The Cosmopolitan “near miss”

The Altair “Lessons Learned”report should be mandatory reading for all board members and everyone occupying a senior management position in the housing association sector.  Cosmopolitan was an extreme case but there are lessons for everyone.

At root there were governance issues and major issues of capability.  Board members need to understand the business and also have an understanding of business in general.  They need to ask the right questions, understand the answers and to press when those answers do not seem right.  They need to speak up when something concerns them.  It is actually a difficult and demanding job.

The world of housing associations nowadays is much more complex than it was even ten years ago.  Since taking over the regulatory role, the HCA has been stressing the importance of risk management and of procuring the right skills or advice to evaluate risk.  The Cosmopolitan case was staring at them from the moment they took over that role and the dangers it highlighted have clearly influenced the current regulator’s thinking.  It has influenced the priorities and behaviour of the regulator already and its impact can be seen in the HCA’s proposed changes to the Regulatory Framework.

The Altair report identifies weaknesses in regulatory work by previous incarnations of the regulator.  You have to wonder how many people elsewhere interpreted co-regulation as arms-length or lax regulation, but it is the regulator’s role to make sure everyone takes them seriously.  In the Cosmopolitan case, there was inadequate disclosure of significant facts.  The Altair report is critical of a past regulator for not following up weak responses to its questions.  Previous regulation did spot tell-tale governance weaknesses and the board sought advice on how to improve but did not implement that advice in full.

The Cosmopolitan case threatened the standing of the whole sector.  HCA threw senior resources into dealing with the problem but its gravity was really shown by the lack of potential rescue partners.  In the end it took a mega-player to safely swallow the mess (and the whole sector should be grateful).  But the Altair report shows that the HCA was restricted in its actions by weaknesses in the 2008 and 2011 legislation.  Given the gravity of the Cosmopolitan case and the threats to social tenants and to the reputation (and fundability) of the sector, it seems ridiculous for instance that the regulator should be restricted by a duty to minimize interference.  A reasonableness test would be more sensible.  Scottish legislation seems to be more realistic and we can expect pressure for change south of the border.

The Altair report makes detailed recommendations for registered providers, for the regulator and for Government.  I expect many of these to be taken up.  However, I have three broader issues which I think need consideration:-

I wonder whether in future the sector will actually be able to recruit sufficient numbers of board members of the calibre that it needs.  I also wonder whether a large number of current board members will drop out when they really understand the weight of responsibility they carry.

Accepting that Cosmopolitan was an extreme case and accepting that legislation and the position of funders complicates matters, I wonder if it is right that failed boards should be in a position to influence the future of the organizations they have let down.  Under various regulators the pattern has been for the failed board to shortlist and even select a “merger” partner.  This may soften the blow for bruised egos but may also lead to a sub-optimal solution – they may be seduced by an option which is less overtly critical of their performance and may even give them a continuing role.

Also accepting that Cosmopolitan required an urgent solution, I wonder if “merger” or absorption of the whole failing entity into one rescuer is always the best solution.  I recall a case where an HA in difficulties had three elements to its business and all three were struggling.  Merging it into one rescuer (the chosen solution) exposed that rescuer to three sets of risk and gave it three major management problems.  Splitting it up and spreading the misery may have been a more prudent option.

Kim Penfold
June 2014