A near miss for the social housing sector

19 Jun 2014

In May 2012, the Regulator identified that Cosmopolitan Housing Group was experiencing cash flow problems because expected funding for its development programme was not in place. This was the beginning of a crisis that, as it developed, brought Cosmopolitan to the brink of insolvency and ultimately led to it being rescued by the Sanctuary Group (Sanctuary).

On 17 June 2014 the HCA published an independent report which reviewed the events at Cosmopolitan. This concluded that the cause of the problem was weak governance and management and an over-ambitious development programme which over-stretched the finances of Cosmopolitan. The report found that the financial problems of Cosmopolitan were primarily created by:

  • An over-ambitious development programme, the proposed funding for which was index-linked and which it seems Cosmopolitan could not have afforded
  • Leases on student accommodation, which were wrongly classed as operating leases, (not, as they should have been, as finance leases). When these were correctly accounted for, this led to a serious breach of banking covenants
  • An overly complex group structure

The report is critical of governance at Cosmopolitan, causing the HCA to comment that “The problems that developed at Cosmopolitan demonstrate the importance of our message to Boards that they need to have an iron grip on risk.” The report concludes by making numerous recommendations for the sector and the Regulator. Many of these are aimed at the Boards of RPs and include:

  • Boards must analyse the skills they require to meet current and future business needs and refresh skills if necessary – even if length of service has not been completed
  • Boards need to take responsibility and understand the risks and the organisation-wide exposure to major contracts and the impact on the organisation were that contract to get into difficulties
  • Boards should take steps to ensure that, where there is any change to its business, it has the right skills and capacity within its management team

As this report shows, governance in an organisation has a direct impact on its success. The foundation of good governance is that there should be a balance, diverse and effective Board which leads and controls the organisation. But good governance can only be delivered by good governors and as this report (and the recent report by Lord Myners into financial difficulties at the Co-Op) shows those that sit as governors do not always have a sufficient business acumen to lead and control.