Navigating Opportunities Amidst Turbulence: A 2023 Sector Risk Profile Review

Posted: 23rd November 2023 Darren Smith, Senior Consultant, Strategy and Regulation

It’s that time of the year (albeit a few weeks late) where the Regulator of Social Housing (RSH) sets out the key risks facing the sector. The Sector Risk Profile provides an opportunity for Registered Providers (RPs) to assess the operating environment and cross-check their ever-growing strategic risk registers.

The headlines? No significant changes a year on, but a clear emphasis and focus on what the Regulator expects RPs should be doing in order to respond to and mitigate against those risks.

Key headlines and opportunities

As expected, this year’s Sector Risk Profile has a level of consistency from previous versions, but the devil is in the detail. Particularly its focus and emphasis. The broad message being the operating environment is challenging including high inflation, higher borrowing costs, difficulties in accessing skilled labour and a declining housing market.

These strong headwinds put ever-growing pressures on financial capacity as the margin for error is getting increasingly smaller. Set out below are some of the key areas RPs should be considering as they plan for the future.

Understanding your strategic purpose

As an organisation, it is critical you understand your core purpose and have clarity on how that informs your strategic objectives. This will enable your organisation to understand what services are essential and ones whereby investment can be pulled back where margins are being squeezed.

Trade-offs are coming

Boards will need to exercise skill and judgement to manage risks in order to deliver objectives, identifying pressures and ensuring mitigation plans remain robust against the potential for further shocks. This will inevitably result in difficult trade-offs for Boards’ (Sector Risk Profile 2023).

At board level, there needs to be proactive discussions on how as an organisation you can respond to worsening circumstances. Given the board are accountable and responsible for strategic decision-making, it is critical they are actively involved in scenario planning on decisions such as the balance between short-term and long-term stock investment. Furthermore, the outcomes of those discussions need to be clearly linked to your risk management and financial stress testing.

Financial resilience

A new week brings further announcements of V2 ratings. Although more an indication of the external environment, the upward trajectory of V2 ratings demonstrates the reduced capacity for RPs to respond to adverse events – although it is important to note that V2 still means financially viable.

The majority of the sector’s existing debt is fixed for more than five years; however, a select few RPs already have material proportions of debt at variable rates. Boards must ensure appropriate treasury management and governance processes are in place to effectively monitor existing loan covenants to mitigate the risk of breaches. The practical implications of identified mitigations needs to be proactively worked through by boards and critically inform stress testing modelling, while open and transparent communication with lenders is highly encouraged.

Data integrity and cyber security

  • Data integrity is a constant theme throughout this year’s Sector Risk Profile and a clear expectation that RPs are taking proactive steps to ensure performance data is accurate and transparent, and data is being utilised effectively to inform service delivery. This also links with changes to consumer regulation and the importance data will play in ensuring RPs comply with the new requirements.
  • Cyber security is explicitly stated this year and the chance of this risk crystallising heightened through widespread move to remote working and increased online service delivery.
  • Data integrity and cyber security are both intrinsically linked to the proposed requirements in the Transparency, Influence, and Accountability Standard which will put more emphasis on RPs making use of information and data to inform their understanding of how they will meet the different needs of tenants.

Consumer Regulation

  • The Sector Risk Profile has a particular focus on risks to delivering the outcomes required by our Economic Standards. However, The Social Housing (Regulation) Act has given the Regulator greater powers to set consumer standards and proactively regulate these from April 2024 and this has been clearly signposted throughout this year’s Sector Risk Profile.
  • Key strategic risks such as ‘delivering against expectations’ mean that RPs need to effectively communicate with all key stakeholders, operating in a transparent, open manner. Tenant Satisfaction Measures are key to this transparency, not only in the final result but the process in gathering data in accordance with regulatory requirements – something the board needs clear oversight and assurance of.

Our conclusions

The Sector Risk Profile provides the opportunity for RPs to take stock, assess and understand how the operating environment impacts their organisation. It is critical those learnings are taken forward and RPs fundamentally understand which risks impact them the most and have well-tested mitigations in place, while agility of decision making will be needed to navigate the current and future operating environment. It is our view that poor governance arrangements will likely be exposed in times of difficulty and RPs should be prepared to make difficult trade-off’s to mitigate these risks.

Listening to the Regulator at the annual NHF Audit and Risk Conference last week, there was a clear acknowledgement that RPs are facing unprecedented, multifaceted challenges but as a sector, we are still robust and the fundamentals are strong. Time will tell if this proves to be true.

To find out more about Altair’s governance and risk management services, please contact our team:

Saqib Saleem, Director of Strategy and Regulation

Darren Smith, Senior Consultant

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