The risks we will focus on - November 2023

Background

Our statutory objective is to safeguard and promote the interests of tenants and others who use the services of social landlords. We do this by monitoring, assessing and reporting on all landlords’ performance of housing activities and the financial well-being and standards of governance of Registered Social Landlords (RSLs). 

The annual risk assessment is one of the principal ways in which we carry out our statutory functions. Here we set out our approach for this year’s annual risk assessment. 

Our risk assessment last year took place against a backdrop of significant volatility and uncertainty for the social housing sector, tenants and other service users such as homeless people and Gypsy/Travellers.  

Some of the pressures landlords were having to manage have eased while others remain or have exacerbated.  For example, the Scottish Government’s intervention on rent increases in social housing ended in March 2023 but challenges remain for landlords in keeping rents as affordable as possible while at the same time funding services for tenants and others and investing in their homes.  Rent controls continue for Mid-Market Rent homes for those social landlords that deliver these as part of their group structure.  Energy costs have fallen from peak levels reached last year but remain high.  The headline rate of inflation has fallen significantly but remains above the Bank of England’s 2% target. Inflation in construction and maintenance is running well ahead of that headline rate. Interest rates have risen and are currently at their highest level for 15 years.  

The coming period looks like it will remain unpredictable, volatile and difficult for those who rely on social housing and for those who provide it.  Cost inflation, higher interest rates, and increasing requirements on the quality of homes mean that landlords face increasing and sometimes competing pressures on resources, whilst aiming to keep homes as affordable as possible. 

We recognise that the current context means that social landlords are likely to have to prioritise their attention and resources on the most critical and immediate issues, including tackling the acute problems in homelessness, decarbonising homes and alleviating fuel poverty, and maintaining tenant and resident safety.  We will take account of this context in our assessment of risk. 

We say more about current challenges and the broader risk landscape in Appendix A. 

The main risks we will focus on

This year we will focus on:  

• Homelessness – How local authorities deliver services for people who are threatened with, or experiencing, homelessness. This includes providing people who need it with suitable temporary accommodation and how local authorities are working with their RSL partners to provide settled homes. We will also consider RSL performance in responding to requests for assistance, limiting the time people spend in temporary accommodation. 

• Performance in delivering services – How local authorities and RSLs deliver services for their tenants and meet the standards and outcomes from the Scottish Government’s Social Housing Charter. This will also include how landlords that provide Gypsy/Travellers sites ensure minimum site standards and fire safety requirements to meet the needs of residents. 

• Development – How RSLs manage the impact on their finances of any plans for building new homes. 

• Quality of homes – How local authorities and RSLs ensure that the homes they provide to tenants meet the Scottish Housing Quality Standard (SHQS), and whether they have a good understanding of the condition of those homes. 

• Tenant and resident safety – How local authorities and RSLs meet their statutory obligations on tenant and resident safety. 

• Financial health of RSLs – How financially healthy RSLs are and how well they manage their money with a focus on financial planning and compliance with Regulatory Standard 3. 

• Good governance of RSLs – How well RSLs are run with a focus on compliance with Regulatory Standards. 

Our approach and priorities within these areas will be informed by the current challenges and risk landscape described in Appendix A.  For example, we will pay particular attention to local authorities’ compliance with the statutory obligation to provide temporary accommodation, increasing risk in the building of new homes, and compliance with tenant and resident safety obligations such as those relating to damp and mould and reinforced autoclaved aerated concrete (RAAC). 

Why and how we focus on these areas

Homelessness 

We have a clear focus on monitoring, assessing and reporting on social landlords’ performance on discharging their statutory duties to people who are experiencing or have experienced homelessness. 

The key areas we focus on are:  

We will engage with all local authorities to aid our understanding of their performance in delivering effective and efficient homelessness services.  The focus for these ‘structured conversations’ will be temporary accommodation and outcomes. 

The structured conversations will also help us in this year’s risk assessment by providing qualitative intelligence on how landlords are performing. These conversations will enrich the quantitative element of our assessment.  The quantitative element is largely based on Scottish Government official homelessness statistics which uses data it collects directly from local authorities.  The data element will consider our four key areas.  See Appendix B further below for details on the indicators we will use.   

Performance in delivering services 

Landlords are required to meet the obligations placed upon them by the Scottish Government’s Scottish Social Housing Charter.  The 22 indicators we will consider allow us to assess progress against the Charter, and they take these tenant priorities and obligations into account.  See Appendix B for a list of these performance indicators.  

We will assess risks across these indicators and target our regulatory engagement in the light of the performance of landlords.  We intend to supplement this data on service quality with the intelligence we have from notifiable events and any specific engagement we have with landlords. We will also review all the Annual Assurance Statements and consider any areas of non-compliance.  

We will continue to engage with landlords that provide Gypsy/Traveller sites about their compliance with the minimum site standards set out by the Scottish Government, and about their obligations in relation to fire safety.  The Scottish Fire and Rescue Service is the enforcing authority for fire safety at Gypsy/Traveller sites. 

Quality of homes 

Quality of homes and tenant and resident safety are intrinsically linked. The criteria in the SHQS covers a range of standards on quality of homes and tenant and resident safety.   

Compliance with SHQS improved between 2021/22 and 2022/23, from 73% to 79%. However, this is still below the compliance rate at the end of 2020/21, which was 87%. The decline in compliance since then has primarily been because of the amendment to SHQS to include the requirement for electrical installation condition reports (EICRs) to be carried out every five years, and for interlinked smoke and heat detectors to be installed in every home. We know that some landlords continue to work to catch up on these inspections and installations, and we are engaging with them about this.  

We will consider as part of this year’s risk assessment:   

• how landlords are addressing houses which fail SHQS; and 
• whether landlords have good quality, up-to-date information about the quality of their existing homes and future stock condition survey plans.  

We will also look at a landlord’s ability to meet its maintenance obligations in general. Where a landlord is not meeting the requirements of the SHQS or there are other potential issues highlighted from the stock quality risk assessment, we may seek additional assurance from the landlord. 

We propose to analyse the following Charter indicators: 

• the level of SHQS fails, abeyances and exemptions; 
• Stock condition survey – coverage; and 
• Stock condition survey – age of information. 

Tenant and resident safety 

Landlords have a range of statutory obligations in this area so we will continue with our focus on tenant and resident safety.  Tenant and resident safety can cover a wide range of issues from the physical condition of properties through to issues around homelessness.   

Given the importance of gas safety we again carried out a detailed exercise in July 2023 looking at the Annual Return on the Charter (ARC) data for every landlord with any fails to meet the statutory duty to complete a gas safety check in 2022/23. We contacted landlords to follow up on fails to get assurance all fails had subsequently been addressed. 

In July 2023, we wrote to social landlords to ask them to include a specific statement on their compliance with all tenant and resident safety duties in this year’s Annual Assurance Statement. We said in the letter that this should include gas, electric, water, fire and lift safety, asbestos and damp and mould. We will include this intelligence in the risk assessment.  

In December 2022, we also wrote to social landlords about damp and mould specifically.  We provided advice on the importance of timely and effective action on damp and mould for tenant safety.   

There is also a potential emerging risk around Reinforced Autoclaved Aerated Concrete (RAAC) in homes which we may factor into our risk assessment once we have fully considered the information social landlords provided to us at the end of October on the number of properties which had RAAC. 

Development  

Given the current economic context, alongside the continued pressure on landlords to increase the supply of new social housing, RSLs more than ever need to ensure that they fully understand the additional risks inherent in the development process and the potential impacts on their strategic plans.  

This includes regularly reviewing and updating assumptions about the capacity to build new homes and associated costs to ensure plans are realistic and deliverable. Robust strategic and financial planning has never been more important.  Given the increased risk exposure that development activity continues we will maintain our focus on development risk and consider the following risks: 

We get this information from:    

• SHR’s Five Year Financial Projection Return (FYFP);    
• local authority Strategic Housing Investment Plans (SHIPs) which also cover a five-year period;   
• business plan assessments; 
• any other engagement we have with RSLs about development; and  
• information from the RSL Annual Assurance Statements.  

Financial health of RSLs 

Through our Financial Risk Assessment (FRA) we monitor, assess and report on the financial well-being of RSLs.  Regulatory Standard 3 (RS3) sets that: “The RSL manages its resources to ensure its financial well-being, while maintaining rents at a level that tenants can afford to pay.”    

Our FRA will focus on:

• general financial well-being;
• rent levels and welfare reform;
• pensions;
• other activities and group structures;
• development; and
• treasury management.

Two years ago we introduced a triage process to the FRA which continues this year. The primary purpose of the triage process is to identify those RSLs where we need explanations on specific areas earlier in the FRA process.  

RSLs continue to face tough economic and operating conditions so strong liquidity is essential.  Many of the triage scoring tests focus on identifying RSLs with poor liquidity. As the number of employees in final salary schemes reduce the probability of a cessation event crystalising an unaffordable liability has increased.  So, we are also considering this risk as part of the triage process. The full list of scoring tests that will be used for the triage process are as follows:

• Debt Service Coverage Ratio (DCRS) loans excluding opening cash balance;
• bad debts;
• arrears;
• voids;
• pension schemes with low active membership;
• proportion of development to opening units;
• variable debt percentage;
• covenant headroom;
• availability of private finance; and
• net cash inflow / (outflow) over 3 years.

As part of our FRA, we consider information from all the various financial data we receive from RSLs as well as the initial outcomes from both the triage process and the full FRA model. We then make a judgement on an RSL’s ability to comply with RS3, particularly around financial well-being.  

Considering the increasing financial challenges that RSLs are facing we will continue to prioritise those RSLs which are classified as high and medium risk.  This will directly influence the regulatory status that is applied to each RSL.

Governance 

Good governance by RSLs underpins the delivery of good financial health and services.  

Social landlords assuring themselves, their tenants and us is central to our approach to regulation. All social landlords must prepare and publish an Annual Assurance Statement in accordance with our statutory guidance to confirm whether they are meeting regulatory requirements. For 2023/24, we have issued separate advisory guidance on preparing the Annual Assurance Statement asking landlords to give us assurance about the work landlords are doing to prepare for the duties they currently face in relation to equalities and human rights, and to confirm whether they meet all duties in relation to tenant and resident safety. 

In addition to the Annual Assurance Statements our assessment of an RSL’s governance will also be informed by the following: 

• ARC submissions received by May 2023; 
• notifiable events; 
• any reports by auditors under S72 of the Housing (Scotland) Act 2010; 
• Annual Financial Statements (AFS);  
• a review of governing body minutes from landlords’ websites; and 
• regulatory intelligence from current engagement.  

We will also use the quantitative and qualitative information we gather from landlords in relation to: 

• group structures (number of subsidiaries, complexity of arrangements and nature of subsidiary activity); and 
• qualitative information including complaints about landlords, whistleblowing and significant performance failures.  

As in previous years, we will also consider:  

• staff turnover and absence rates;   

• how frequently the RSL rotates the appointment of its external auditor; and  
• the RSL’s internal audit arrangements. 

In May 2023, we published a lessons learned report on the recording of decisions and discussions by governing bodies to help support RSLs to maintain good standards of governance.  Our review of governing body minutes will focus on RSLs compliance with regulatory requirements. 

Joined-up approach

Our approach joins up with our other key work/priorities.  For example, our risk assessment will consider the findings and outcomes of the: 

• homelessness thematic; 
• Annual Assurance Statement visits thematic; 
• report on RSL finances; 
• structured conversations with all local authorities about their homelessness services with a focus on temporary accommodation and outcomes for homeless people; 
• findings from our National Report, Tenant Panel Report and work by our Tenant Advisors; 
• wider intelligence gathered from our on-going engagement with landlords and other stakeholders; and 
• lessons learned from our intensive cases and earlier statutory interventions. 

We will continue to moderate the outcomes of the risk assessment considering what we already know about landlords.   

Appendix A

Strategic context and risk landscape 

There is an extremely challenging and uncertain environment for social landlords, tenants and other service users.  Our risk assessment this year reflects these challenges.   

Persistent household inflation 

Headline inflation is currently 4.6%, higher than the Bank of England’s target of 2%, but lower than the peak figure of 11.1% in October 2022.   Prices are therefore still rising albeit at a slower rate and are higher than they were for example prior to the pandemic.  Inflation is expected to continue to slowly fall reflecting lower annual energy inflation despite the recent upward pressure from oil prices, and further declines in food and core goods price inflation. Inflation for the price of services, however, is projected to remain higher than core headline inflation in the near term. The Bank of England expects inflation to return to the 2% target around the first half of 2025. 

Food and drink price inflation remains high. The annual rate hit 19.1% in March and fell a little to 17.3% in June. The latest monthly data shows this has slowed to around 10%.  Poorer households spend more of their budget on essentials – such as food – than wealthier households, leaving them the most exposed to high food inflation.  

The Bank of England has raised interest rates in a policy effort to reduce inflation back to the 2% target. It has recently kept rates at 5.25% for the second consecutive month having increased them every month for 14 months.   

Heightened risk in building new homes  

The development of new affordable homes is a government priority, and the Programme for Government sets out a commitment to deliver 110,000 affordable homes by 2032, of which at least 70% will be for social rent and 10% will be in remote, rural and island communities. In addition to providing quality, affordable and secure homes to those in housing need, the affordable housing programme is a fundamental part of the strategy to tackle homelessness. 

For RSLs the development process carries a significant range of additional risks which, if not managed effectively, have the potential to seriously impact on individual RSLs, their tenants and on the sector as a whole.  RSLs now face more acute risks around high costs and cost inflation across all aspects of development (both the build itself and financing the build) and delays due to labour and material shortages as well as contractor capacity. RSLs are also increasingly having to manage the impacts and costs of contractors getting into financial difficulties.   

These challenges are feeding through to RSLs’ spending plans. For example, we are seeing fewer RSLs planning to build fewer homes over the next five years than they told us last year. RSLs are also planning to cut back or delay investment in existing homes, with an aggregate figure of more than £15 million being cut from expenditure plans in the next five years. 

Acute issues in temporary accommodation 

In our thematic report we published in February, we said that some local authorities were finding it increasingly difficult to provide sufficient and appropriate temporary accommodation, and so to fully meet their statutory duties.  Many local authorities also found it difficult to access enough permanent housing for homeless people.  We said that there is an emerging risk of systemic failure in the delivery of homelessness services in some local authorities.  Scottish Government data from August 2023 shows that:  

• the number of households in temporary accommodation increased by 6% compared to the previous year; 
• the average total time spent in temporary accommodation is increasing; 
• there are more households and children than ever before in temporary accommodation; 
• households with children spend, on average, the longest in temporary accommodation; 
• there are concerns around the suitability of some temporary accommodation for pregnant women, children and other vulnerable people (but women in particular); and   
• there are more homelessness applications and fewer closed cases. 

We will shortly publish an update to this thematic report setting out our current view.      

Landlords’ balancing affordability with business plan commitments 

Rent affordability is critically important as pressures remain on household finances, particularly for those on lower incomes.   We also recognise that landlords must balance rent levels with their costs, including those to invest in the quality of services to tenants, tenants’ homes, their wider community activities and meeting statutory obligations such as those relating to net zero and tenant and resident safety. 

RAAC 

We worked closely with SG Building Standards colleagues, the SFHA and ALACHO to develop a survey for social landlords to identify the extent of RAAC in social housing and undertook an information return from social landlords to get greater clarity on the extent of the issue.  We are currently assessing the data and note that several landlords are still investigating the extent to which RAAC is present in their stock. We expect the numbers investigating to change over time as landlords' complete inspections. It is important that landlords are communicating directly with their tenants during this time to reassure them that if RAAC is found, there is no immediate risk, or the required action is taken where there is.  

We will continue to update the figures as landlords complete their outstanding investigations, and we will engage with those landlords who have RAAC in homes to get appropriate assurance about their management of that RAAC. 

Damp and mould 

In December 2022 we wrote to all social landlords with advice on the importance of timely and effective action on damp and mould for tenant safety.  In that letter we asked all governing bodies and committees to consider the systems they have in place to ensure their tenants’ homes are not affected by damp and mould and that they have appropriate, proactive systems to identify and deal with any reported cases timeously and effectively. 

We asked our tenant advisors to review the online information and advice that a small number of landlords published on damp and mould.  We will take the outcomes of this work into account in our risk assessment.  

Other tenant and resident safety obligations 

Some landlords continue to face challenges in meeting the obligations in relation to connected fire alarms and smoke detectors, and electrical safety compliance checks. This impacts on the overall level of compliance with SHQS.  

Data accuracy 

Landlords must have complete and accurate information about the homes they provide to tenants, their performance and their finances to comply with regulatory standards and the Scottish Social Housing Charter. Landlords should seek to assure themselves that their decisions are based on good quality data and that they are providing complete and accurate information to the Regulator.  This is particularly the case for issues relating to tenant and resident safety where some landlords have reported not having a full understanding of whether and the extent to which they comply or otherwise with their statutory obligations.  

Cyber security 

The number and sophistication of cyberattacks has risen dramatically in recent years.  It is important that landlords consider what security they need to put in place to protect their digital systems, including the personal data of tenants and staff.   

Insurance premiums 

Some RSLs are facing issues obtaining a variety of business insurance such as property cover, public liability and other covers.  Premium costs are increasing owing both to inflationary impacts and a lack of insurers in the marketplace.  A landlord’s ability to obtain insurance is usually necessary to meet its loan terms for property cover.  We know that some landlords are concerned that with the cost-of-living challenges, this issue won’t be resolved in the short term. 

Appendix B

Technical appendix for landlords: the information and indicators we use to assess risk in relation to homelessness and performance