HCA: Cosmopolitan failings changed sector

The Homes & Communities Agency has published an independent report on the failure of Cosmopolitan Housing Group, the large North West housing association which came close to collapse in 2012 with potential liabilities of £100m.

The report Cosmopolitan Housing Group Lessons Learned was compiled by consultant Altair for the HCA.

The authors concluded that the primary cause of the problems at Cosmopolitan was a serious failure of governance over a number of years, with previous regulators such as the Housing Corporation and Tenant Services Authority failing to appreciate the severity of the risks within Cosmopolitan. The report said that had regulation in the early 2000s been more thorough, the crisis may have been avoided.

HCA, as the current regulator, said there were lessons to be learnt for all in the sector.

Liverpool-based Cosmopolitan and Chester & District Housing Trust merged in 2011, owning 12,500 homes combined. Cosmopolitan ran into difficulties when it emerged that the leases in its student housing business guaranteed against its social housing assets had been incorrectly classified, leading to a breach in lending agreements. The housing association had ignored suggestions from both law firms and accountants to review the student housing documentation. The reported size of the potential liabilities on student housing leases was £100m.

Cosmopolitan reported cashflow issues to the regulator in 2012, coupled with over-ambitious development plans.

The housing association was rescued by a takeover from Sanctuary in March 2013.

Matthew Bailes, director of regulation at the HCA, said: "We welcome the independent report, which acknowledges the role of the regulator in protecting social housing assets but nevertheless contains lessons for all in the sector, including the regulator.

"The HCA regulation committee had begun strengthening regulatory capacity before problems at Cosmopolitan crystallised, including changes to the regulatory framework, additional senior staff capacity and improved accountability, and new regulatory judgements for all providers.

"These, and the other steps we have taken, mean we would expect to identify similar problems at a provider at an earlier stage than previous regulators did at Cosmopolitan.

"The problems that developed at Cosmopolitan demonstrate the importance of our message to boards that they need to have an iron grip on risk. Nevertheless, as regulator we need to keep pace with a sector that is becoming more complex and diverse, which is why we have already taken action that addresses a number of the report's specific recommendations."

The report makes recommendations for providers and the regulator across six areas; skills and resources, information requirements, risk management, mergers, crisis, and future regulation.

The HCA said that it has already made significant progress in meeting the report's recommendations, having begun a formal consultation on changes to the regulatory framework, designed to improve the understanding and management of risk. The standards now require providers to undertake robust stress testing against combinations of identified risks across a range of scenarios, maintain a thorough and up to date record of their assets and liabilities, ensure that the potential impact on current and future business is taken into account before taking on new liabilities and ensure boards manage their affairs with appropriate skills, capabilities and independence.

• The independent report is available to download from the HCA website.