 appraisal meetings with the Chair. On a three yearly basis this is supplemented by an externally led review with the next due in The Board feels that it has an appropriate relationship with the executive directors with this being one of challenge but also of support. As part of this: The Group Chair meets at least monthly with the Chief Executive. The Group Chair annually sets formal objectives for the Chief Executive and undertakes an annual appraisal. Subsidiary Chairs meet regularly with lead subsidiary directors. Committee Chairs meet regularly with lead officers Our integrated Board (made up of the boards of East Thames Group, East Homes, East Living and East Potential) has now been in place for three years. The current structure has advantages in terms of ring-fencing potential risks within separate legal entities, and thereby safeguarding social housing assets, whilst benefitting from this integrated board approach. During 2013/14 the Board agreed that this approach should be extended and as a result it has established: A Treasury Committee made up of the boards of East Treasury Limited, East Finance plc and East Regen Limited. A Development and Property Committee made up of the boards of East Place Limited, East Thames Partnership Limited and the former East Homes Development and Asset Management Committee As a result of the 2013 review the number of members on our boards and committees has been reduced to 17 as of 1 st April Our integrated board now has 10 members with each board member having a particular role or portfolio. As at September 2014 there will be two new people joining the Board: Larissa Joy Senior Independent Member who replaces Marianne Skelcher and chairs the Governance and Remuneration Committee; and James Scott Chair of Development and Property Committee who replaces 4

5 Shirley Watson. 5.2 Requirement 2: Registered providers shall ensure that they operate an appropriate strategic planning and control framework that identifies and manages risks to the delivery of their objectives and compliance with regulatory standards. Providers shall communicate in a timely manner with the regulator on material issues that relate to non-compliance with the economic standards As part of the Review of the Regulatory Framework undertaken in 2013 by Altair, it was concluded that the strategic planning process was well established in ETG, with a sound relationship between the setting of strategic aims and delivery through operational performance objectives. The approach to risk was found to be typical of organisations of the size and complexity of ETG As outlined above the Group has introduced a new Internal Controls Framework based on the COSO model. This has been successfully introduced and going forward will provide a more robust assessment of our internal controls. As part of the 2013/14 review no material weaknesses have been identified. However, areas of improvement have been identified and an action plan is in place to ensure these are captured and monitored. 5.3 Requirement 3: Registered providers shall provide accurate and timely returns to the regulator, including an annual report on any losses from fraudulent activity, in a form determined by the regulator The 2014 statement on Fraud and Theft losses was considered by Board in August This showed that 12 cases were reported during 2013/14, of which 9 directly affected the Group during the year at a cost to the Group of circa The annual Statistical Data Return for 2014 was submitted by the 31 st May deadline and quarterly financial surveys have been submitted to deadline The 2014 Financial Forecast Return (FFR) was submitted on 1 st July 2014, some 20 hours after the regulatory deadline. This breach of the Regulatory Framework has been taken extremely seriously. Following an internal investigation a number of improved controls have been put in place to ensure that the risk of such a breach in future is mitigated. 5.4 Requirement 4: Where there is a non-regulated element, the registered provider shall demonstrate to the regulator that it has in place effective mechanisms (such as commitments, undertakings or other assurances between itself and the non-regulated element) which ensure that: a. It is and will be able to comply with the regulator s standards and other regulatory requirements b. Its ability to meet the regulator's standards and other regulatory requirements is not and cannot be prejudiced by the activities or influence of the non-regulated element c. In the event that the registered provider does not or may not be able to comply with the regulator s standards or other regulatory requirements: i. The non-regulated element will give any necessary support or assistance to enable compliance, and ii. The registered provider has the ability to require the support or assistance of the non-regulated element to enable compliance The approach adopted by the Group in relation to compliance with the Regulatory Framework is group-wide so all entities are expected to comply with framework provisions. Intragroup Agreements were put in place as part of the move to the integrated board 5

6 structure in It has been identified that intragroup agreements for some other subsidiaries need to be refreshed and action is in hand to put up to date agreements in place. The Group has the right to appoint and remove board members of all subsidiaries All subsidiaries report to their respective parent boards through the receipt of minutes and detailed reports as appropriate Established criteria are in place for on lending within the Group including set requirements for free reserves within East Homes. Independent legal advice is obtained for each subsidiary considering a new financial arrangement. 6 Resident Involvement 6.1 The Group as a whole is committed to resident involvement evidenced in our Resident Involvement Strategy. As part of this an elected Housing Scrutiny Panel (HSP) is in place made up of 10 residents from across the neighbourhoods in which the Group operates. Whilst not part of the formal governance structure the Panel is charged with providing an independent and transparent assessment of our performance to the Board of East Homes. The HSP reports to the Customer Experience Committee (CEC), made up to the Chair of East Homes (who chairs the meeting), the Chairs of East Living and East Potential and three resident members. The areas which the CEC covers includes all customer facing elements: 7 Conclusion Tenancy management, including estate services; The management of anti-social behaviour; Resident involvement; Reactive and planned repairs and maintenance, Access and customer care, including complaints; Care and support services; and Social and Economic Regeneration Programmes. 7.1 The Group has made a conscious effort to improve governance practices during the year and has undertaken a range of activities aimed at strengthening our controls. As a result we have concluded that we meet the overall standards required within the HCA Regulatory Framework. We acknowledge that there are areas of continuous improvement which will strengthen our compliance further and these actions will continue to be monitored over the course of the coming year. 7.2 During the 2014/15 we will be reviewing the proposed changes to the Regulatory Framework and the recommendations from the Altair Inquiry into Cosmopolitan Housing Group to ensure we continue to comply with the Regulatory Framework and improve our governance standards more generally. 6