THE RECOVERY OF CAPITAL GRANT

THE RECOVERY OF CAPITAL GRANT A consultation on proposals for a revised determination 2015 January 2015

Contents CONTEXT... 3 KEY PROPOSALS FOR CHANGE... 5 THE DETAIL ON AREAS FOR CONSIDERATION... 6 TIMETABLE... 11 KEY QUESTIONS AND HOW TO RESPOND... 12 CONSULTATION STATEMENT... 13 2

Context 1. The Housing and Regeneration Act 2008 (HRA 2008) established the concept of registered providers of social housing, which superseded that of registered social landlords (RSLs) (as provided for under the Housing Act 1996). The class of entities eligible to be registered providers has been expanded and now includes former RSLs (primarily housing associations), stock-holding local authorities and newly registering organisations that may be either non-profit or profit making registered providers. 1 2. The Homes and Communities Agency (the Agency) is able to recover capital grants paid pursuant to social housing under sections 32 to 34 of the HRA 2008 and antecedent legislation. 3. Sections 32 to 34 of the HRA 2008 together with the provisions of antecedent legislation require that the Agency should determine the events which would give rise to and the principles underpinning the exercise of the Agency's powers in relation to the recovery of capital grant. The circumstances, or relevant events, upon which grant is either recovered and repaid to the Agency or recycled by RSLs are currently set out in The Recovery of Capital Grants and Recycled Capital Grant Fund General Determination 2012 (the determination) and through the Agency s Affordable Housing Capital Funding Guide (the guide). Reference is made throughout this consultation to both the determination and the guide. Proposals adopted as a result of this consultation will result in the publication of a revised determination and consequential amendments to the recovery chapter of the guide. 4. Under the current determination, registered providers, registered prior to 1 April 2010 (ex-rsls), are able to recycle capital grant, paid (or treated as having been paid) whether as housing association grant, social housing grant or social housing assistance, under legislation (including but without limitation) the 1988 and 1996 Housing Acts, the Housing Associations Act 1985 and the HRA 2008, broadly for the purposes for specified in the guide. 5. However, the recycling provisions of the determination do not cover any of the wider classes of registered providers contemplated by the HRA 2008. This consultation (subject to its outcome) proposes to extend the scope of the determination to cover all classes of registered provider and to undertake a range of minor amendments to clarify points or codify existing custom and practice to ensure that no perceived gaps or lack of clarity exist. 6. Where a proposal is made to amend or otherwise alter the determination, the Agency is obliged, by section 34 of the HRA 2008, to consult with the social housing regulator and such other persons as it considers appropriate. This includes, in particular, such bodies appearing to represent the interests of registered providers of social housing. 7. This consultation is concerned with sections 32 and 33 of the HRA 2008 under which the Agency may recover social housing assistance given under section 19 of the HRA 2008 and with the provisions of antecedent 1 This document uses throughout the terms profit making registered provider and non-profit registered provider to refer to the two types of private registered provider designated in the 2008 Housing and Regeneration Act. 3

legislation relating to the recovery of capital grant by the Agency and its predecessor bodies. This consultation is directed at all recipients of social housing assistance (and previous forms of capital grant) and, for the purposes of section 34(4) of the HRA 2008, the Agency is consulting such bodies appearing to it to represent the interests of social landlords. Questions for consideration are set out within the key proposals for change section of this consultation and are summarised at the end of this paper. 4

Key proposals for change 8. The proposals being brought forward in this consultation paper are a consequence of: a. changes that have arisen since the enactment of the HRA 2008 and the advent of the register of social housing providers in April 2010, b. the recent consultation on the regulatory framework by the social housing regulator with respect to profit making private registered providers disposing of grant funded social housing acquired from non-profit registered providers, c. the devolution of housing and regeneration responsibilities to the Greater London Authority which happened in April 2012, d. amendments required to clarify existing requirements or to codify current custom and practice. 9. There are two principal areas (I-II below) that are in scope for change and three separate points of clarification (III-V below), which this consultation proposes and invites views upon from interested parties. These are set out in summary below, and in greater detail, including the context for the proposal, in the sections which follow; Summary of principal areas for change I. To extend the scope of the determination to cover all classes of registered provider, including allowing the recycling of grant. II. To remove references to the Greater London Authority and Greater London from the determination. Summary of points for clarification III. IV. To clarify the Agency s requirements for registered providers, to first consult with the Agency and to seek its consent where it is proposed to write off grant in accordance with the limited circumstances described in the guide. To confirm that: a) transfers of historically stock from non-profit registered providers to profit making registered providers does not trigger recovery or recycling on the part of the transferor (ie so that the grant travels with the stock); b) if the stock is subsequently disposed of by the profit making registered provider, they will be required to place the net proceeds from sale separately in a disposal proceeds fund subject to proposed changes by the social housing regulator to the regulatory framework. 2 V. To clarify the Agency s requirements for the reporting of registered providers outline plans to utilise their recycled capital grant fund. 2 It should be noted that existing recovery arrangements for unregistered bodies such as house builders will remain in accordance with the provisions of the relevant grant agreement. 5

The detail on areas for consideration I) To extend the scope of the determination to cover all classes of registered provider, including allowing the recycling of grant. 10. The context for this proposed change is that the class of entities eligible to be registered providers has been expanded and now includes former RSLs (primarily housing associations), stock-holding local authorities and newly registering organisations that may be classified as either non-profit or profit making registered providers. 11. We therefore propose that the scope of the determination should be broadened to include all registered providers so that standardised recovery procedures and processes will apply to all registered providers irrespective of the date of registration. This means that the current definition of registered social landlord, included in the 2012 determination, A body that is registered to the Housing Corporation under section 3 of the Housing Act 1996, is proposed to be replaced by the definition of registered providers given in the Housing and Regeneration Act 2008. 12. This will have the effect of ensuring that all registered providers would in future be obliged to conform to all of the requirements for recovery and recycling as specified through the relevant events in the determination and the guide. In particular, all registered providers will in future be able to operate a recycled capital grant fund in accordance with the provisions of a revised determination and the guide. 13. The permitted uses to which recycled grant can be put are set out through the Agency s guide. All providers exercising a recycled capital grant fund are required to account back to the Agency annually through its annual IMS Recycled Capital Grant Fund return. Separately, registered providers must also declare their recycled capital grant fund balances to the regulator through submitting their audited annual accounts. 14. The Agency s objects include to improve the supply of housing in England. In addition, the social housing regulator s statutory objectives include to support the provision of social housing and to ensure that value for money is obtained from public investment in social housing. We therefore want to be sure that grant is adequately protected following any alterations to the scope of the determination. 15. Whilst the Agency wishes to minimise differences in approach to the recovery and recycling of grant between classes of registered providers, we are at the same time mindful of our objects to improve the supply of housing. 16. Our proposals to extend recycling are intended to cover all registered providers. However, we propose some distinctions in the treatment for two classes, namely, local authority registered providers and profit making private registered providers, which as well as being covered by the determination will also be set out in contractual arrangements. Local authority registered providers 6

17. We will make provision by way of the determination for local authority registered providers to recycle grant. The intention will be to set out in our contractual terms the need for local authorities to be able to account for and report separately on the operation of a recycled capital grant fund, recognising that they are not able to hypothecate and ring-fence recovered grant. Profit making registered providers 18. Through this consultation we set out 3 separate approaches for profit making registered providers and the recycling of grant. Our preference is for option 2, which is in line with our approach to contractual requirements for profit making registered providers that received grant funding. The options for consultation are as follows: Option 1 19. To permit profit making registered providers to recycle new grant funding, following a relevant event, at historical value only. This is in line with all other classes of provider. The risks of this approach are that profit making registered providers might choose to dispose of assets to generate uplift for distribution to shareholders as profit, and that historical grant is unlikely to be sufficient to re-provide social housing, resulting in a net loss of social housing. Non-profit registered providers generally reinvest significant proportions of their surpluses in the provision of new supply, in line with their objects. Option 2 20. To put in place a requirement on profit making registered providers to recycle grant plus a proportion of uplift based on house price inflation following any relevant event that triggers recycling. This is in line with our approach to contractual arrangements and provides a balance between allowing recycling at historical grant only and requiring all sales proceeds to be reinvested in new supply. It recognises that grant will have contributed to the initial creation of the asset, thereby enabling an uplift in value to be generated. It is also more closely aligned to the approach of non-profit registered providers who apply additional resources to delivery of new supply, and is therefore more likely to mitigate a reduction in social housing. This is the Agency s preferred option. For the avoidance of doubt, falls in house prices will not lead to a reduction in the historical grant to be recycled, other than in the limited circumstances set out in the guide. Option 3 21. To require profit making registered providers to recycle all sales proceeds (net of expenses) into the recycled capital grant fund. This is in line with the regulator s proposed approach that all net proceeds from sales of social housing acquired from the non-profit sector, must show separately in a disposal proceeds fund and used for social housing purposes. 1) Do you agree that the scope of the determination should be broadened to allow recycling of grant in accordance with the principles set out in the determination and the guide to include all registered providers? 7

2) Do you have a preference for any of the stated options for handling recycling by profit making registered providers? If so, please state which it is and why. 22. If the proposals are adopted this will mean that all registered providers which operate a recycled capital grant fund will be obliged to report annually to the Agency via its Investment Management System (IMS) to account for the inputs ie grant placed into the fund subsequent to relevant events and withdrawals ie expenditure from the fund in line with priority uses, and/or permitted purposes (the Agency s agreement is needed for permitted purposes). II) Remove reference to the Greater London Authority and Greater London from the determination 23. Since the devolution of housing and regeneration powers from the Homes and Communities Agency to the Greater London Authority (GLA) in London, the GLA has continued to rely upon the Agency s determination and guide in order to recover capital grant and to define the events and circumstances upon which capital grant will be recovered or recycled by ex-rsl registered providers. The GLA has the power under section 333ZE (1) of the Greater London Authority Act 1999, to make a determination governing the recovery of grant within Greater London. In 2012, a set of revisions to the 2006 determination was put in place to clarify that the GLA would to continue to rely upon the Agency s determination in lieu of having its own determination in place at that time. 24. The Homes and Communities Agency is therefore proposing to restrict the geographic scope of its revised determination to cover its grant funding programmes in England outside of Greater London. 25. As a consequence of the introduction of separate determinations, we will also update the rules and requirements set out in the Agency s guide and remove reference to the GLA and Greater London. The GLA will put in place its own arrangements for Greater London. Consultees should refer to the GLA s website for details. 26. Providers operating across England and Greater London will continue to be obliged to separately account for and report on their in-london and out-of- London recycled capital grant funds. Providers operating across England and Greater London will be subject to the rules and requirements of (a) the Agency s determination for areas outside of Greater London and (b) the GLA s determination within Greater London. 3. Do you have any comments on proposals to remove reference to the GLA and within Greater London from an amended determination and thus reduce the geographical scope of the determination to cover all of England excluding Greater London? III) Write off of historical grant 8

27. Under certain circumstances such as where the grant liability exceeds the sales proceeds following a disposal of a grant funded property, registered providers may (subject to the terms of the guide) defer or (in exceptional circumstances affecting continued viability) write off the shortfall. Under present arrangements, there is some inconsistency about the requirement to seek the Agency s prior approval for ex-rsls to write off some shortfalls within the limited circumstance allowed in the guide. This is inconsistent with the Agency s requirements for the re-investment of recycled capital grant, where the Agency s prior approval for re-investment is required for all permitted purposes, aside from the stated priority uses for recycled capital grant. 28. This consultation proposes that registered providers who propose to write off capital grant in the limited circumstances outlined in the guide must first consult with the Homes and Communities Agency and obtain its prior agreement to the proposed write off. Registered providers will be expected to demonstrate why financial hardship would result if they are not able to write off the grant. If agreement is secured from the Agency, ultimately the action of writing off grant remains with registered providers. 3 This is consistent with our existing procedure pertaining to grant write off published in the guide. 4. Do you have comments on the clarification that registered providers must consult with the Homes and Communities Agency in advance of writing off historical grant? IV) Profit making registered providers 29. The social housing regulator has recently set out proposed changes to its framework for the regulation of the social housing sector. Section 177 of the HRA 2008 gives the social housing regulator the power to require that private registered providers account separately for net proceeds of specific types of disposal and to show these in a disposal proceeds fund. The regulator is proposing using section 177 to require that when profit making registered providers acquire and then later dispose of stock which was previously held by a non-profit registered provider or local authority registered provider, they must show the net proceeds in a disposal proceeds fund. Sums in the disposal proceeds fund will be restricted to use for social housing purposes as directed by the regulator. 30. The Agency is proposing to conform to this approach and whilst profit making registered providers will be able to receive grant funded affordable housing with the grant intact, should a subsequent relevant occur, the grant sitting in the properties would be included within the net proceeds separately shown in a disposal proceeds fund. Although this requirement is linked to the proposals from the regulator with regard to profit making registered providers, it sits separately from them. The Agency will take into consideration the regulator s detailed requirements on the treatment of net proceeds from the sale of acquired grant funded social housing stock when published and if appropriate may seek to revisit this proposition. 3 The Agency itself is not able to write off grant. Only organisations themselves can write off assets and liabilities shown in their accounts; that is why it is for registered providers to decide whether or not to write off amounts. 9

5. Do you have any comments on the confirmation that profit making registered providers will be able to acquire grant funded affordable housing with the historical grant intact? 6. Do you have any comments on the clarification that where profit making providers have acquired grant funded stock and then a subsequent relevant event occurs that the grant should be paid into their Disposal Proceeds Fund? V) Administration of recycled capital grant funds 31. The 2012 determination states at paragraph 17 that there are circumstances under which the Agency may revoke the option of applying or appropriating capital grants through the recycled capital grant fund. 32. Currently registered providers (ex-registered social landlords) must demonstrate that the administration of their funds conform to the Agency s requirements through the annual Investment Management System (IMS) return. Through the IMS return, registered providers (ex-registered social landlords) account back to the Agency for inputs and withdrawals from their funds. Annual reporting by registered providers (ex-registered social landlords) provides assurance that funds are being administered transparently. 33. The determination states that the Corporation [the Agency] will from time to time publish the requirements in respect of the administration of the recycled capital grant funds. Through the publication of this consultation, the Agency wishes to clarify that in future all registered providers will be expected to have clear plans in place for the utilisation of their recycled capital grant fund in line with the Agency s priorities and permitted uses. In the absence of clear plans set out in annual IMS returns, then the Agency will continue to reserve the right to recover sums allocated to the registered provider's recycled capital grant fund. 34. The Agency expects these clear plans for re-investment to conform to the requirements set out in the guide in the recycled capital grant fund administration chapter at section 5.9.4 Accounting Arrangements for Recycled Capital Grant Fund. 4 7. Do you have any views on the Agency s clarification that providers operating a recycled capital grant fund should set out their clear plans for the reinvestment of recycled grant as part of the annual review process in IMS? 4 http://cfg.homesandcommunities.co.uk/cfg?page_id=5721&page=133 10

Timetable 36. Our aim is to put in place a new general determination that will apply prospectively from 1 st April 2015, to coincide with the start of the 2015-18 Affordable Homes Programme period. This timetable is challenging and we recognise that we are time constrained. Given that the proposals are responding to changes in the operating environment and clarifying and codifying existing practice, we are proposing to hold a short consultation of 4 weeks for providers and their representative bodies to consider these and express their views. Table 2: Key milestone dates for this consultation Milestone event date 4 week consultation period 29 January 26 February 2015 Deadline for receipt of responses Midday 26 February 2015 Publication of consultation responses Early March 2015 Analysis of consultation Early March 2015 Sign off revised determination by Secretary of State End of March 2015 Implementation 1 April 2015 Publication of the determination and revised Recovery Chapter in the guide. 1 April 2015 11

Key questions and how to respond 37. We have outlined below the key questions that we have posed in our key proposals for change section. There is no requirement to answer all of the questions to submit a response. Q1. Do you agree that the scope of the determination should be broadened to allow recycling of grant in accordance with the principles set out in the determination and the guide to include all registered providers? Q2. Do you have a preference for any of the stated options for handling recycling by profit making registered providers? If so, please state which it is and why. Q3. Do you have comments arising on the proposal to remove reference to the GLA and within Greater London from an amended determination and thus reduce the geographical scope of the determination to cover all of England excluding Greater London? Q4. Do you have comments on the clarification that registered providers must consult with the Homes and Communities Agency in advance of writing off historical grant? Q5. Do you have any comments on the confirmation that profit making registered providers will be able to acquire grant funded affordable housing with the historical grant intact? Q6. Do you have any comments on the clarification that where profit making providers have acquired grant funded stock and then a subsequent relevant event occurs that the grant should be paid into their disposal proceeds fund? Q7. Do you have any views on the Agency s clarification that providers operating a recycled capital grant fund should set out their clear plans for the reinvestment of recycled grant as part of the annual review process in IMS? 38. Responses should be made by midday26 February 2015 and can be sent in writing to our address below or by email to RCGF2015@hca.gsi.gov.uk Recovery of Capital Grant consultation Homes and Communities Agency Fry Building 2 Marsham Street London SW1P 4DF 39. The Agency is able to provide literature in alternative formats including large print, braille and audio. 12

Consultation statement 40. Alongside the publication of this consultation document, the Homes and Communities Agency has a statutory duty to consult with the regulator of social housing and such other persons as it considers appropriate. We will engage in these discussions through meetings with registered providers and their representative bodies. 41. Upon the closure of the consultation we will consider the views received before seeking final approval to proceed through Agency s governance structures and ultimately seeking sign off for an amended determination from the Secretary of State for Communities and Local Government. 42. We will publish all written responses shortly after the closure of the consultation. 43. The Homes and Communities Agency is subject to the Freedom of Information Act (FOIA) and the Environmental Information Regulations 2004 (EIR). Therefore, information provided in response to this consultation may be made available in accordance with either statute. The Agency has a statutory obligation to respond to all requests for information. To inform our responses, we consult with third parties where applicable and appropriate. Additionally, you should indicate any areas of information that you believe are particularly sensitive when submitting your consultation response. 44. Confidentiality agreements are not binding under FIOA or EIR. 45. The Homes and Communities Agency will process your personal data in accordance with the Data Protection Act 1998 and the Data Protection Principles. 46. The Homes and Communities Agency (the Agency) is committed to equality and diversity. As a public body section 149 of the Equality Act 2010 imposes a legal duty on the Agency that requires us to have due regard to three elements. These are to: a. eliminate discrimination, harassment, victimisation and any other conduct that is prohibited by or under the Act b. advance equality of opportunity between persons who share a relevant protected characteristic* and persons who do not share it c. foster good relations between persons who share a relevant protected characteristic and persons who do not share it Do you believe that there are any equality issues relevant to this consultant that we need to consider in order to meet our obligations under section 149 of the Equality Act 2010? If yes, please: 1) state the specific nature of the issue and identify the specific equality characteristic(s) that you believe are relevant 2) set out any action the Agency should consider to mitigate any adverse impact on persons who have the protected characteristics 13

*The protected characteristics relevant include race, gender, disability, sexual orientation, religion and age, marriage and Civil Partnership. 47. The Homes and Communities Agency is mindful of its statutory equality duties under section 149 of the Equality Act 2010. This requires us to eliminate unlawful discrimination, harassment or victimisation, advance equality of opportunity and foster good relations. In support, the Agency has published its equalities strategy which sets out 9 equality objectives that we are working on to deliver. 48. The Agency will take a proportionate approach to its equality obligations and has identified no specific equalities implications for this consultation. However, based on responses to this consultation, the Agency reserves the right to revisit these matters if new information comes to light. 14

homesandcommunities.co.uk mail@homesandcommunities.co.uk 0300 1234 500 Homes and Communities Agency Fry Building 2 Marsham Street London SW1P 4DF RCGF2015@hca.gsi.gov.uk The Homes and Communities Agency is committed to providing accessible information where possible and we will consider providing information in alternative formats such as large print, audio and Braille upon request. Publication date: January 2015