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Grading under review

Grading under review notices are issued by the Regulator for Social Housing on all Registered Providers than own 1,000 or more units. The following is an extract from a paper produced by the regulator.

There are four governance grades:

  • G1 The provider meets our governance requirements.
  • G2 The provider meets our governance requirements but needs to improve some aspects of its governance arrangements to support continued compliance.
  • G3 The provider does not meet our governance requirements. There are issues of serious regulatory concern and in agreement with us the provider is working to improve its position.
  • G4 The provider does not meet our governance requirements. There are issues of serious regulatory concern and the provider is subject to regulatory intervention or enforcement action.

All providers should seek to be assessed at G1. Where we judge a provider to be G2 this will be because we have identified some deficiencies in its governance which it needs to address. Although material, the deficiencies are not judged to affect our overall assessment of compliance. Our expectation is that providers assessed at G2 will take timely remedial action to address the issues identified. For this reason, we describe movement between the compliant governance grades in terms of upgrades and downgrades.

A G3 judgement means that the provider is not compliant with governance requirements. In these circumstances we will be actively involved with the provider as it works to address the failures in governance and move back into compliance with regulatory requirements. A G4 judgement also signifies that the provider is noncompliant with governance requirements but it is applied where the severity of the governance failures are such that we are actively intervening or taking enforcement action.

We reflect the level of assurance that we have on a provider’s compliance with the Value for Money Standard through our published governance judgement.

There are also four viability grades:

  • V1 The provider meets our viability requirements and has the financial capacity to deal with a wide range of adverse scenarios.
  • V2 The provider meets our viability requirements. It has the financial capacity to deal with a reasonable range of adverse scenarios but needs to manage material risks to ensure continued compliance.
  • V3 The provider does not meet our viability requirements. There are issues of serious regulatory concern and, in agreement with us, the provider is working to improve its position.
  • V4 The provider does not meet our viability requirements. There are issues of serious regulatory concern and the provider is subject to regulatory intervention or enforcement action.

Providers at V1 will have supplied the regulator with sufficient assurance that they have met the viability requirements of the Standard. Typically they will have a strong financial profile, built on robust and prudent assumptions, good headroom on their financial covenants and appropriate levels of liquidity. The level of financial risk being taken on by the organisation will not be considered to be unreasonable and the regulator will have assurance that the crystallisation of the identified risks can be mitigated successfully by the organisation in most circumstances.

Providers at V2 will also have provided the regulator with sufficient assurance that they have met the viability requirements of the Standard. However, we may judge that these providers’ financial profiles leave them relatively more vulnerable to the crystallisation of significant downside risks, potentially including changes in market conditions beyond the provider’s control.

Providers at V2 can often share some of the following characteristics, amongst others:

  1. A material reliance on relatively uncertain cash flows, often relating to the type of activities being undertaken (for example, sales versus rental products) or the types of markets in which the provider operates
  2. A material change in the business model being pursued by the provider that involves taking on more risk. This could be moving into new business areas or scaling up existing operations, including taking a step change in new development aspirations or significant increase in debt levels
  3. A significant financial event in the short term (typically one to two years) that could change the profile of the organisation, for example a refinancing requirement or a material peak in sales exposure
  4. A business plan that is built on assumptions that are difficult to achieve or justify on the basis of past experience or current operating conditions
  5. A weaker financial profile with less headroom against covenants or insufficient cash generation for the level of risk being taken. Using debt or sales income to meet interest costs is a concern for the regulator
  6. A business plan that does not cope with severe but plausible adverse stress testing: and/or can’t absorb a limited amount of stresses without enacting mitigations.

Providers at V3 will have been unable to provide the regulator with sufficient assurance that they meet the requirements of the Standard. In these circumstances the regulator will be working closely with the provider to try and remedy the issue as soon as possible.

Providers at V4 are in serious financial difficulty and the regulator will be working with the provider and others (as appropriate) to remedy the situation, potentially using the regulator’s full range of intervention powers.

In some cases, as well as publishing a provider’s grades, we will also issue a narrative regulatory judgement report. We will usually do this where, for any reason, our assessment of that provider has changed, or there are new issues we want to make public. If our assessment of a provider’s grades has not changed since the last publication, we will normally only re-publish its grades, unless the provider remains
non-G1/V1 following completion of an IDA.

 

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