Cosmopolitan troubles a 'one off', says HCA
Published by 24publishing for 24dash.com in Housing and also in Central Government, Communities, Legal, Local Government
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The director of regulation at the Homes and Communities Agency believes the troubles at Cosmopolitan Housing Group (CHG) are a one off, but warns it’s not getting complacent in preparing for a future where providers diversify.
The north-west association – which only merged with Chester and District Housing Trust (CDHT) back in November to form a 14,000-home social landlord – has approached housing giant Riverside for merger talks after reportedly getting into difficulties with its borrowings.
But the director of regulation at the HCA, Matthew Bailes, is keen to stress that the troubles at Cosmopolitan – which are believed to be around its student homes business – are not representative of the wider sector.
Mr Bailes said: “I don’t think we’ve got grounds to think that there is any endemic problem here,” he said. “I think at this stage our view is that this is a one off where an organisation has got itself into a bit of a muddle through poor governance and management basically. It’s not a symptom of a wider disease.”
He says the regulator is always working with a handful of providers at any given time to help resolve issues they are facing but currently "no providers are in the same position as at CHG”.
Bailes said the HCA has been “fairly intensively engaged” with Cosmopolitan since early this calendar year on issues around its “compliance with the governance and viability standard”.
“We’ve been talking pretty intensively with Cosmopolitan since about February on a range of issues including the ones that are in the media now,” he said.
The troubles have led some to question the viability of the original merger between Cosmopolitan and CDHT and the regulator’s role within that. However, Bailes said it received assurances from both sets of boards that the due diligence had been carried out.
He said: “With regard to the CHA/CDHT merger, providers are independent bodies and it is not the regulator’s role to carry out due diligence on operational matters that are for boards to manage. In advance of the merger, the boards of both organisations gave the regulator assurance that the necessary due diligence had been undertaken, including through the use of professional advisors. The current issues at the group were identified by us as a result of our ongoing regulatory engagement with CHG."
Some have also questioned why the HCA can’t help Cosmopolitan to restructure the business and work with lenders rather than merge with a larger provider.
One source close to the situation said: “In the private sector they’d look to restructure the business and work with the lenders to help them to do that. What you’ve got with the HCA is the immediate reaction to merge.”
However, Bailes said that although the HCA supports Cosmopolitan’s decision to seek a partner, it didn’t force it down that road.
“As a result of the concerns we had, it offered us a voluntary undertaking in the summer which, among other things, concluded someone independent should do a strategic review of the business which might include options to merge with other businesses,” he says. “In that time frame some further issues were identified and CHG itself took the decision on the advice of its advisors to seek a merger partner. I have to say we think that is the right decision. But this is not a case of us using statutory powers or anything to compel them to do that – even if we did have powers. We have not used powers to date in this case. They themselves took the decision to seek a merger partner. I think that is a sensible course of action given the sort of range of challenges they’re facing.”
He added: “Riverside is working closely with the lenders and we are being kept informed of progress by both organisations. We have made clear to CHG our expectations on how, when and on what grounds we expect a decision on partnership to be made to safeguard social housing assets.”
Despite being a "unique case", Bailes warned that the regulator is not getting complacent and is preparing for a future where providers diversify.
He said: “The bottom line is, if you’re going to do something more commercial it needs to be managed effectively. It’s fairly obvious there were some challenges with Cosmopolitan managing bits of its business but it wasn’t directly related to the development programme I don’t think.”
Is there a role for the HCA to be more proactive in mergers from the outset and, as some suggest, act as an 'independent arbiter'?
Bailes says providers are independent and the role of the regulator is to ensure they are viable and well managed, "but not undertake management itself".
"We have regular engagement with providers with more than 1,000 homes which helps us understand the strengths of a provider and any weaknesses; and at the point a merger is proposed we assess the business case, and take further assurance from boards that the necessary due diligence had been undertaken, including through the use of professional advisors.”
He says the role of the regulator to seek assurances on viability and governance "certainly played a part in flushing out the problems with Cosmopolitan". "Like everyone else, we’ll reflect on this particular case when it’s all done and dusted to see if there is anything we can learn," he said.
The HCA is doing some thinking about how it regulates a more diverse sector including how to insulate social housing assets from some of the risks of commercial activity.
Bailes says it is looking to publish a discussion document in the New Year.
“If we’re in a situation – like we are here – where the parent is regulated then the regulator has obviously got some insight into what’s going on over the entire group,” he says. “If the parent is not regulated we won’t have the same sort of insight into what’s going on. In that situation in particular – though not exclusively – we’re interested in this idea around ring fencing, which basically says that, for example, the lenders to the non-regulated businesses haven’t got recourse to the social housing assets.”
He added: “We’re quite interested in looking at strengthening that. It’s part of the framework now but it’s something we might strengthen.”