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Volume 5
Chapter 3 Financial Assistance

Introduction

3.1. This chapter sets out the case for changes to the current system of financial support for owners, and in some circumstances tenants, and outlines new options for local authorities to help owners such that ever more people are able to tackle the responsibilities that come with homeownership.

3.2. The chapter is laid out in a way which is intended to help the reader piece together the elements of financial assistance with the aim of building a section 72 statement of assistance.

3.3. The chapter explores the reasons for changing the grant system and the need for greater use of lending. It then focuses on lending, the range of options owners have now, what new lending products are required to help owners in different circumstances and options for delivering these.

3.4. Given the availability of a range of lending options as well as grant, the chapter then covers the routes to various types of financial assistance according to the individual's circumstances. It outlines proposals for supporting authorities who need to help owners find commercial lending or gain access to publicly funded loans and grants.

3.5. The chapter then goes into more detail about the appropriate assistance in different circumstances, looking particularly at the difference between works to adapt houses to suit the needs of disabled occupants and works to deal with problems of house condition.

3.6. Finally the chapter considers the powers that Ministers have to regulate for a test of resources, in the context of the proposals within this chapter, and deals with the terms that local authorities can and must impose when dealing with a loan directly or a grant.

3.7. We would like to obtain a wide range of views on the many areas of new thinking in this chapter. To help readers understand the rationale behind what is proposed here, the text goes beyond simply stating the guidance, and lays out the arguments for what is proposed.

Why the system needs to change

3.8. Until now, options available to owners looking for assistance from local authorities have centred around the provision of financial assistance - specifically, eligibility for and availability of grant. In focussing so closely on the use of grant as the primary tool of assistance over the last 30 years or so, the culture surrounding assistance to homeowners has polarised. Those eligible for any grant typically receive substantial amounts as a result of minimum percentage awards, but those ineligible for grant typically receive little or even no assistance at all. This approach has created an expectation among certain groups of owners that government is prepared to award grant to owners of houses which are not maintained. Official and unofficial queues for grant - in many cases running into years - exist in every local authority area.

3.9. A change in approach will also allow clearer distinctions to be made between house condition works, where failure to maintain property is largely the fault of the owner, and works related to a disability, where fault is not at issue.

3.10. The historic emphasis and reliance by both local authorities and owners on grant was a key concern of the Housing Improvement Task Force ( HITF), which stated the following:

• Public funding is inevitably limited and there can be no justification for indiscriminate assistance to owners who are often increasing their wealth through ownership of an increasing asset.
• Too often in the past assistance has been seen in terms of grants but advice, practical support and various forms of loans also have a role to play whilst recognising that targeted grant aid can be appropriate when this is the best and most effective solution.

3.11. Consultation responses to the draft and final reports of the HITF indicated general support for the principle that public funding should not be used to support repair and improvement works when other viable alternatives were available, with the proviso that grant would continue to be appropriate in some circumstances.

3.12. The Scottish House Condition Survey in 2002 found that 50% of owners who received grant would have carried out the work even if they had not been provided with grant assistance.

3.13. The recent housing boom has been a double edged sword - it has led to rising costs of ownership and has had an inflationary impact on building costs but it has equally led to a growth in wealth. The condition of the house itself and the need to prevent deterioration should be the foundation of such wealth. Owners need to maintain their properties and it is right that they be expected to make use of their wealth to do so. This self-reinforcing argument underpins the policy behind the Act and this chapter in particular.

The role of grant

3.14. In addition to its use in funding disability-related works, there may be exceptional circumstances in which grant can be used to drive owners' behaviour, particularly where it is used to reward positive actions, such as participation in common works programmes where there is no requirement to take part. In addition, grant or subsidised lending may have a role to play in helping those who cannot afford to pay for works and where they are essential and cannot be delayed. Certain cases of hardship are also suitable for grant funding.

3.15. The use of open ended grant programmes for assistance in the general maintenance and improvement of properties is, however, considered by Ministers to be counterproductive. It leads to unrealistic expectations about the extent to which government is prepared to pay for works most owners routinely carry out from their own resources. With national resources for tackling serious disrepair in the private sector representing only around 0.1% of the total cost of necessary works, local authorities must consider the use of alternatives to grant if they are to make significant and lasting progress against their strategies.

Objectives of financial assistance

3.16. The overall objective of offering any assistance to owners is to meet the gap in capability faced by the owner, which is represented by what the owner can do and what they need to do. In practice, this will mean a range of things including providing information and advice, or more resource intensive support such as financial assistance.

3.17. The Act introduces new powers for local authorities to extend financial assistance from primarily grant to include standard and subsidised loans. While it is important for authorities to offer financial support to those who need it, it is equally important that where owners do need to borrow to fund the cost of works, authorities respect the primacy of the financial industry to offer lending products before offering alternatives.

3.18. Nevertheless, many owners cannot access commercial lending on terms that are fair and affordable and in these circumstances the objective of financial assistance is to provide a suitable lending product.

3.19. In certain other circumstances, the authority will want to define groups of owners undertaking certain types of work to be offered early access to subsidised lending products. The objective of offering subsidised lending is twofold: to reduce the cost of alternative forms of financial assistance such as grant by using lending on favourable terms, and to increase the total number of people who can be encouraged to undertake works which support the local authority's housing strategy. In both cases, subsidised lending represents a cost effective 'half way' option between grant and commercial lending and should feature in the planning of local authorities who must manage limited resources.

3.20. It is proposed that the NLU will introduce a Home Appreciation Loan as its first product. Capital and interest and interest only loans could be made available within the first few years of the NLU. Paragraphs 3.119 to 3.152 outline the timetable for development of the NLU and its products.

Lending

Introduction

3.21. This section looks at:

• the new local authority powers to lend, where an owner cannot access a sufficient loan on fair terms from a commercial lender
• how commercial lenders assess what is a sufficient and fair product for an owner
• what commercial products exist
• the types of borrowers for whom few or no commercial lending options may exist
• what new products may be needed.

3.22. The section then looks at the advantages and disadvantages of different potential lending delivery vehicles. It recognises the expressed view of local authorities that they generally do not wish to be direct lenders, and looks in particular at the option of the Scottish Government setting up a unit which could:

• make standard lending products available to owners not able to access them from commercial lenders (for example because of age or credit history)
• make available special products which do not exist in the commercial market - most notably a "home appreciation loan" which uses equity and requires no regular repayments.

3.23. A further option discussed is the potential for local authorities to subsidise interest rates on standard loans in order to assist owners prioritised (in the section 72 statement) for such assistance.

3.24. The guidance below is built on evidence contained in a detailed report on lending options produced for Ministers in August 2007, which is available on the private sector housing part of the Scottish Government website. Detailed information on all the options and issues summarised below can be found in the full report.

Local authority powers

3.25. The Act introduces new powers for local authorities to:

• lend directly to owners for the purpose of carrying out works
• arrange for others to provide loans for this purpose.

3.26. There is an accompanying expectation that they will make effective use of such powers in support of their housing strategy.

Lending directly

3.27. The powers in Part 2 of the Act allow local authorities to lend directly to owners and specify the nature of that lending. These powers sit alongside other legislation governing financial services and local authorities must also take this into account. Financial regulation is covered later in this chapter.

3.28. If a local authority does make loans directly, section 75 of the Act stipulates that it may approve an application for a grant or loan only if, in its opinion, certain specific conditions are satisfied.

3.29. One such condition (section 75(4)(e)) is that in the case of an application for a standard loan, the applicant is unable to obtain a sufficient loan on fair terms from a commercial lender. This means that local authorities can only offer a standard loan if the owner is not able to obtain a commercial loan or if the loan offered is not on fair terms as defined by the Act.

3.30. As the central case underpinning the guidance is around centralised delivery via a national lending unit, this guidance does not cover direct lending by local authorities. In the event that direct lending becomes the primary route, draft guidance will be prepared.

Definitions

"Loan"

3.31. There is not one universal definition of a loan. The dictionary definition is:

• something that is borrowed, especially a sum of money that is expected to be paid back with interest
• the action of lending.

"Credit"

3.32. The dictionary definition of credit is "the facility of being able to obtain goods or services before payment, based on the trust that payment will be made in the future".

3.33. Consumer Credit legislation defines "credit" and "the provision of credit" as:

A personal credit agreement is an agreement between an individual ("the debtor") and any other person ("the creditor") by which the creditor provides the debtor with credit of any amount.

A consumer credit agreement is a personal credit agreement by which the creditor provides the debtor with credit not exceeding £25,000. This limit will be removed in April 2008.

3.34. In the Act "credit " includes a cash loan, and any other form of "financial accommodation".

3.35. The FSA definition of a Regulated Mortgage Contract is:

A contract which, at the time it is entered into, meets the following conditions:

(i) a lender provides credit to an individual or to trustees (the "borrower"); and

(ii) the obligation of the borrower to repay is secured by a first legal mortgage on land (other than timeshare accommodation) in the United Kingdom, at least 40% of which is used, or is intended to be used, as or in connection with a dwelling by the borrower or (in the case of credit provided to trustees) by an individual who is a beneficiary of the trust, or by a person who is in relation to the borrower or (in the case of credit provided to trustees) a beneficiary of the trust:

(A) that person's spouse or civil partner; or

(B) a person (whether or not of the opposite sex) whose relationship with that person has the characteristics of the relationship between husband and wife; or

(C) that person's parent, brother, sister, child, grandparent or grandchild.

"Commercial lender"

3.36. The Act defines a Commercial lender as a person who:

a) has permission under Part 4 of or is otherwise authorised under the Financial Services and Markets Act 2000 (c.8) to pay money under a contract on terms under which it will be repaid or otherwise to provide credit,

b) is an exempt person within the meaning of that Act in relation to the activity mentioned in paragraph (a), or

c) holds a licence under Part 3 of the Consumer Credit Act 1974 (c.39) to carry on a consumer credit business or consumer hire business or who, by virtue of section 21 of that Act, does not require such a licence.

3.37. These categories cover virtually all lenders operating in the mainstream markets.

"Fair terms"

3.38. The Act defines "Fair terms" as terms which, in the opinion of the local authority, are reasonable and affordable having regard to the circumstances of the applicant and the interest rates prevailing at the time the loan was applied for.

3.39. In providing loans to individuals, the commercial market will assess the perceived risk of lending to a particular individual. Generally speaking, the higher the risk of default the higher price the borrower has to pay. Price includes interest rates and arrangement fees. A comprehensive trawl of the market will provide borrowers with a loan deemed a fair price by the market matched to the individual's circumstances. There is provision in financial legislation to protect borrowers against extortionate credit.

3.40. In the context of the Act, the definition of "fair" may have a different effect, in that local authorities may make a wider judgement taking account of circumstances that would not be relevant to the commercial market. The Act allows the local authority to look at reasonableness and affordability in the circumstances of the applicant and current interest rates when deciding if an offer made by the commercial market is "fair" for the purposes of section 75.

3.41. If a National Lending Unit ( NLU) is set up, it is possible that each authority could adopt its own definitions of "fair" for the purposes of permitting access to a loan from the NLU. In practice we would aim to agree a single definition covering all local authorities to ensure the benefits of operating a single NLU are not undone by unnecessary variation across local authority boundaries.

Arranging for loans from others

3.42. The wide-ranging powers in section 71(3) of the Act allow local authorities to help owners obtain lending from third parties, whether they are existing commercial lenders or other lenders as described later in this chapter. This could be by a range of methods such as referral, guarantees or subsidies, supporting the cost or practicalities of administration and so on.

3.43. It is generally more appropriate and more cost effective for owners to borrow from third parties where this meets their needs, rather than direct from the local authority. The rest of this section on lending reviews what the commercial market can provide and how to access it, and then considers how government can expand the options available for those whose needs are not met by the existing commercial market.

Commercial lending

Commercial lending: Criteria

3.44. There are a number of options available to owners in the commercial market for raising funds to finance home improvements. Overdrafts, personal loans, secured loans and mortgages are widely available from banks and building societies on a variety of terms and conditions. Each organisation has different product terms and conditions and lending criteria, but in the main high street banks will base their lending decisions on:

• The amount and purpose of the loan
• The age of the borrower
• The borrower's track record
• The borrower's ability to repay.

3.45. High street loans are restricted generally to those aged over 18 who are in receipt of regular income with a good credit rating and who can demonstrate that they can afford repayments over the term of the loan.

Commercial lending options: Equity loans

3.46. Equity is the difference between any mortgage on a property and the value of the property. Equity release is a way of unlocking the value of a property without having to move home. It is used mostly by older homeowners who have either paid off their mortgage altogether or have only a small amount left to pay.

3.47. There are two main forms of equity release in the commercial market - lifetime mortgages and home reversions. With a lifetime mortgage (which includes interest only and rolled up interest products for older people) an individual takes a mortgage out against their home to give them a lump sum or a regular income. The loan is repaid to the lender when the property is sold. The individual continues to own their home until the property is sold.

3.48. With a home reversion scheme, the owner(s) sells their home, or a part of it, to a reversion company that allows them to continue to live there for the rest of their lives.

3.49. Commercially available equity products are restricted generally to the over 60s with either no mortgage or a very small mortgage, a minimum property value (£40,000-£60,000), often a minimum loan value of £25,000 and maximum loan to value of 25%-50%. The limitation on the loan to value is important, particularly where the loan involves rolled up interest, to ensure that the amount owed does not become more than the value of the property. This is why it is often not possible to realise all of the unmortgaged equity in a property.

3.50. These constraints mean that current commercial equity products offer very limited scope for addressing the problems of condition identified by the HITF. This is because lenders operating on a commercial basis require to address the following risks when they provide equity products:

• Demographic risks - covering longevity, long term care entry and other miscellaneous reasons for early redemption or pre-payment which affect returns
• Market risks - including interest rate risk, the 'no negative equity' guarantee on lifetime mortgages and house price index risk on home reversions
• Expense related risks - the need to cover product development costs
• Reputational risks - the impact on the wider business if an equity product leads to problems for borrowers.

3.51. Pricing and capital considerations for home equity loans cover a wide range of complex actuarial issues. The commercial market does not currently provide an equity type home appreciation loan as modelled later in the section on suggested products.

3.52. Equity products are already constrained by the risks outlined above and lenders tend to avoid further sources of risk. Properties that are not of standard construction are often not eligible for equity release, so this type of solution may not be suitable, for example, for some right to buy owners. Some lenders will not offer equity release on properties in serious disrepair. Equity release is often not the most cost effective way of borrowing money, particularly for small loans on a rolled up interest basis where the amount owed can double in 7-10 years (depending on the interest rate).

3.53. Equity release products are still a fairly new concept, with many of the major banks taking policy decisions not to enter the market. Some have withdrawn due to pricing issues, fear of mis-selling and bad press. In addition to this there are few equity release providers in Scotland due to differences in property law. This means that a Scottish version of the product is necessary and some commercial lenders have taken the view that as the size of the Scottish market is relatively small, it is not commercially viable for them to develop products specifically for this market.

3.54. Due to the complexity of equity release products in particular, specialist advice is required before these products can be recommended to individuals. Equity loans are regulated by the Financial Services Authority ( FSA) and mortgage advisers must pass specific examinations before they are allowed to advise on any type of equity release loans.

Commercial lending options: Islamic mortgages

3.55. Few banks currently provide Islamic mortgages and due to differences in the legal and financial systems there is only one provider of Islamic home finance in Scotland.

Commercial lending options: Non-conforming ("sub-prime") loans

3.56. In addition to "prime" lenders such as traditional high street banks, a commercial market has developed to assist borrowers who do not meet the requirements of conventional lending, otherwise known as non-conforming. Some prime lenders have recognised that a large percentage of borrowers are non-conforming and there is now a broad spectrum of lenders who offer products to meet different borrowers' circumstances, from near-prime to 'medium to high adverse'. Non-conforming lending accounts for around 25% of the total lending market and 5-6% of the total mortgage market. The market offers a range of products including mortgages, secured and unsecured loans. Notwithstanding this, the recent problems in the US sub-prime mortgage market will have a profound and lasting impact on the mortgage market. Some lenders in the UK have withdrawn from the market or are no longer serving specific segments, notably borrowers with a high level of adverse credit. Some lenders have reduced the maximum loan-to-value ratios at which they are prepared to lend and tightened other lending criteria. This may make it more difficult and in practice more expensive for some borrowers to obtain loans.

3.57. The terms of the loan, including the interest rate, are matched to the individual borrower's particular circumstances. Generally speaking, the higher the lender's perceived risk from lending to the individual the higher the interest rate and charges. The result is intended to be an offer to the borrower that is considered "fair" by the market, matched to the individual's particular circumstances and the range of products that the particular lender has available. Like the prime market, the non-conforming market is regulated by the FSA and is subject to other regulation such as Consumer Credit legislation. In providing products, lenders must lend responsibly, ensure affordability, give due regard to legislation relating to extortionate credit, and treat customers fairly.

Commercial lending options: Help to choose a suitable product

3.58. The assessment of affordability and the recommendation of suitable lending products is a specialised process. There are a number of options available to owners when searching the commercial market. Owners can:

• approach their own bank or building society for assistance
• search the market themselves via the internet, financial publications or by visiting branches of banks and building societies
• use a financial advisor
• use a mortgage broker.

3.59. Mortgage brokers can search the whole of the market and find suitable products for borrowers. This search can be carried out free of charge and with no obligation on the part of the borrower. When the loan is made, brokers may charge a fee which is related to the borrower's circumstances.

Commercial lending options: Owners unable to access commercial lending

3.60. There will be owners for whom there are no commercial loan options. Typically, the prime lending market will not provide for borrowers who are:

• under 60 with equity and no affordability
• under 60 with equity, affordability but poor credit rating
• owners with no equity and no affordability
• over 60 with equity but in properties of low or insufficient value or unsuitable construction
• elderly owners with no equity but affordability.

3.61. In addition, smaller loans which require security may not be considered attractive by high street lenders.

3.62. Non-conforming lenders may be able to find solutions for some of these categories of borrowers. However, the commercial market as a whole does not provide products for:

• owners with no affordability and no equity
• owners under 60 with no affordability but with equity in their property
• owners in certain types or values of property.

3.63. In addition to these categories of owners, there is limited availability of smaller loans where arrangement fees may be high in relation to the size of the loan. Equity release products will also not be provided by the market for smaller loans.

3.64. Consideration needs to be given to these categories of owners and how to assist them so that they can carry out works.

Q: Are there any other categories of borrowers who require consideration in developing lending options?

Possible loan products

3.65. Suggested products that may be appropriate for owners for whom commercial lenders do not currently cater are summarised in the following table.

3.66. For each of these products consideration needs to be given to setting criteria such as:

• minimum age limit for owners (particularly for a HAL)
• maximum age limit
• amount of equity which can be released for example maximum loan to value percentage less any outstanding secured loans
• maximum amount of loan that can be granted
• minimum amount of wealth (if any) that should be disregarded for the purposes of calculating an owner's affordability for the cost of works
• the minimum amount of loan which can be granted in relation to the costs for setting up secured loans. Costs for secured loans include independent solicitors' fees for acting for owners in preparing the standard security and valuation fees and are anticipated to be around £500
• life cover requirements for loans
• the extent to which local authorities can subsidise loans.

Q. Should any changes be made to the key features of these lending products?

Q. Are the proposed products suitable for these types of borrower?

Q. Are there any other products that should be considered?

Q. Should a minimum amount of an owner's wealth be disregarded when assessing affordability of works? If so, on what basis?

Q. What is the realistic possibility of the commercial market developing a Home Appreciation Loan as outlined above?

Repayment charges

3.67. Section 172 of the 2006 Act allows the local authority to impose a repayment charge in certain circumstances. This is registered in the land register and is an obligation to repay costs that the authority has incurred.

3.68. A repayment charge gives the authority the means of recovering costs where it has carried out works following enforcement action that it has taken against the owner or that the Private Rented Housing Panel has taken against a landlord. The authority does not have to recover full costs if it chooses not to, and can choose whether to apply interest and administrative costs.

3.69. The sum due is repaid by the owner in 30 equal annual instalments. The repayment charge can be redeemed at any time by payment of an amount agreed by the authority or, failing agreement, set by Ministers.

3.70. There are potential dangers in the use of a repayment charge. The lodgement of a repayment charge could be classed by a lender over the property as an event of default and this could result in the lender calling up their standard security and taking possession of the property.

3.71. There is also the danger that, if the authority is generous in its interest and repayment requirements, owners will abdicate their responsibilities and wait for the authority to carry out the work and apply a repayment charge.

3.72. So although repayment charges could be seen as a way of funding works for owners unable to access commercial lending, they should not be treated as a loan option but simply, as intended by the legislation, as a last resort for recovering public money that the authority has been obliged to spend in order to enforce the repair, improvement or demolition of property.

Delivering new loan products

Considerations for local authorities delivering lending

3.73. The 2006 Act allows local authorities themselves to make loans direct to owners. Under section 80 of the Act a local authority can set the terms for a standard loan or the repayment element of a subsidised loan, including provisions on interest (or other charges) and repayment. The local authority may not require repayment of the interest free element until the applicant to whom the loan is made disposes of an interest in the house by sale or otherwise, except by the granting of a standard security or a servitude or by means of a lease. The local authority may require the loan and interest to be secured by a standard security over the house.

3.74. However, there are other matters that an authority should consider before deciding whether it should deliver any part of the lending process.

3.75. The delivery of lending can be split into the following parts:

1. Assessing affordability

2. Providing financial advice

3. Providing suitable products

4. Processing the loan application

5. Providing the loan capital

6. Administering the loan after it is made.

3.76. In theory each part can be done by separate parties and this opens up a number of options to local authorities when considering how to deliver lending under the Scheme of Assistance.

Financial regulation

3.77. The provision of each aspect of lending is heavily regulated. This is intended to ensure that borrowers are given good advice and products are not mis-sold. Financial regulation is intended to protect borrowers against the danger that they will unknowingly enter into long-term commitments that they are unlikely to meet, leading them into financial difficulty. It aims to protect lenders by ensuring they follow the good practice and guidance developed by various bodies and avoid the consequences that would flow from mis-selling and other bad practice.

3.78. At the heart of much of the regulation is the fact that it is not possible to make a sound recommendation about specific lending products without assessing an individual's personal circumstances in relation to the amount of loan required. In the case of equity loans, the interactions between personal resources and state support are complex and can vary dramatically based upon personal circumstances. There are no safe ways to group people and there are big differences in the impact of benefit and tax on people in apparently similar circumstances.

3.79. All products and services offered by lenders must be compliant with the necessary legislation. It is therefore vital that the whole of any loan delivery mechanism that is developed complies with regulatory requirements, particularly when dealing with vulnerable people.

3.80. Current legislation and related considerations for lenders include:

• The Financial Services Authority ( FSA) Mortgages and Home Finance Conduct of Business Sourcebook
• The Consumer Credit Act
• Financial Services Distance Marketing Regulations
• Responsible Lending
• Extortionate Credit
• Treating Customers Fairly.

3.81. Local authorities (and certain other bodies) have some exemptions to current legislation applied to them and these are covered in some detail in the full report on lending, available on the private sector housing part of the Scottish Government website. In summary:

• First charge secured home improvement loans must offer a comparable quality of service to that outlined in the Financial Services Authority Mortgage and Home Finance Conduct of Business Sourcebook to ensure customer protection.
• A second charge debtor-creditor-supplier (d-c-s) agreement for home improvement works - must comply with the 1974 Consumer Credit Act. Generally a d-c-s is one where the lender is connected in some way with the supplier of the goods or services being financed by the credit agreement. This includes cases where the lender and the supplier are the same person. If the lender and the supplier are different persons, the agreement would still be a d-c-s if there are arrangements between them under which the lender is prepared to finance the transaction between the supplier and the customer.
• A second charge debtor-creditor (d-c) agreement for home improvement works - does not need to comply with the 1974 Act as it is exempt under the 1989 Regulations. A d-c agreement is one where there are no goods or services directly involved, for example a personal loan, or where there are no arrangements between the lender and the supplier of goods. This would arguably only apply to home improvements loans where there is absolutely no contact between the supplier and the local authority with regard to the works being carried out.
• Unsecured lending - will not be exempt unless, in a d-c-s agreement, the period of the loan does not exceed 12 months and the number of repayments does not exceed four, or, in the case of a d-c agreement, the loan falls within the low cost exemption which applies where loans are only made available to a class of individuals, where the agreement in question is a debtor-creditor agreement and where the total cost of credit does not exceed 1% over bank base rate.

3.82. If lending falls outwith the exemptions granted by the Consumer Credit Act then a Consumer Credit licence is required by the local authority.

3.83. Irrespective of whether the agreements are exempt under the 1974 Consumer Credit Act, local authorities will still need to comply with the Advertising Regulations and the Total Charge for Credit Regulations formulated under the 1974 Act. There may also be other provisions to take account of under the new Consumer Credit 2006 Act. The majority of these new rules come into force in April 2008.

Potential delivery vehicles

3.84. These are considered to be:

• Commercial Lenders*
• Credit Unions*
• Local Authorities
• Registered Social Landlords
• Existing Special Purpose Vehicle
• New Special Purpose Unit.

[*Commercial delivery vehicles which could provide their own capital. The others would require public funds for capital.]

3.85. The advantages and drawbacks of each of these delivery vehicles are discussed in some detail in the full report on lending referred to above. The following is a summary.

Commercial lenders

3.86. The products that the commercial market currently offers and the type of borrowers that are serviced by this market are covered in the full report on lending. As identified in that report, there is a perceived gap in what the market provides and the type of borrowers that local authorities may wish to assist. In principle, the market itself could fill all or some of that gap by developing new products or further developing existing ones.

3.87. Before market involvement of any kind, commercial lenders considering product development will want to see a robust business case which specifies, among other things, the types of property involved, projected loans, returns, and details of client groups etc. In the case of equity loans, if products are not limited to older people then it is difficult for lenders to predict returns.

3.88. There is no short-term prospect of significant development of products suitable for filling the gap identified. That gap is known and the market has not moved to fill it. However, activity around the Scheme of Assistance may in the longer term help to generate a market that may prove of interest to commercial lenders. This should be encouraged because it would help to maximise the use of private funding and allow public funding to be focused on those most in need.

3.89. Discussions with lenders around product development and supplying loans which local authorities could guarantee or subsidise will continue at national level. However, many lenders develop products on a UK wide basis. It is unlikely that products will be developed specifically for Scotland or at a local level. There is a possibility that lenders may be encouraged to assist on a small scale under their Corporate Social Responsibility policies.

Credit unions

3.90. Only larger credit unions have the necessary capital, resources and infrastructure to deliver high volumes of loans under the Scheme of Assistance. They have qualified staff and are fully compliant with all necessary legislation. The advice offered by credit unions would, however, not be independent and would be limited to the credit union's products.

3.91. Local authorities could work together with larger credit unions to deliver loan products to homeowners who would not normally have access to such financial support. This support could range from direct financial contributions towards the cost of administering loans to offering loan guarantees and indemnities (guarantees granted by local authorities are a contingent liability and should be recorded in the local authority's accounts). Larger credit unions may be receptive to developing new products such as equity loans, which could be developed more quickly than by larger high street lenders.

3.92. Smaller credit unions could provide smaller loans, and local authorities could work with local credit unions to encourage owners to save in anticipation of repair bills.

3.93. If a local authority sets up a scheme whereby it refers applicants to a credit union then State Aid, procurement and competition rules will require to be considered . Any aid given by local authorities through credit unions has to be compatible with the terms of the Scottish Credit Union Scheme.

3.94. The current lending pilot in Glasgow has provided valuable insight into the way in which a local authority and a credit union can develop a joint approach. The Scottish Government has worked with Glasgow City Council and Glasgow Credit Union on the Financial Gateway pilot scheme. The pilot gave owners in Glasgow the option to apply for loans with Glasgow Credit Union if they were finding it difficult to meet the cost of work to their homes and they could not access commercial lending. The pilot:

• was aimed at owners who could not access affordable high street lending products
• allowed owners to repay the cost of works over up to 7 years, and longer in some circumstances
• included benefits such as a personal approach to identifying the right solution for owners based on their individual financial circumstances
• offered the same interest rates on loans for everyone. The rates varied only by product type and the term of the loan.

Local authorities

3.95. As a minimum, for each local authority to set up its own lending operations, it would require:

• A team of specially qualified staff who could provide financial advice, process applications, assess affordability, recommend suitable products and monitor accounts after drawdown including dealing with arrears
• Expertise in new areas such as FSA regulation, consumer credit legislation, responsible lending and financial advice. Maintaining such expertise would be an ongoing process as regulation is constantly being introduced and revised
• Loan documentation, procedures and guidance for staff to follow
• IT systems to support all aspects of the lending delivery chain, such as providing loan repayment quotes, processing applications, credit searching and scoring borrowers, producing loan contracts, storing customer details, collecting and monitoring repayments, managing arrears, charging interest, producing statements etc.
• Expertise in product development.

3.96. At present, local authorities do not have a model in place to provide this service. This was evidenced in research for the lending pilot. Discussions with local authorities have identified that whilst they want flexibility at a local level they do not see themselves as lenders. It is unlikely to be economical for each individual local authority to develop its own direct lending operation. It would also take considerable time for each individual local authority to set up its own scheme.

3.97. Each local authority's loan terms and conditions would be different: this would be confusing and perhaps seen as unfair by owners in different areas. In addition the Council of Mortgage Lenders has advised that lenders would be less willing to invest in to a large number of different local authorities loan schemes. The Council of Mortgage Lenders' members are banks, building societies and other lenders who together undertake around 98% of all residential mortgage lending in the UK.

3.98. Looking further ahead, if each local authority builds up a lending book and looks to securitise it, ie. sell off a portion to the commercial industry, the loan books will consist of a diverse range of loans and owners granted under different terms and conditions. This would be less attractive to investors and it would be harder to determine the expected returns than if the whole loan book was granted on the same terms and conditions to the same customer base.

3.99. The Regulatory Reform (Housing Assistance) (England and Wales) Order 2002 has similarities to the Housing (Scotland) 2006 Act in that it introduced new powers enabling local authorities to provide assistance for repair and improvement of private housing. A general power of the Order enables local authorities to consider offering financial assistance other than grants to allow more homeowners to be assisted with a given amount of public sector resource. As a result of the Order there are a number of subsidised lending options currently being developed and piloted in England. Examples of these can be found in the full lending report.

Registered social landlords

3.100. Registered social landlords ( RSLs) have the same exemptions as local authorities regarding regulation.

3.101. Providing lending or hosting lending vehicles has been a business opportunity for some RSLs in England seeking to expand their role. It may be that the same could apply in Scotland over time.

3.102. RSLs could set up and provide a lending delivery chain for local authorities. Local authorities could work individually with local RSLs or work on a combined basis to set up a regional scheme with an RSL to deliver lending.

3.103. This would be a completely new area for RSLs in Scotland and expertise would require to be developed by each RSL. The result would be a number of smaller schemes which, going forward, would be less likely to attract private funds. Not all local authorities may be able to develop relationships with RSLs and there would be inconsistencies across local authority borders.

3.104. The setting up of a scheme by each local authority with an RSL is seen as labour intensive. There is a also a need to introduce lending options as quickly as possible once the Act's provisions become live and this option may not offer as quick a path to lending products as is needed.

Existing Special Purpose Vehicle ( SPV) - Art Homes Limited ( AHL) and Home Improvement Trust ( HIT)

3.105. The services that AHL and HIT offer are considered in some detail in the full lending report.

3.106. Local authorities individually or in groups could make agreements with these companies. There are examples of this happening in England and Wales and the City of Edinburgh Council can provide a general overview of their approach to Scheme of Assistance to other local authorities.

3.107. Both companies have been in existence for a number of years and have specialised experience in providing loans to owners who have difficulty accessing affordable high street products. They have the necessary permissions from the FSA, and AHL have a Consumer Credit licence.

3.108. Using an existing SPV may be an easier option than local authorities setting up their own lending departments.

3.109. A disadvantage of any third party SPV, however, is that the reputation of the scheme and the safety of the local authority's funds are dependent on the performance and the management of the company, which are not under the authority's direct control.

3.110. There is a need to introduce lending options as quickly as possible once the Act's provisions become live. Given the need for a full tendering procedure and the length of time needed to work with a new provider to set up the scheme, this option may not offer as quick a path to lending products as is needed.

New Special Purpose Unit

3.111. A possible option for delivering lending would be for local authorities collectively or the Scottish Government to set up or facilitate a new, national Special Purpose Unit to lend directly and deliver the required products in a way that complies fully with the standards and requirements of financial regulation. This would be a centralised public sector lending unit and all local authorities would have access to its services. In the short term at least this option would be best delivered from within an existing body, rather than by creating an additional public body.

Suitability of potential delivery vehicles

3.112. As evidenced in the potential delivery vehicles section, and more fully in the lending options report, there are relatively limited options available to local authorities to provide comprehensive lending options to owners, compliantly, in a relatively short period of time.

3.113. Commercial lenders and credit unions do not offer a Home Appreciation Loan type product which is seen as pivotal to the Scheme of Assistance lending options. Whilst larger credit unions may be more receptive to developing new products, smaller credit unions may not have the capital resources and this option may not give blanket coverage of Scotland for all owners. Commercial lenders have no plans at this time to develop a Home Appreciation Loan type product.

3.114. Local authorities have advised that they do not wish to be direct lenders and they do not have the necessary experience or infrastructures to lend directly. This it is not seen as cost effective for each local authority to set up its own direct lending unit since there is no obvious need for lending processes (as distinct from referrals) to reflect local circumstances.

3.115. Registered social landlords may see this as a new business area, however it is likely that it would take considerable time to develop to the extent that it was available across Scotland and would involve local authorities negotiating with RSLs in their area. This option is seen as fairly labour intensive for local authorities in an area which is outwith their core expertise. There is no guarantee that each local authority would be able to find a suitable RSL and there would be a number of schemes in operation resulting in inconsistencies across regions.

3.116. The Home Improvement Trust provides a comprehensive service. However, they cannot offer a Home Appreciation Loan type product and their products are not available to owners under the age of 50 at this stage. As the Trust acts as a broker and does not lend directly, there is limited scope initially to introduce new products tailored to the needs of owners identified through our research.

3.117. ART Homes is currently the only provider of a Home Appreciation Loan. Given the need for a full tendering procedure and the length of time needed to work with a new provider to set up the scheme, this option may not offer as quick a path to lending products as is needed. The company is based in Birmingham and taking on an additional 32 local authorities in Scotland would mean an increase in their customer base of over 200%. These factors present delivery risks and further extend the amount of time required to introduce the scheme.

3.118. In light of the need to have lending options available as soon as possible and the relatively limited options available to local authorities to provide lending themselves, together with the current challenges on local authorities resources to deliver other parts of the Scheme of Assistance, Ministers' preferred option is to investigate further the viability of setting up a new special purpose unit. This could be set up within a controlled framework which would be consistent across local authorities. For working purposes we will refer to the unit as the National Lending Unit, and in the following section we explore this option in detail, including where it should sit.

Proposal for a National Lending Unit

3.119. The main aims of the National Lending Unit ( NLU) would be:

• to make standard lending products available to owners deemed by the local authority to be a priority for financial assistance but who are unable to access a sufficient loan on fair terms from a commercial lenders (for example because of their age or poor credit history)
• to make available specialist new products not available commercially (for example a home appreciation loan). Products would be aimed at owners who cannot access commercial products and who are deemed by the local authority to be a priority for financial assistance
• to provide subsidised variants on these products to owners who are deemed eligible to apply by local authorities.

3.120. The NLU would have overall responsibility for the delivery of compliant state sponsored lending products. Over time the centralised function would be responsible for:

• Establishing a national delivery framework offering regulated mortgage advice and affordable state sponsored financial products to assist owners in carrying out certain housing repairs
• The appointment of a panel of mortgage brokers
• Overseeing the operations of the mortgage brokers
• Monitoring the brokers' specific recommendations to owners on a case by case basis to ensure offers are 'fair' as per section 75(5) of the Act
• Developing lending products and setting lending criteria for these products
• Producing compliant loan documentation
• Ensuring products and methods of delivery are compliant with all relevant regulations including FSA regulation, consumer credit legislation, money laundering and responsible lending
• Setting up and holding regular meetings with a Steering Group consisting of representatives from all local authorities.
• Setting up and holding regular meetings with a Lending Advisory Group. The LAG would consist of selected lending industry experts
• Writing guidance notes and setting and documenting procedures for the delivery of NLU products
• Setting up IT systems to support all aspects of the lending delivery chain, including providing loan repayment quotes, processing applications, credit searching and scoring borrowers, producing loan contracts, storing customer details, collecting and monitoring repayments, managing arrears, charging interest, producing statements etc.
• Training staff, including appropriate staff within local authorities
• Appointing a panel of independent property surveyors to carry out mortgage valuations for secured loans
• Sourcing legal services for setting up the property charges
• Developing and delivering the lending delivery chain. This would include putting procedures in place for:

1. Assessing affordability/suitability of owners for state sponsored lending products

2. Providing financial advice on state sponsored lending products

3. Recommending state sponsored lending products

4. Processing loan applications

5. Administering loans after drawdown

6. Dealing with arrears.

3.121. The NLU would have specialist, financially qualified staff to deal with all aspects of the delivery of lending. As evidenced from research and the lending pilot, in addition to financial advice many owners require advice on money management, over indebtedness and benefit entitlement. It would be beneficial if one person could provide all of this advice and information, and a qualification could be developed to ensure that best advice is given by the NLU.

3.122. In addition to these assessments, a full assessment of the owner's long term requirements, including medium to longer term repairs, should be carried out by the local authority to ensure that any given product and amount of loan provided is suitable for both the short and long term housing requirements of the owner. The assessment of an owner's position would be a further filter to ensure that commercial lending or savings have been fully utilised.

3.123. Having a centralised lending unit receiving referrals from local authorities would remove the need for local authorities to lend directly but would retain their flexibility at a local level to decide on the types of owners that they wish to help and in what circumstances. This would be documented in their section 72 statement of assistance.

3.124. The NLU would be commercially focussed whilst adopting a social responsibility policy which at its core would be transparent and fair to all concerned.

3.125. The type of product offered would depend on the authority's statement of assistance and on the suitability of that particular product for the owner concerned.

3.126. The mechanics of how the scheme might work in practice, together with a diagram, are considered in some detail under the section entitled Process for deciding routes to financial assistance.

3.127. In summary, the benefits of setting up such a unit are seen as:

• Economies of scale could be maximised
• Best practice would be followed, and made easier for each local authority
• Would be FSA and CCA compliant
• Staff would be specialised and trained
• Greater chance of encouraging commercial lenders to lever in funds
• Greater potential for loan book to be securitised in future, freeing up capital for reinvestment
• Would ensure a consistent approach among local authorities
• Products would be tailor made for owners' needs
• Local authorities could concentrate on developing other areas of their Scheme of Assistance.

Options for delivering the NLU

3.128. The main options for delivering the NLU and the key points in each case appear to be as follows:

Option 1

A lead local authority establishes a national lending unit within its structure and makes its services available to all local authorities in Scotland.

• Authorities have suggested they do not want to have to grapple with the regulatory and administrative issues at this stage, although a small number have expressed tentative interest
• CoSLA would need to ensure agreement between all authorities on this approach
• Local authorities cann ot obtain services from other local authorities without a tendering procedure u nless the lead authority does not charge for its service

Option 2

Lead local authorities establish regional lending units and make their services available on a regional basis.

• This would require several authorities across Scotland to be equally willing to take on the task
• Economies of scale would be lost and evidence from schemes in England suggests that units at this scale would not work effectively and would almost certainly not attract investment from the wholesale lending industry
• Local authorities cannot obtain services from other local authorities without a tendering procedure unless the lead authority does not charge for its service.

Option 3

A lead local authority establishes a shared national service agreement with a service partner acting as the national operator.

• This would be a variant of option 1, with the service partner focused entirely on the delivery task and perhaps perceived as having a more neutral relationship with authorities
• Control over risks to authorities' capital and the reputation of the scheme would be less
• The service partner could be a private sector or third sector organisation, existing or created for the purpose
• A tendering exercise would be required to select the service partner.

Option 4

A consortium of local authorities takes the role of the lead authority in option 3.

• This would give authorities generally greater voice in the operation
• Governance and management arrangements would have to be clear, firm and simple to avoid cost, delay and operational risk from bureaucracy
• A tendering exercise would be required to select the service partner.

Option 5

The Scottish Government takes the role of the lead authority in option 1, establishing a National Lending Unit.

• This would give clear identity to the national nature of the service
• It would make it easier to evolve the Unit in line with policy in other areas, particularly to extend equity lending to other purposes and reap the benefits of scale
• It could make it easier to attract external investment and tune the development of public policy and investment accordingly
• This would be the quickest route to setting up new products in line with policy requirements and would be more flexible once up and running.
• There would be reduced risks of delivery and would permit the opportunity to explore other delivery models over a longer timeframe

Option 6

The Scottish Government takes the role of the lead authority in option 3, commissioning a service provider to operate the National Lending Unit.

• This would be a variant on option 5, requiring tight control to realise the benefits under that option
• Control over risks to the loan fund and the reputation of the scheme would be less
• A tendering exercise would be required to select the service partner.

3.129. Scottish Ministers have indicated that option 5 would fit best with their strategic thinking. A report on the proposed structure for delivery including potential capital requirements and set up costs is available via the private sector housing part of the Scottish Government website.

3.130. If this option is agreed then the structure of the NLU could be as follows:

• Scottish Government takes lead in the setting up of the NLU
• Representatives from local authorities would be invited to join a Steering Group to be involved in the set up and ongoing monitoring and governance of the NLU
• Initially a simple infrastructure could be set up to pilot operations with a small number of local authorities
• The first product to be offered by the NLU would be a Home Appreciation Loan
• Findings from the pilot would be evaluated after the pilot has been in operation for six months
• Capital and interest loans and interest only loans would be introduced subject to findings from the pilot
• Availability of the NLU would be rolled out in a phased approach across remaining local authorities and the larger infrastructure developed over time
• A full review of progress against objectives, governance and funding arrangements would be conducted within the first two years of operations. The review would determine what changes, if any, should be made to ensure the NLU is successful. This could mean a transfer of control from the Scottish Government to, for example, a consortium of local authorities.

Funding of National Lending Unit

3.131. The NLU would require funding to cover administrative costs and capital for the provision of loan products. Although an important objective of the NLU would be to seek to attract private funding to support its activities, it is prudent to assume for planning purposes that this would not have a significant impact in the short term. Similarly, it should be assumed that the income stream from the repayment of loans would be small in relation to investment requirements in the short term.

3.132. On this basis the NLU would initially need to be funded fully from public funds available for dealing with the condition of private sector houses. Under current arrangements, that means making use of central funding and if necessary, top slicing or recharging Private Sector Housing Grant ( PSHG) provided by the Scottish Government to local authorities. Instead of local authorities making loans direct to individuals from their PSHG allocations they would refer appropriate applicants to the NLU, and instead of authorities using their PSHG to establish lending teams, the NLU would establish a single team, with the economies of scale that this would bring.

3.133. This arrangement reflects the consistent desire of local authorities (shown by our research and discussions with authorities) to divest themselves of direct lending responsibilities and to take part in a joint scheme that can best offer owners and local authorities flexible lending options.

3.134. To allow the level of funding for the NLU to be decided, information on the likely call for loans through each local authority will be needed. Local authorities will need to plan and budget annually for the amount of capital that they expect to lend. This amount should be established after local authorities have identified priority works and owners through their local housing strategies and in their section 72 statement. The intention is that each local authority should have an allocation of capital held in the NLU's lending fund.

3.135. In addition to budgeting for capital requirements, local authorities should consider the circumstances, if any, in which they would offer subsidised loans to owners. The standard products offered by the NLU would not be subsidised. However, where a local authority wished to amend the terms of a product, for example to reduce the interest rate on a standard loan, it could do so through an additional payment to the NLU, funded from its PSHG allocation.

3.136. In assessing what funding is needed for this purpose in the long term, Ministers would aim to strike a balance between ensuring the unit had sufficient funds - allowing for increasing rates of take up as both local authorities and owners became more familiar with the products available - and the possibility of alternative or supplementary funding sources becoming available. In the event that demand far outstrips supply of available capital, the planned review of the NLU could be brought forward.

3.137. It is possible that unexpectedly high demand in the early years could be presented as negating the effectiveness of an approach that favours loans over grants. However, short-term issues should not affect the merits of a loan-based approach since, over time, loans are repaid and capital plus any returns can be recycled to fund further borrowing.

3.138. Ministers expect the package of measures introduced through the 2006 Act to result in significant growth over time in private investment in private sector housing activities and, in consequence, an overall increase in the total of private and public sector investment for this purpose. In addition to the two primary public funding sources - Scottish Government and direct local authority funding - the establishment of a loans unit should mean that substantial funding otherwise paid as grant will be returned as loans are repaid. A key objective would be to maximise the potential to attract private funding into the loan fund from "wholesale lenders" such as a major bank or pension fund, encouraged by the stability of the NLU.

Self funding

3.139. An objective of the NLU would be to generate sufficient surplus income on its activities to cover its own operational costs, such as through charging interest on repayment loans and appreciation on home appreciation loans.

3.140. Beyond that, the aim would be for the NLU to generate returns sufficient to supply new demand for loans so that it could maintain a desired level of lending activities without further significant injections of public funding. However, this would depend on a number of variables, particularly in relation to the home appreciation loan. These include:

• volumes of loans and operating costs
• house price inflation
• average length of occupancy
• the age of borrowers that the product is offered to
• borrowers' ability to continue to maintain their property
• levels of default on repayments
• the costs of operating the NLU
• the eligibility criteria and rate of return charged on the products.

This range of factors means that it is not possible to predict when the NLU would start generating returns beyond saying that this would take a number of years. It is possible that in some scenarios it would not generate sufficient returns.

Sale of portfolios

3.141. A further opportunity is that some portfolios of particular types of loans held by the NLU may become of interest to commercial lenders because, over time, the NLU would be able to demonstrate that there is a market and has established the risk profile and other indicators for loans of that type. If this happens, there is the possibility of selling the portfolio to a wholesale lender, who then becomes the lender for the existing individual borrowers, rather than simply a bulk funder for the NLU's loan fund. This frees up capital and capacity for the NLU. It may also stimulate the establishment of a wider commercial market that can then serve some of the categories of owners that at present need assistance through the Scheme of Assistance. The recent crisis in the US sub prime market and the resulting liquidity problems in the commercial market may however make both these options difficult.

3.142. If the NLU proceeds, as it is established and its business model is refined, consideration will be given to the future strategic use of the unit. This will include the possibility of involving the financial services industry. Involvement may take a number of forms, such as the sale of the loans portfolio on a loan by loan basis, or on a block basis. Alternatively, the financial management of the Unit could be retained while the day to day customer service aspect could be outsourced, taking advantage of the expertise in the industry. Strategic thinking could influence the way products are developed and managed in the shorter term.

3.143. This approach would very much be in the future and would be dependent on the way lending developed over time. It would also depend on the liquidity position of the commercial market and the market's attitude to the loan portfolio. However, it would be helpful to signal the long-term direction of travel at this stage so that the commercial market is aware of the potential and more likely to show interest in the short and medium term involvement that would be needed.

3.144. The financial services industry will be invited to advise and comment on the creation of such a Unit to lay the foundations for any possible direct involvement at a later date.

Costs of delivering the NLU

3.145. The NLU would be established as soon as is practicably possible. It is likely some start up costs would be incurred during the 2008/09 financial year although these, and any capital funding required for initial lending, would be met centrally to avoid disturbing agreed PSHG allocations to local authorities. Further details of potential costs are contained within the separate paper on the proposed National Lending Unit, which can be found on the private sector housing part of the Scottish Government website.

3.146. It is difficult to calculate with any degree of accuracy the likely capital requirements of a new scheme that aims to operate in a part of the lending market that does not yet exist and for which there is limited data available on which to base assumptions. Pricing and capital considerations for equity loans cover a wide range of complex actuarial issues. In addition to demographic assumptions, economic factors such as the guarantee against no-negative equity, house price inflation risk and interest rate risk have to be considered.

3.147. Staffing, costs and capital requirements will also depend on demand. Demand will principally be driven by individual local authorities who will need to be proactive in their whole approach to the Scheme of Assistance. Local authorities will need to actively support the culture change from grants to loans.

3.148. On the basis that establishment of the NLU is given approval, and the structure is as outlined in the detailed report, expected costs for year one of operations are thought to be of the order of £0.5m to £1.0m. This figure is an estimate only and will need to be reviewed depending on the agreed structure of the NLU. Costs for year two can be more accurately predicted after the Unit has been in operation for a year and demand can be more accurately predicted. Input will also be sought from the Lending Advisory Group on costs and capital requirements.

3.149. In developing and pricing any products, a balance needs to be struck between making the product attractive to potential applicants (many of whom may be vulnerable or have limited means), and at the same time maximising the return to the NLU in the long term to ensure the scheme's continued viability. This needs to be considered, particularly if private funds are to be attracted.

Timescale for delivery of lending through the NLU

3.150. In the first year of operations the NLU would aim to:

• Establish a National Lending Unit, to act as fund manager/lender on behalf of local authorities
• Set up a Steering Group with representatives from all local authorities to obtain input and ensure ownership of NLU by local authorities
• Set up a Lending Advisory Group ( LAG) with representatives from the lending industry to advise on strategic and operational matters
• Source and appoint a panel of mortgage brokers to act as a Lending Advisory Service to source commercial loan products for applicants
• Put in place infrastructure, staff and procedures to deliver lending products - the first of which will be the Home Appreciation Loan ( HAL)
• Pilot the HAL with a small number of local authorities
• Review findings from the pilot and adapt procedures where necessary
• Draw up contracts for all local authorities to formalise working arrangements between them and the NLU.

3.151. Within the first two to three years of operations the NLU would aim to:

• Introduce processes to allow new local authorities members to join the NLU in a phased approach
• Establish contractual arrangements between local authorities and NLU
• Roll out in a phased approach access by local authorities to the NLU
• Introduce and pilot capital and interest loans and interest only loans based on level of demand from the pilots in year one.

3.152. Within the first four years of operations the NLU would:

• Review the progress of the NLU against objectives, governance and funding arrangements. The review will determine what changes, if any, should be made to ensure the NLU is successful. This may mean a transfer of control from the Scottish Government to a consortium of local authorities.

Q. Do you support the creation of a National Lending Unit to supply products to people generally not served by the financial markets? If not, what alternatives would you suggest?

Q. How do you think a National Lending Unit should be delivered?

Routes to Financial Assistance

A model framework for deciding routes to financial assistance

3.153. The core of the model framework for financial assistance is around the following principles (see diagram below):

• Owners are primarily responsible for the costs of maintaining their properties
• Owners must use all reasonable means at their disposal to meet those costs which includes using savings and affordable commercial lending
• Owners who have a financial shortfall after maximising their commercial lending capacity will be offered access to public lending products (subject to affordability) or in some circumstances grant
• Owners may be offered more immediate access to subsidised public lending products or grant in circumstances laid out in local authorities' statements of assistance.

3.154. The model framework outlined here represents a fundamental shift away from grant as the primary method of financial assistance towards supported self sufficiency, particularly for works relating to house condition as opposed to disability (financial assistance with adaptations is not fully covered in the diagram below but is the subject of detailed guidance later in this chapter). The model framework puts the emphasis firmly on owners to fund works themselves and only then to be offered publicly funded loan products if necessary. Local authorities will, however, be able to define key groups of people or activities which they deem priorities and which may be offered early access to grant or publicly funded loan products. These priorities would be set out in each authority's section 72 statement of assistance. Specific assistance to help construct this can be found in chapter 4 - Deciding on Criteria for Assistance: the Section 72 Statement of Assistance.

3.155. For simplicity the framework is based on the assumption that there is a National Lending Unit as proposed in the previous section. If, following consultation, it is decided not to create a NLU, the framework will take account of this.

Process for deciding routes to financial assistance

3.156. When an owner approaches the local authority for financial assistance the local authority should first of all establish if the works are priority works, and whether any approved expense limit applies, as detailed in the section 72 statement. Within specific categories of priority works, there may exceptionally be some categories of owners who are prioritised above others, but the norm should be that the circumstances of each owner are assessed, and financial assistance targeted at those owners with no or insufficient options open to them for funding the work.

3.157. If the works being undertaken are not classed as a priority, the owner will not be eligible for grant or for access to any National Lending Unit products. The local authority can, however, provide the owner with assistance in the form of leaflets and information on other options available, for example other organisations that may provide financial assistance and/or grants. Local authorities may wish to offer a service of referring owners to financial intermediaries such as mortgage brokers if owners require assistance in accessing commercial financial products. State Aid, competition and procurement rules should be considered. If the owner is also seeking non-financial assistance, that can be dealt with, as covered in chapter 2.

3.158. If the works are priority works under the local authority's section 72 statement then the authority should establish if the owner is eligible for any grant assistance, taking account of legislation and the priorities for grant aid as set out in the section 72 statement.

3.159. If grant assistance is not available but the local authority has a policy of subsidising loans in circumstances defined in the local authority's section 72 statement (for example subsidised interest rates for certain works - see later section on financial assistance with house condition works) the authority should next establish whether such circumstances exist.

3.160. If the criteria for assessment for subsidised lending are met, the owner should be passported by the local authority to the National Lending Unit, where affordability and suitability of products in relation to the owner's circumstances and other products available in the market will be assessed.

3.161. Where this assessment concludes that a loan through the NLU subsidised by the local authority would be appropriate, this can be offered. In the event that an owner does not wish to take up the subsidised loan then they can be referred to a broker to find a commercial option or use their own funds.

3.162. Where (a) there are no subsidised loans or grant available, or (b) there is a balance between any financial assistance offered and the costs of works, local authorities should advise owners that:

1. they are primarily responsible for the costs of maintaining their properties

2. they must use all reasonable means at their disposal to meet those costs which includes using savings, assets and affordable commercial lending

3. alternatives may be available if they are nonetheless unable to proceed with the work for financial reasons.

3.163. The local authority should then establish if the owner requires assistance in sourcing a suitable commercial product.

3.164. If they do then the owner should be referred to a broker in the Lending Advisory Service who will search the whole of the commercial market for a suitable product.

3.165. If the broker cannot source an appropriate and fair commercial product or if there is a shortfall between the amount offered by the commercial market and the amount required (subject to any approved expense limit set by the local authority in accordance with section 76), the owner will be passported to the NLU who will assess the owner for suitability of a NLU product for the balance.

3.166. Access to the NLU is not allowed unless the owner has first searched the commercial market via an approved broker (unless the owner qualifies for a subsidised product as described above). Consideration should be given to the amount of loan in relation to the costs of setting up the loan, and a minimum amount for financial assistance should be set.

3.167. If after assessment the NLU is unable to offer any suitable products, it will refer the owner back to the local authority. The local authority can then decide on the best course of action for the owner. This may involve grant or top-up grant where some grant has already been given in accordance with the section 72 statement. The use of enforcement and or repayment charges may be appropriate in these circumstances.

3.168. If the broker can find a suitable commercial product for the owner but the offer is deemed not to be "fair" taking account of guidance provided by the Scottish Government, the offer and the owner will be passported to the NLU for further assessment to establish if any of the NLU products are suitable.

3.169. Where a loan offer is available either through the commercial market or the NLU and the owner does not proceed, local authorities should consider using enforcement measures against the owner, leading if necessary to completion of the work by the authority and recovery of costs using a repayment charge. This is likely to be used in particular where it is in the local community's best interests to have the works completed, for example certain common works.

3.170. In the case of priority works, local authorities should consider whether there are any circumstances in which, whilst the particular works in question do not attract up-front grant, they may be willing to consider giving "residual" grant where an assessment of the applicant's circumstances (including ability to use equity in the property) shows that a shortfall will exist.

Factors determining eligibility for financial assistance

3.171. For owners who seek financial assistance, the model framework offers different forms of assistance to owners on the basis of:

• the type of work being undertaken;
• if the works being proposed are classed as being subject to mandatory grant or are otherwise a priority for the local authority then preferential access to financial assistance may be available subject to the details in the authority's section 72 statement.
• If the works are not considered a priority, financial assistance may still be provided but on the basis that owners make use of their own resources before seeking assistance from the authority.
• In determining priorities where these are not already set in the Act or in regulations, local authorities should consider the types of assistance to be offered in relation to the following broad types of work:
• Compulsory works - works relating to sub-standard premises that have been or could be the subject of work notices or other enforcement action.
• Voluntary works - works driven by owners themselves and which do not form part of the local authority's housing strategy.
• Common works and other non-enforceable works - works which are part of the local authority's housing strategy and which are not generally enforceable or where there is no realistic prospect of recovery from owners and which in any case warrant some degree of subsidy.
• Rural works - for example, works which relate to crofts.
• the circumstances of the owner;
• in relation to mandatory grant for adaptations, applicants in receipt of specified income replacement benefits are entitled to grant of 100% of the cost of the work
• a specific example is people who own crofts and are unable to access sufficient lending on fair terms from a commercial lender.
• for owners wanting to carry out repairs or improvements, an owner's ability to use equity in their property or otherwise self-fund the work may be a key criterion used by the authority to target grant aid at those with no such options.

Defining 'priority works' and 'priority groups'

3.172. As part of its section 72 statement of assistance each local authority will need to establish priority types of work (and, within them, any priority groups) that bring passported access to certain forms of financial assistance deemed appropriate by the local authority.

3.173. The decision to mark particular works as high priority for the purposes of awarding grant or lending (including subsidised lending) through the NLU should align with the authority's strategic housing priorities. Where such priorities are not yet reflected in the Local Housing Strategy ( LHS), this should be addressed as soon as practicable. Wherever possible empirical evidence should also be used to demonstrate the more favourable treatment of one type of work over another.

3.174. Identification of types of work authorities might want to prioritise for the purposes of passporting owners for financial assistance should take due cognisance of Ministerial priorities such as the need to expedite efforts to eradicate sub-tolerable housing and to enable older and disabled people to live independently.

3.175. In terms of defining any group of people (as opposed to works) as a priority, it is unlikely that defining people over a given age or in a particular postcode area (excepting the process of declaring a Housing Renewal Area) would be sufficient reason to award public subsidy without further evidence of need. Any priority groups should be identified only in circumstances where, within a priority works category, the local authority wishes to target particular types of assistance at particular groups. An equalities impact assessment should be undertaken when identifying priorities, in line with the requirements of equalities legislation.

Non-priority owners and works

3.176. Owners wanting to carry out works which do not fall into one of the local authority's priority works categories would not generally be offered access to publicly funded financial assistance. They would be expected to use their own resources to pay for works. However, they may be able to access the proposed Lending Advisory Service (see later in this section) which may help them find commercial loans which are affordable and on terms that are fair. There may be exceptions to this, such as where works which are not in a priority category are nonetheless considered appropriate and worth encouraging and the owner cannot meet the cost in any way. The process for deciding exceptions should be included in the section 72 statement and should be fair and transparent.

The option to subsidise standard lending products

3.177. It is proposed that each product offered by the National Lending Unit will be offered on a non-subsidised basis. But where a product involves monthly repayments, local authorities would have the option of subsidising the payments, including the option of covering the entire interest, effectively offering an interest free loan where this type of assistance can be justified. A local authority wishing to subsidise lending products would pay for the cost of the subsidy from its own resources (such as its PSHG).

3.178. As an example, the total funding for Standard Loan A (below) to the local authority would be £15,000 (unless the loan was funded at national level) as it would involve no subsidy. If the authority wanted to offer the subsidised alternative Loan B, it would result in an additional charge to the authority of £1,649 to cover the total cost of the subsidy.

3.179. The method shown here for calculating the 'subsidy charge' to local authorities is deliberately simplified for illustrative purposes.

Example model: Lending products for local authorities

3.180. The advent of 'half way' tools such as these between 100% subsidy in the form of grant and standard loans offers local authorities cost effective options for helping owners who either need help gaining access to low cost loans or to whom authorities wish to offer incentives.

3.181. The level of subsidy offered by local authorities should be based on the scope and nature of priority works and should be documented within local authorities' section 72 statement of assistance. Local authorities should ration their funding to meet these priorities and should review them in line with resources.

3.182. In principle, subsidised loans for particular purposes in relation to particular areas do not raise fundamental competition law concerns provided that the scheme is well targeted and clear what loans can and can not be given for. The loans should be provided to meet particular, specific, and unmet need.

3.183. If loans are incentivised then in addition to defining the purpose of the loans, the provision of such loans has to be constrained in other ways, for example available for improvements to housing stock that fails to meet particular standards.

3.184. State Aid is also a consideration. As a minimum, the scheme requires to be provided on a defined and targeted basis. In addition any subsidy needs to be limited to giving loans to individuals, not companies or partnerships or other such bodies, for example if the owner (or landlord) of a particular property is a company, they cannot qualify for a loan. Landlords with two or more properties are likely to be considered businesses for this purpose.

Amount of loan

3.185. Local authorities should give due consideration to the amount of loan in relation to the cost of assessing affordability and referring the owner to the NLU. If the average cost of setting up the secured loan is in the region of £500 then this is disproportionate to the size of the loan if the loan is under, say, £3,000.

Double subsidy

3.186. Under section 88 of the Act local authorities are prohibited from offering a subsidised loan for work also benefiting from a grant. On the basis of the proposals put forward in this guidance, where authorities continue to administer grant but lending is provided by a non-local authority body, this section will have limited or no application in practice.

3.187. However, the spirit of this section should be applied where possible and owners benefiting from grant should not generally also be offered subsidised lending. This does not preclude the possibility of offering owners a grant and standard lending - for example a home appreciation loan - through the National Lending Unit where there is no appropriate access to commercial alternatives.

3.188. Administration costs and any imputed charges associated with products provided by the National Lending Unit which are waived by the NLU, paid for by the authority or rolled up into the loan would not be counted as subsidy for these purposes.

Owners with no financial options

3.189. While every effort would be made to find a financial option for owners it is recognised some may be unsuitable for lending. These circumstances should be considered in the authority's section 72 statement of assistance.

3.190. As suggested previously in this section, at the local authority's discretion, any amount for which a suitable lending, equity or other option cannot be identified could be covered by grant. Where this is necessary, the grant required should cover the proportion the applicant is unable to fund. The section 72 statement of assistance should clearly set out any circumstances in which such residual grant will be considered.

3.191. Alternatives to grant funding include:

• delaying works until the owner's financial position improves
• providing for specialist debt, money or benefits advice to help the owner improve their financial position
• using enforcement powers to carry out the work and applying a repayment charge to recover funds under Part 7 of the Act.

Q. Do you support this overall approach to the assessment of financial assistance?

Q. Is the proposed model framework helpful?

Q. How do you view the framework in the context of the new relationship between national and local government that has been signalled (see volume 1, chapter 1 - Policy)?

Proposal for assessing owners' ability to access the commercial market for a loan

3.192. Most owners should be able to carry out their responsibility for works without financial assistance, using their own income, savings or lending options. But for many owners, finding affordable finance is difficult despite there being a well developed market in prime and non-conforming lending. Whilst the principle of requiring owners to make reasonable attempts to access suitable lending is accepted, it is clear that many owners lack sufficient experience of financial products to make fully informed decisions about what is suitable and appropriate. In addition, those groups least able to access the cheapest forms of finance also tend to mirror those groups with the lowest incomes. This hinders their ability to access any kind of independent financial advice, compounding the difficulty they face.

3.193. Section 75(4)(e) allows local authorities to provide access to publicly funded lending products if an owner is unable to access a loan from a commercial lender which is affordable and fair.

3.194. It is clear that local authorities could face considerable uncertainty defining terms such as 'fair'. They also risk inadvertently offering financial advice by recommending lenders or products, when they do not meet financial regulation standards.

3.195. A basic affordability assessment could be carried out by the local authority to establish if the owner could access affordable high street products. However, there are numerous products and providers in the commercial market. It is unrealistic to assume that local authorities will have detailed knowledge of the commercial market and its products, particularly as the amount of loan required will vary in every case, as will the owner's circumstances. Again, the local authority also risks inadvertently offering financial advice by recommending lenders, when they do not meet financial regulation standards.

3.196. As discussed in the lending report, there are various ways that owners can search the commercial market for loan products. One of the most comprehensive and quickest way to search the market is through a financial adviser or a mortgage broker.

3.197. To assist owners search the whole of the commercial market, we propose to offer a mortgage broker service at a national level to serve owners across all local authorities.

3.198. These brokers would offer an independent brokerage, primarily for owners who are carrying out priority works (as detailed in the local authority's section 72 statement) and need to search the financial industry for loans appropriate to their needs. The service would make use of industry tools to search the whole of the lending market for products suitable for owners and would be able to identify the most appropriate commercial product for each situation.

3.199. This service would act as a form of means test in respect of assessing affordability for commercial loans and would remove the need for local authorities requiring complex guidance on assessing owners ability to access commercial loans.

3.200. While most owners could potentially access some form of commercial lending product, this does not always mean that products are affordable or fair. We do not propose to suggest a definition for these terms in this guidance but instead propose to allow them to be defined through the National Lending Unit in discussion with local authorities. This offers the main advantage that individuals will receive assistance tailored to their needs, whilst giving the service discretion to passport some owners to non-commercial lending products rather than commercial options that, taking their whole circumstances into account, are too expensive.

3.201. Section 75(3) of the Act places on the local authority responsibility for the decision as to whether terms available to a person are "fair". To protect vulnerable owners from taking out loans that are deemed not to be fair, a filter process should be set up to audit offers made to owners. This process could be carried out by the National Lending Unit which would already have the necessary skills in house.

3.202. Access to non-commercial lending products would therefore be from owners undertaking priority works, defined in the authority's statement of assistance as being:

• owners eligible for subsidised lending; or
• owners who have not been able to access commercial products, or the products offered by the commercial market are deemed by the NLU not to be fair.

Delivery of the Lending Advisory Service

3.203. The service could be delivered by either a panel of brokers from the financial services industry or as part of the National Lending Unit.

3.204. If the broker service was provided by the NLU it would retain control over the information and advice offered by the broker and could ensure that best advice was given and products were "fair" for the borrower. Employees would be salaried and not commission driven. There would be a cost to public funds in setting up such a scheme. To satisfy competition rules the service can be provided by the State if "market failure" can be proved in that the advice in question is not currently available to certain portions of society.

3.205. The other option is to use existing brokers who operate in the market. A panel of brokers could be selected following a tendering exercise. This option could be set up fairly quickly and would be a cost effective option, but the Government would not have direct control over the advice and information offered to borrowers. Whilst a fee per case could be negotiated, brokers would still be remunerated by commission from the lender. Brokers' assessments and offers of commercial loans would require to be audited - possibly by the NLU - to ensure that best advice and 'fair' loans, as mentioned in the Act, were being offered. Guidance would be issued to brokers on what was considered a fair loan for a particular owner, and would also be available to assist in assessing brokers' recommendations for non-commercial lending.

3.206. To assist owners who are not carrying out priority works as detailed in the local authority's section 72 statement, arrangements could be set up with the external brokers to refer non-eligible owners to them as part of the local authority's information only service. The number and type of referrals to the broker is likely to determine the fee, if any, that the broker will charge on a case by case basis.

Q. Do you support the creation of a publicly funded financial advice service? If not, what alternatives would you suggest?

Q. Do you have any views on whether the service should be delivered by an appointed panel of brokers from the financial services industry, or whether it should be run as part of the National Lending Unit?

Assessing Financial Assistance

3.207. The types of works and owners listed below are among those for whom local authorities should outline their priorities for financial assistance in their section 72 statement of assistance. Other than in relation to landlords and tenants (see below), authorities are encouraged to think in terms of types of works such as disability-related works or common works, rather than categories of owners such as older people: it would generally be difficult to justify passporting an entire category of owners down a particular financial route, given the very wide variety of financial circumstances likely to prevail within most categories.

3.208. The categories covered below are:

• Works to meet the needs of disabled people
• House condition works (common works and other non-enforceable works, enforcement works, voluntary works)
• Costs of opening or closing maintenance accounts
• House purchase
• House sale
• Crofters
• Landlords and tenants
• Local authority improvement of the amenity of an area.

3.209. For each category, authorities should specify:

• Any approved expense limits which they intend to set where they have the power to do so
• In what circumstances grant will be given, and whether any minimum percentage grant will be applied, taking account of any nationally prescribed minimum percentage contributions
• In what, if any, circumstances applicants will be considered for subsidised lending ( i.e. standard loan products from the National Lending Unit subsidised by the local authority).

3.210. Taking account of the guidance and diagram on the process for deciding routes to financial assistance (para 3.153 onwards), there are various categories of assistance a local authority might specify in relation to particular works. Examples include:

• Up-front grant awarded, for example in the case of adaptations assessed as being eligible for assistance
• Subsidising (discounting) the interest rate on a loan product offered by the National Lending Unit, subject to assessment of suitability, with the amount of subsidy specified for the various types of work to which this applies
• Grant not initially awarded but considered if, after assessment of affordability and capacity to lend, the NLU concludes that the owner faces a shortfall in meeting the cost of the work. In such cases (which should be relatively rare) the local authority may wish to cover the shortfall in full on the basis that the owner has no other means of covering the cost.

3.211. It is open for a local authority to decide that no financial assistance will be given for house condition works costing less than a specified amount, on the basis that owners should be fully responsible for minor works. In any event, lending is unlikely to be a viable or desirable option for low cost works.

3.212. Small grants may well be given where a local authority is funding any outstanding proportion of works costs which the owner cannot cover through other means.

3.213. Statements of the local authority's priorities for financial assistance, as distinct from where it is a statutory requirement to pay grant ( e.g. section 73(2)) and any such requirements derived through relevant case law, should be qualified as being subject to resources.

3.214. For clarity, it may be helpful for the local authority to specify any types of work which will not normally be considered for certain types of (or any) financial assistance.

Works to meet the needs of disabled people

Introduction

3.215. Although adaptation works have many technical issues in common with other works to existing houses and may often be carried out at the same time, there are several reasons for dealing with assistance for adaptations in a distinct way.

3.216. The evidence we have received in developing this draft guidance is that the great majority of applications for grant for adaptations that are supported by a recommendation from social work services (usually an occupational therapist) result in a high level of grant assistance. This reflects the generally lower disposable incomes of disabled people and their families. In practical terms it seems excessive to apply a rigorous test of resources to such applicants when the bulk of the results cover a narrow band.

3.217. In principle, adaptations differ from works to repair a house that the owner may have allowed to deteriorate, or to improve a house and increase its value. There is no 'fault' associated with the need to carry out adaptations, and adaptations normally do not add value to the house - indeed they may reduce it.

3.218. In the light of these factors, Ministers consider that the approach to the provision of financial assistance for adaptations should be more sympathetic and relaxed than that for repairs and improvements. This is consistent with wider policy relating to disability - for example the tenant's right to adapt in section 52 of the 2006 Act - and with policy on the prevention of homelessness. It also contributes to facilitating independent living, which is an important part of the Scottish Government's key objective of making Scotland healthier.

3.219. On the other hand, the principle of personal responsibility for one's housing should apply across the private sector, and there is a danger that a simple, more generous formula could open the way to abuse by a small minority who are not applicants under the current system or could lead to some demonstrably unfair and inappropriate uses of public money.

3.220. Our conclusion, which we put forward for consultation, is that the best approach is to set a framework that reflects Ministers' overall priority for helping people with disabilities but to allow authorities a degree of flexibility within that framework to take decisions based on the circumstances of individual cases. The framework that we propose has the following elements:

1. Most, if not all, requests for assistance should be the subject of a single shared community care assessment, the complexity of which should be appropriate to the person's indicated needs and include relevant contributions across health, housing, and social care. This assessment should identify the needs of the person, and their eligibility for assistance according to clearly defined community care priorities. Where adaptations are identified as the best way of meeting an eligible, assessed need, agreement to do so should be reached across all relevant interests - including social work, housing, and health as required, and the disabled person and carers. The input of technical (building) expertise is likely to be part of this process.

2. As adaptations straddle the respective legal and financial frameworks applying to community care and housing provision, the development of a corporate approach to equipment and adaptations that reflects wider community care priorities is important.

3. Mandatory grant will apply (as now) to the provision of standard amenities for a disabled person and additionally to the provision of adaptations, excepting the provision of additional living accommodation. Local authorities are encouraged to use their discretionary powers to award grant where the provision of additional living accommodation is deemed to be the best way of meeting eligible assessed community care needs.

4. Where mandatory grant is made it must be 80% of the approved expense. Grant will be set at 100% of eligible cost for any applicant receiving certain income replacement benefits.

5. Where a shortfall is faced, for example because grant does not cover part or all of the cost of providing additional living accommodation, the owner must be provided with access to advice on lending options. Local authorities also need to consider their powers and duties to assist disabled people under community care and disability legislation.

6. Decisions on assessment of need, eligibility for assistance, degree of urgency and the best way to meet need should be subject to review (this expands on the more limited requirement in the 2006 Act for a review mechanism relating to the applicant's contribution to the cost of works).

7. The assistance provided should achieve the outcome defined as a result of assessment.

The wider context

3.221. Adaptations are one option within a continuum of services for disabled people, which can range from provision of equipment and adaptations to health and care services, to housing support and even rehousing. It is therefore important that any person who applies for financial assistance for disability-related work should be encouraged to make contact with social work services, if they have not already done so. Their needs can then be fully assessed in line with the principles of the single shared assessment process, and then all the options on how best to meet eligible assessed need explored.

3.222. Local authorities should be aware of their responsibilities to assess need and meet eligible assessed need that apply to the authority as a whole under community care legislation. Whilst practitioners frequently refer to "housing adaptations" and "social work (or OT) equipment and adaptations", duties to assess and meet eligible need with adaptations are overall local authority duties. An authority's strategy on financial assistance with structural adaptations should therefore be drawn up in close conjunction with social work colleagues. Furthermore, duties relevant to adaptations provision exist under legislation relating specifically to disabled people, most notably the Chronically Sick and Disabled Persons Act 1970, as explained in a Scottish Executive publication from 2003 ¹. Providing a grant through the Scheme of Assistance could, but will not necessarily, discharge responsibilities in relation to adaptations under this legislation.

Scope of disability-related work

3.223. For the purposes of assistance provided under the 2006 Act, work to assist a disabled person is not restricted to work to assist a physically disabled person. The Disability Discrimination Act 1995 refers to both physical and mental disability. As an example, the needs of a person with autism - or the needs of family members living with someone who has autism - should be considered equally alongside applications for assistance relating to a physical disability.

Provision of standard amenities

3.224. Section 73(2)(a) requires local authorities to provide assistance in the form of grant for works to provide, or provide access to, standard amenities which in the opinion of the local authority meet the needs of a disabled person.

3.225. Works under subsection (2)(b) permit grant funded provision of standard amenities despite the presence of existing facilities, in circumstances where additional or replacement facilities are essential to the needs of the disabled person.

3.226. Standard amenities are defined in terms of those described in the Housing (Scotland) Act 1987 section 86(1)(e), (f) and (fa):

• (e) has a sink provided with a satisfactory supply of both hot and cold water within the house;
• (f) has a water closet available for the exclusive use of the occupant of the house and suitable located within the house; and
• (fa) has a fixed bath or shower and wash-hand basin, each provided with a satisfactory supply of both hot and cold water and suitably located within the house.

3.227. The Act gives the Scottish Ministers power to change the selection of amenities from section 86(1) of the 1987 Act but they do not intend to exercise those powers at present.

Provision of adaptations

3.228. Section 73(1)(b) requires an authority to provide assistance (not necessarily financial assistance) in connection with works not deemed to be standard amenities but which relate to adaptations to support the accommodation, welfare or employment of a disabled person where the premises being adapted are the residence of the disabled person, or will be within a reasonable period. The Act also places a duty on local authorities to provide assistance where works are for the reinstatement of any house adapted for the purpose set out above.

3.229. It is intended to introduce regulations under section 73(3) to prescribe that assistance for adaptations must be in the form of grant. The draft regulations define adaptations as "structural work and other changes to the building fabric to make a dwelling suitable for a particular disabled person". Ongoing maintenance of adaptations is not eligible for grant assistance. Any requests for assistance with maintenance should be considered by social work departments in line with the authority's overall responsibilities under community care legislation.

3.230. The draft regulations specifically exclude from the scope of mandatory grant work to extend the original structure of the property to provide additional living accommodation. "Living accommodation", as defined in section 194 of the Act, has general meaning - ie. relating to the house as a whole - rather than being restricted to living room and bedroom accommodation. This exclusion from the scope of mandatory grant is partly because of the high cost of many such works, and partly because work of this nature may well result in a net growth in the property value, making it reasonable to expect the applicant to consider lending options should they be necessary. This is in contrast to most other types of work to adapt property for a disabled person.

3.231. In practice, however, blanket exclusions of all such works from the scope of mandatory grant should be avoided in favour of an approach which, where applicable, looks at each component part of a larger project of works. For example, in some cases, part of a wider project involving the provision of additional living accommodation may include provision of a standard amenity such as a downstairs bathroom, in which case the appropriate proportion of the work would attract mandatory grant. Where a property is extended solely to create space for a bathroom (ie with no loss of existing living accommodation) the local authority, in meeting its duty to fund the provision of standard amenities, may decide that a large proportion - or in some cases all - of the cost should be covered by mandatory grant.

3.232. In other cases, where the provision of additional living accommodation does not attract mandatory grant but is nonetheless deemed to be the best way of meeting eligible assessed community care needs, local authorities are encouraged to use their discretionary powers to award grant for some or all of the cost of the work.

3.233. Where a proportion of work to meet eligible assessed need does not attract mandatory grant, and assistance with the work is requested, the local authority will be under a duty (under section 73(3)) to provide advice and information to assist the applicant to fund the work (such as referral for assessment for potential lending options) and - as stated in the preceding paragraph - can provide grant if it chooses. The aim of such assistance must be, as far as is reasonably practicable, to enable the owner to carry out the works assessed as being needed.

Provision of minimum percentage grant

3.234. Evidence from local authorities indicates that under existing arrangements, most grant applications relating to the provision of adaptations and standard amenities for disabled people attract between 80% and 100% of eligible costs after the test of resources has been applied. This is consistent with data which shows clearly that average incomes of disabled people are significantly lower than for the population as a whole. It is questionable whether the cost of administering the test, and the time required to gather and verify information as part of the test, can be justified when most applicants are found to be entitled to a high percentage grant anyway.

3.235. We are therefore proposing to prescribe through regulations that when the local authority gives mandatory grant for standard amenities and adaptations, a minimum percentage grant of 80% should apply.

3.236. The minimum percentage would rise to 100% for those applicants in receipt of one of four income replacement benefits:

• income support
• income based jobseeker's allowance
• pension credit (guarantee element)
• employment support allowance (income related) (from November 2008).

In the case of works for a disabled child, the above would apply to any parent(s) making the application on the child's behalf.

3.237. It is recognised that removing the test of resources and applying an automatic high percentage grant may result in some households receiving grant when they could have afforded to contribute towards the work themselves. Under the present system, grants for adaptations are a minimum of 50%, however high the applicant's income. Where applications are made the average grant for adaptations is 84%. If a small minority of disabled households do in future benefit from grant when they could have funded the work themselves we believe this is an acceptable price for a faster, simpler route to assistance for the great majority of households who need urgent, substantial assistance as quickly as possible. Nevertheless, we will keep such a system under review to ensure it works effectively in the interests of all stakeholders.

3.238. Where a local authority chooses to award grant for disability-related works not within the scope of mandatory grant it is not bound by the provisions on minimum percentage grant and must therefore decide how it will assess the applicant's contribution.

Awarding more than the minimum percentage grant

3.239. In some cases there may be evidence that an applicant eligible for 80% grant will not be able to afford some or all of the outstanding element of the cost. Local authorities will have the power to award more than the prescribed minimum percentage grant where they assess the applicant's contribution to be less than 20%, as section 79(1) specifies that the grant must be the greater of (a) the approved expense minus the applicant's contribution and (b) the prescribed minimum percentage grant. Authorities also have powers and duties to provide financial assistance under community care and disability legislation. Authorities should therefore establish a corporate policy on any circumstances in which they will consider awarding more than 80% grant under either the 2006 Act or community care legislation, for applicants not passported to 100% grant. For example, some authorities may decide they do not intend seeking any parental contribution in relation to applications on behalf of disabled children.

Mandatory assistance with finances for works not covered by mandatory grant

3.240. Applicants undertaking works excluded from the scope of mandatory grant would have the right to receive advice and information to assist them to fund the work. In practice, this means, as a minimum, that they should be able to access advice on lending options via the Lending Advisory Service. The service would aim to source an appropriate commercial lending product, or would make a recommendation for access to a publicly funded lending product. It is for local authorities to decide whether these products would be subsidised. Section 88, which prohibits 'double subsidy', applies here if a grant is given within the last 10 years. No further subsidy would be permitted when some of the conditions within section 88(3) apply. Local authorities should set out in their section 72 statement of assistance their approach to any situations such as these where a lending option is deemed unavailable by the National Lending Unit.

3.241. A local authority's policy in relation to any direct financial assistance with works not covered by mandatory grant should be developed through liaison between housing and social work colleagues, taking account of the local authority's overall duties under community care and disability legislation.

3.242. In some cases, applicants may be seeking to carry out works which go beyond those deemed necessary to meet assessed needs. It would not normally be appropriate - and may be unlawful - for the local authority to refuse grant altogether on the basis that the additional work would go beyond that covered by the assessment of need. The local authority would normally restrict the grant (and any further assistance) to the sum needed for those qualifying works assessed as being necessary. It would then be up to the applicant whether they wanted to self-fund works not included in the assessment of need.

3.243. Where works are not subject to mandatory grant, local authorities have a power to provide grant if they wish to. Authorities should outline in their section 72 statement the circumstances, if any, where they may exercise such a power. Within such a policy, authorities may want to allow themselves discretion to increase an existing grant, for example where relatively minor modernisation work is necessary in order for the adaptation to be carried out and only a small amount of additional grant is needed.

Assessing individual needs

3.244. Local authorities have a duty under the Social Work (Scotland) Act 1968 to assess the needs of, and arrange for the provision of appropriate services to, people who need them. For more straightforward works it may occasionally be appropriate for housing staff within a joint working environment and with training or a basic qualification in community care assessment to make decisions about the needs of the disabled person without direct reference to community care colleagues. But generally, applications for assistance should be referred to a suitable specialist, normally a local authority occupational therapist ( OT), who will be responsible for assessing community care needs. ² A comprehensive community care assessment will not always be necessary or appropriate, but should normally be carried out if major works are being considered or if there are other indicators present (such as carer issues).

3.245. The assessment should be in accordance with all relevant legislation, including homelessness legislation, the code of guidance for which refers to the possibility of a house being unsuitable for occupation due to a physical impairment. The assessment should take account of the needs of all those affected by the disability including affected family members and informal carers, and must take into account, so far as is reasonable and practicable, the views of the person being assessed and of their carer, together with relevant advice across health, housing and social care. The written assessment should be available to applicants.

3.246. The assessment should identify the needs of the person, and their eligibility for assistance according to clearly defined local community care priorities. Where adaptations are identified as the best way of meeting an eligible, assessed need, agreement should be reached to meet them across all relevant interests - including social work, housing, and health as required, and the disabled person (and carers). The input of technical (eg. building) expertise is likely to be part of this process.

3.247. Where consideration of the best way to meet eligible assessed need indicates an adaptation, housing staff should advise which elements of the work will attract (mandatory or discretionary) grant and which may be the subject of assistance in the form of referral for lending advice.

3.248. Consideration of required works should take into account the evolving needs of a disabled person over the medium and long term, avoiding the need for subsequent applications, unnecessary subsidy and disruption to the applicant.

3.249. Consideration of the use of an adaptation to meet eligible assessed needs for a disabled child in foster care should generally be on the same basis as other applications, taking into account the permanency of the placement. Where a local authority is in the process of arranging the placement of a child with foster parents in another local authority area, it should normally be this authority ( i.e. the placing authority) which assumes responsibility for assessing and meeting eligible need.

Prioritisation: determining eligibility for assistance

3.250. As stated in the introduction to this section of the guidance, because provision of adaptations is affected by legal and financial frameworks relating to both community care and housing provision, it is essential to have in place a corporate approach to determining priorities and eligibility for assistance which is in line with local community care priorities, meets legal requirements and is appropriate in resource terms. National guidance on roles and responsibilities in relation to community equipment and adaptations (for example NHS Circular No. 1976 (Gen) 90) is currently under review and will take account of the changes coming from the Housing (Scotland) Act 2006. The outcome of that review will be published for consultation in due course.

3.251. Clearly, in the case of assistance with adaptations, it would be unhelpful if existing community care prioritisation criteria were at odds with the likely availability of grant aid. Such a situation should as far as possible be avoided through close liaison between community care and housing functions in the development of a prioritisation system that reflects the overall prioritisation system for community care services. In the event of unforeseen additional grant funding becoming available to the local authority, the system should be flexible enough to enable assistance to be given to applicants who may have fallen just outwith the original priority bands.

3.252. The regulations require adaptations that are essential to the needs of a disabled person to be assisted with grant except where the work is extending the original structure to create additional living accommodation. Where the applicant is entitled to grant in this way, the mandatory grant should be processed and paid without undue delay and should not be put in a queue or priority list. At the extreme, this may mean having to provide assistance to an applicant even if no budget is available. So it is important that the local authority is very clear about how it interprets "essential to the needs" in the light of its wider policies on meeting the community care needs of disabled people. Applicants for works which the authority regards as desirable but not essential should be dealt with under the authority's policies for discretionary grant.

3.253. The key elements of the method of prioritisation within the community care assessment process should be set out in the statement of assistance.

Approved expense limits

3.254. The Act defines the "approved expense" in relation to a particular application, for the purposes of calculating grant or loan made direct by the local authority. It is the cost that the authority considers is reasonable for carrying out the work (or the relevant proportion of the work) in that application. As at present, the authority does not have to accept as reasonable any prices given in the application, nor does it have to accept that all the work in the application is reasonably necessary for the purpose of the grant-aided works. It makes its own judgement.

3.255. There is a distinction between the general position on approved expense limits and that applying to adaptations and reinstatement works. The general position is that the local authority can then limit the approved expense before calculating grant or loan, provided it has set out the manner of doing so in its section 72 statement. So it could, for example, say that the approved expense for certain medium-priority works shall be no more than a certain amount. This gives the authority an additional mechanism for reflecting priorities.

3.256. However, the Act makes special provision in relation to the approved expense for adaptations and reinstatement works covered by section 71(2)(e) and (f). Sections 76(6) and (7) exclude such works from the scope to limit the approved expense through the section 72 statement. The approved expense can only be limited in connection with such works with the consent of the Scottish Ministers on an individual basis or because the Scottish Ministers have made a general order under section 76(4) requiring such a limitation.

3.257. In dealing with applications relating to adaptations for the benefit of a disabled occupant or to their reinstatement, the authority must still make a judgement as to the reasonable cost for the appropriate proportion of the work (ie that work assessed as being necessary) but must then use that cost as the basis of calculation of grant.

3.258. In deciding what is a reasonable cost the authority may well have benchmarks for comparison, for example for the standard, competitive cost of a wet floor shower and the works necessary to provide one. It would be helpful to publish such benchmarks as a guide for applicants. However, the authority may not treat benchmarks as limits and must make a judgement as to what is reasonable in each case.

Minimising the cost of adaptations

3.259. As suggested in the chapter on Information, Advice and Practical Assistance, local authorities may wish to consider making greater use of their local Care and Repair service in facilitating the provision of adaptations. Even though this would require additional funding to cover labour costs incurred by Care and Repair, there could be savings in the overall cost of grant funded adaptation work.

3.260. Views are invited on the value of undertaking a national tendering exercise for adaptations, possibly on the basis of a shared service administered by a lead local authority. The objective would be to engage the services of a small number of specialist contractors to carry out works for all local authorities, with the aim of sourcing such works more cost effectively. Such a scheme could apply just to private sector adaptations or across the social rented sector too.

Q. Do you see value in a national tendering exercise for permanent adaptations? If so, should it extend to adaptations funded in the social rented sector or be limited to adaptations in owner occupied housing?

Reinstatement of adaptations

3.261. Section 71(2)(f) of the Act requires local authorities to provide assistance with reinstatement of any property which has previously been adapted. Such assistance, applications for which would not normally go through the community care assessment process, does not need to be financial, although this may be the most appropriate option in some cases. In considering criteria for assessing any applications for such assistance, which must be included in the section 72 statement, authorities should consider in particular whether a different approach is needed for tenants and landlords than for owners.

3.262. A tenant can request the landlord's permission to adapt the home to suit a disabled person. Section 52 of the Act prohibits the landlord from withholding or applying conditions to permission unreasonably. A code of practice issued by the Disability Rights Commission in 2006 ³ deals with what is reasonable, and this could include requiring that a tenant reinstates the property to its original condition at the end of the lease. Offering financial assistance, or any other commitment to directly assist with reinstatement works such as through a Care and Repair scheme, could remove a barrier for landlords to give consent.

Rehousing

3.263. Under section 71(1)(a) of the Act, authorities may help an owner with the actual or proposed acquisition or sale of a house. Authorities should consider helping a disabled person move house to more appropriate accommodation where this demonstrably meets the medium to long term needs of the disabled person and/or where this is a more effective overall solution than adapting an existing property.

3.264. Through section 71(5) of the Act, such assistance is not governed by the detailed requirements in Part 2 of the Act, since those requirements are defined in terms of works. The terms on which assistance for acquisition or sale is given are at the authority's discretion under section 71(4). The authority's approach to using the powers in section 71(1)(a) should be included in the section 72 statement.

Transitional arrangements

3.265. The duty to provide assistance to make a house suitable for a disabled person or to reinstate a house that has been so adapted applies to all local authorities from [commencement date], regardless of whether the local authority intends to use the subsequent transitional year to prepare to use its powers under the Scheme of Assistance.

3.266. Regulations prescribing the circumstances in which grant must be given for adaptations, and the minimum percentages applying to such grant, will come into force on [commencement date].

3.267. The nature and manner of assistance is likely to change as the authority makes its transition to the use of 2006 Act powers.

Q. Do you support the intention to regulate for adaptations to attract mandatory grant? Is our proposed definition of adaptation appropriate?

Q. Do you agree with our proposed approach of restricting mandatory grant in cases where additional living accommodation is being provided but avoiding a blanket exclusion?

Q. Do you support the intention to regulate for 80% minimum grant for grant-aided works related to a disability, increasing to 100% for people in receipt of specified income replacement benefits?

Q. Do you have any other comments on this overall approach to financial assistance for works related to disability?

House condition works

3.268. This part of the guidance refers to any works to repair or improve property, excluding adaptations for a disabled person. Local authorities have broad discretion within section 71 to decide what works will be eligible for assistance. Consequently, while there is significant flexibility to assist in a wide range of circumstances it is essential to focus efforts and resources to ensure maximum impact.

3.269. The following sections cover broad types of works and the factors authorities should consider in deciding whether to offer assistance under them. The categories are broken down not by the nature of the works themselves, but by the degree with which they fit with local authority plans and whether they can be enforced. This distinction is important in influencing whether it is appropriate to offer various types of assistance.

3.270. Work to permanently reduce radon emissions from occupied property are repairs for the purposes of section 71, and the power (but not a duty) to provide assistance therefore applies to such works. The replacement of lead piping and the provision of fire escapes also remain appropriate works for the provision of assistance although this need not be grant.

Common works and other non-enforceable priority works

3.271. This proposed category of works is intended to be used to support priorities defined by the local authority but where enforcement action is not deemed to be appropriate or possible. From discussions with local authorities this category is most likely to be used a) to help support rural communities by helping members of the community carry out essential works and remain in their houses, particularly where alternative financial assistance options are unavailable, and b) to help address the particular problems of common works. These works generally relate to situations where the local authority is keen to see works carried out but where there is little or no realistic prospect of obtaining a contribution from owners without an element of up-front assistance. The works may be part of a planned programme - one where it is hoped that incentives, rather than enforcement, will lead to the works going ahead.

3.272. The need for this approach to be available to local authorities has emerged from discussion with local authority representatives on the problems that could arise from an approach that limits grant only to owners assessed as being unable to afford works. It is clear that in specific circumstances there can be factors that make it more important to the authority or the local community that works should go ahead rather than be delayed or prevented altogether by a process of seeking sizeable contributions from owners when some may not have suitable options open to them for financing the work.

3.273. A particular example of where an incentive to carry out works can be beneficial is in the repair and improvement of tenements and flatted blocks where vital elements of the building are in common ownership and house values and incomes are low. Factors influencing the need to provide incentives can include:

• repair and improvement work to poor condition tenements or flatted blocks may help to stabilise and regenerate a declining community
• owners' views on the desirability of improvements
• owners' views on the necessity and timing of repairs
• the particularly high cost of some communal works
• owners who have saved may see grant for others who have not as unfair
• owners who move rather than take on works compound the difficulties of arranging work.

3.274. These factors can also apply in mixed tenure blocks where works need to be carried out by a local authority or registered social landlord charged with upgrading social rented housing to meet the Scottish Housing Quality Standard ( SHQS) by 2015.

3.275. In very specific circumstances incentives may also be deemed by the local authority to be necessary in relation to self contained houses, for example where it is felt to be important to encourage owners, such as young families, to remain in the area in the interests of a sustainable rural community rather than move away and demolish or sell.

3.276. Considerations relating to local authority intervention, and the consequent questions about who pays what, are, by nature, more complex in common works situations. Works will often be needed to all the flats in a block and to common areas such as the stairs. In some cases, works to tenements or blocks of flats can be particularly expensive, even allowing for the cost being divided among a number of owners, increasing the likelihood of grant being required and, where contributions are sought from owners, the chance of some being unable to afford their share.

3.277. But it can be seen as unfair (by owners and local authorities alike) that the inability or unwillingness of some owners to pay their share of the cost of the work should delay or prevent altogether the work being carried out. Owners who want and are able to co-operate do not want to subsidise others. In mixed tenure blocks, tenants do not want their landlord to cover owners' costs as this means that their rent is being used to subsidise those who have exercised their right to buy.

3.278. In many areas there has been a specific approach to common works, where for example:

• the local authority has taken a proactive approach to improving tenemental property, often characterised by significant (for example 50%) minimum grant funding to all owners, including non-resident landlords
• the local authority and a local housing association have worked together to enable mixed tenure blocks to be repaired and improved, again sometimes featuring significant coverage of owners' costs.

3.279. There can be difficulties for a local authority which is considering the need for - and levels of - financial assistance for owners whose blocks are being improved in order to achieve compliance with the SHQS. It needs to balance the obvious pressure of facilitating social landlords' compliance with SHQS with competing pressures such as work to houses below the tolerable standard or adaptations for disabled people. Compliance is subject to a deadline (2015) but the SHQS is a higher standard than the tolerable standard, and some local authorities may consider that SHQS works are therefore a lower priority than BTS works or adaptations to enable disabled people to live independently.

3.280. Despite the complexities of common works, the use of up-front grant to encourage participation in such works needs to be proportionate in relation to the assistance available for other types of work. In offering up-front grant as an incentive, a local authority must be able to justify - not least to other owners - its action, which may be for one or more of the following reasons:

• High cost of works: relevant issues here include considering why the cost is high: if it is because the works go much further than lifting the properties above a "substandard" category then it may be questionable whether owners should enjoy grant for improvement purely because they happen to live in a flat rather than a house; it should also be borne in mind that common repair costs are split among a number of owners, whereas costs relating to self contained houses fall solely on one household
• Low incomes of some owners: low income may not in itself be sufficient to justify the awarding of grant. The authority should also be looking to refer owners to the Lending Advisory Service for advice on potential lending options: where the LAS finds that there are no commercial lending options available they can refer owners to the NLU, who can explore alternatives such as a home appreciation loan which does not require regular repayments
• Pragmatic way of speeding up works: there is some initial evidence that where intensive staff resources are put into helping owners obtain advice on financial options, works can progress within a reasonable timescale; the cost of such a staff resource needs to be set against the high cost of awarding up-front grant indiscriminately.

3.281. The statement of assistance should be clear in setting out what assistance is to be given as incentives and, where appropriate, explaining why the often complex issues around common works justify different priorities for funding than simply the condition of the properties and the capacity of the owners to meet the cost.

Enforcement works

3.282. Section 73(1)(a) of the Act places an obligation on the local authority to provide assistance for any works that are required by a work notice. The assistance does not have to be financial. The authority's view of the type and level of assistance may differ according to the circumstances and if so this should be clear from the authority's statement of assistance under section 72.

3.283. For example, the authority may be less sympathetic to financial assistance if the owner has failed to comply with a work notice and the authority has to enforce the notice by doing the work itself. On the other hand, the authority's approach might also be different for particularly high cost works or works which are part of a regeneration programme in which owners are obliged to take part. Enforcement of works in common blocks may require a particular approach.

3.284. Local authorities can serve a work notice on any house which is sub-standard, whether or not it is in a Housing Renewal Area ( HRA). Specifically in relation to HRAs, authorities can issue a work notice to require the owner of a house to carry out all repairs and improvements which a HRA Action Plan has identified for that property. Local authorities can designate an HRA to improve the amenity of the area where this is being adversely affected by any houses, or to deal with a significant number of sub-standard houses in an area.

3.285. The fact that works are subject to enforcement action (that is to say, the authority has served a work notice) does not oblige the local authority to offer financial assistance but it may opt to do so, thereby offering incentives to owners to co-operate rather than having to carry out the works and impose repayment charges on owners.

3.286. These examples reinforce the point in chapter 3 of volume 1 of this guidance ("Setting the Local Strategy") that balancing the use of enforcement and assistance, including the use of up-front grant as an incentive to co-operate, is a complex issue and needs to take account of the variety of circumstances that the local authority is likely to be presented with.

3.287. As referred to above, where necessary, local authorities have the option of imposing repayment charges to recover costs from owners for works that the authority has carried out as an enforcement measure (see volumes 2 and 3 of the guidance on the enforcement provisions in Part 1 of the Act).

Voluntary works

3.288. This category of works generally relates to applications from owners who seek assistance with repairing and/or improving their property but fall outwith the categories already described. It includes owners of both houses and flats, but it is recognised that with flats there are likely to be additional complexities associated with common ownership issues for which the local authority may in some circumstances want to make incentives available.

3.289. Ministers believe that it would not be a cost effective use of limited resources to offer up-front grant in these circumstances. However, at the discretion of the local authority there may be exceptions relating to specific circumstances or objectives. Where authorities are keen to encourage owners to carry out certain types of work, whilst generally avoiding payment of up-front grant, they may wish to offer "residual" grant where, after assessment of affordability and capacity to lend, the owner still faces a shortfall.

Justifying priorities for financial assistance

3.290. Decisions on which (if any) categories of house condition works will attract financial assistance and which (if any) of these might attract assistance in the form of up-front grant, may involve difficult and sensitive considerations. Policies and/or individual decisions may be challenged, especially by individuals whose circumstances are not deemed a priority. Authorities need to be able to justify the respective priority attached to (a) each type of house condition work relative to other types, and (b) assistance for house condition works as against assistance for adaptations.

Q. Do you support this general approach to financial assistance for house condition works?

Q. In what, if any, circumstances do you envisage that up-front grant might be a necessary tool in facilitating work to be carried out?

Maintenance accounts

3.291. Local authorities can make payments under section 51 to cover certain administration costs of maintenance accounts. Specifically in relation to the Scheme of Assistance, section 71(3)(e) refers to the power to make payments in relation to expenses incurred in connection with the opening of a maintenance account. The legislation does not prevent conditions being applied to such payments, but the local authority should avoid making conditions that effectively turn the grant into a loan that is subject to financial regulation. See volume 3 of the consultation document for more information on maintenance accounts.

House purchase

3.292. Section 71(1)(a) of the Act gives local authorities the power to provide assistance with house purchase. They therefore need to decide what criteria they will use for assessing applications for such assistance, and set out the criteria in their section 72 statement of assistance. One criterion could be that assistance will be considered where it is more cost effective to help someone (for example a disabled person) move house than fund major works to their existing home. Such consideration will be influenced by the extent to which suitable alternative property is available in the area.

3.293. Other particular circumstances including social need could also mean that it is preferable for the owner to be able to move house rather than improve the present house and the use of the power to assist with house purchase should be considered. In such circumstances the most appropriate assistance might be to give information on schemes more specifically designed for the circumstance in question, such as Rural Home Ownership Grants.

House sale

3.294. Section 71(1)(a) also gives local authorities the power to provide assistance with house sale. Local authorities should therefore consider whether there are any circumstances in which they might wish to exercise this power and set out in their statement of assistance the criteria for assessing applications for assistance. An example might be that assistance with single survey costs can be considered where an owner is facing genuine difficulty and can evidence that they have tried but failed to enter into a commercial arrangement (for example with an estate agent) to cover the cost.

Crofters

3.295. Lending against the property is not generally an option for crofters, as they do not own the land on which the croft is situated. In some circumstances it may be possible for crofters to obtain grant from the Crofters Commission.

Landlords and tenants

3.296. In general terms the criteria for deciding financial assistance suggested in this guidance apply to both resident and non-resident owners.

3.297. However, it is generally unlikely that giving grant or subsidised loan products to landlords will be appropriate. Landlords normally operate on a business basis and have a choice as to whether to continue that business if the need to carry out works alters its financial viability. Their tenants have legal protections if the landlord decides to sell. Providing subsidy could simply support poor business decisions or fund compliance with the legal obligations that apply to all landlords. There may be situations where it is better to help a landlord through difficulty than force a change of ownership, and unsubsidised loan would be an appropriate response if the landlord cannot access the normal commercial market.

3.298. Local authorities should consider how they will respond to any approaches from privately renting tenants for financial assistance. Authorities are likely to have an existing policy on this. A good practice approach might involve giving basic information and onward referral to advice agencies with expertise in private renting issues. Giving grant to tenants would ultimately benefit a landlord who may well have been uncooperative in carrying out works to the property.

Local authority improvement of the amenity of an area

3.299. Section 95 of the Act relates to the improvement of the amenity of areas that are predominantly residential. It gives local authorities the power to assist - financially or otherwise - with the carrying out of work to any non-residential premises or land. Examples might include work to an owner's garage, or to land attached to a shop, that needs to be carried out as part of an amenity improvement in the back area between houses or tenements.

3.300. In common with the principles outlined above in relation to house condition works, there should be no automatic assumption of up-front grant, as this could be seen as rewarding neglect on the part of the owner.

3.301. Any assistance the local authority intends making available in relation to this power should be outlined in its statement of assistance.

Q. Is this a reasonable approach to financial assistance for landlords and tenants?

Q. Are there other types of works or categories of owner on which you think guidance on financial assistance would be helpful?

Test of resources

3.302. Financial assistance as it relates to the provision of standard amenities and works covered by section 71(2)(e) and (f) is dealt with in the section entitled 'Work to meet the needs of disabled people'.

3.303. For all other housing related work the approach outlined in this guidance is likely to mean that a detailed test of resources to calculate grant entitlement should rarely, if at all, be needed.

3.304. A Communities Scotland working group established in July 2007 to review the operation of the existing test of resources reached a broad consensus that a prescribed test of resources for grant eligibility was no longer appropriate in light of the need to make a much broader assessment of applicants' financial and property-related circumstances and of the availability of a range of potential finance options under the Scheme of Assistance. The concept of "hardship" being seen purely in terms of income is no longer appropriate, nor is the notion that low income means no ability to borrow, given the likely availability of loans which use equity in the property but require no regular repayments. The conclusion that someone is facing hardship should be arrived at only if all possible options for funding the work have been explored and found to be unviable.

3.305. It is therefore intended that there should be no nationally prescribed test of resources associated with the 2006 Act powers. The existing prescribed test of resources, provided for through The Housing Grants (Assessment of Contributions)(Scotland) Regulations 2003, as amended by the Housing Grants (Assessment of Contributions)(Scotland) Amendment Regulations 2004, will cease to apply once the 1987 Act powers are repealed.

3.306. Section 77 of the Act requires the applicant's contribution to be assessed before grant entitlement can be arrived at. As this assessment is no longer to be by means of a nationally prescribed test of resources, regulations laid under Section 77, and coming into force on [commencement date], will delegate to local authorities the power to assess an applicant's contribution. The terms of section 79(1) mean that the consequence of not making such an assessment is 100% grant.

3.307. Local authorities using a test should consider the extent to which an owner's assets (including savings, investments and house equity) should be assessed as something the owner should expend before grant is offered.

3.308. Section 79(1) stipulates that the amount of grant that an applicant will receive will be the greater of:

• (a) the approved expense less the applicant's contribution (if any), or
• (b) the amount which must be paid where Scottish Ministers (under section 79(6)) have made regulations specifying the percentage of the approved expense that is to apply in certain cases.

3.309. As regulations under section 79(6) set out minimum percentage grant rates for the provision of standard amenities and adaptations for disabled people, the power to assess an applicant's contribution is overridden by the minimum percentage grant rates for such works. This means that a local authority cannot award less than what is set out in the regulations but can award more if it assesses an applicant as being so entitled.

3.310. There may be some categories of works which (in its statement of assistance) the local authority does not prioritise for up-front grant assistance but where, if the applicant faces a shortfall after all lending and other options have been properly explored, the authority would consider offering top-up grant. In these circumstances the original grant application should be refused and, if a shortfall is faced after other potential options have been exhausted, the owner invited to make a new application.

Q. Do you support the view that a nationally prescribed test of resources for assessing grant eligibility for repair and improvement work will no longer be appropriate under the Scheme of Assistance?

Q. If your authority plans to use a local test of resources, are there any aspects of this on which you would find guidance helpful?

Terms of grant and loan made by local authority

Minimum grant

3.311. In addition to the proposed minimum percentage grant to be prescribed in relation to works associated with a disability, local authorities may, in exceptional circumstances, choose to apply minimum amounts or percentages of grant for other works. Any such circumstances should be set out in their statement of assistance.

3.312. Generally, however, the use of minimum percentage grant is strongly discouraged, as it is not consistent with an approach of exploring, on an individual basis, what options exist for funding the work.

100% grant

3.313. Aside from the statutory provisions relating to mandatory grant for adaptations, local authorities will have discretion to pay grant of up to 100%, where this is the outcome of their assessment of the applicant's contribution. In any such circumstances, authorities should be satisfied that they have monitoring systems in place to ensure that payment of a high percentage of grant does not lead to excessive prices from contractors who may be aware that the cost of the works is to be covered by grant.

Grant repayment conditions

3.314. The Act allows local authorities to apply such terms as it thinks fit to the provision of assistance (section 71(4)). This is subject to the terms specified in Part 2, which include conditions that must be applied to grants (section 83). If those conditions are breached, repayment is required.

3.315. If an authority applies additional conditions they will not be governed by the provisions in sections 84 onwards of the Act, and the authority will have to specify its own terms governing the conditions it creates, including whether and how repayment will be required on breach. It will need to make its own decision as to whether the additional conditions proposed are permissible or whether, for example, they conflict with the conditions already contained in the Act or if certain clauses expect repayment and in doing so turn the grant into a loan and conflict with the requirements of financial regulation.

Administration of grants

3.316. Processes used for the calculation and payment of grant should be fair and transparent and consistent with the authority's statement of assistance.

3.317. Apart from the guidance (paras 3.302 to 3.310) on the intention not to prescribe a test of resources, there is no current intention to provide guidance on issues relating to the administration of grant. However, depending on the outcome of this consultation on the principles of financial assistance, we will be in a position to review with local authority practitioners the existing guidance on administrative processes ("Guidance for Local Authorities on Improvement and Repairs Grants", revised November 2004).

3.318. There is no intention to provide prescribed pro formas through regulations, but templates will be made available for local authorities to adapt in accordance with relevant legislation.

Approved expense limits

3.319. The 1987 Act sets a limit or filter on the level of approved expense for grant purposes, of a value to be determined by the Scottish Ministers. The current value is £20,000 and the effect of the filter is that applications for grant for works where the approved expense would exceed this value cannot be approved without the prior consent of the Scottish Ministers. The 2006 Act alters the position by allowing the Scottish Ministers to decide whether or not to have such a filter at all and if so to set the value in regulations.

3.320. The practical experience is that where a local authority seeks approval to exceed this level there is almost invariably a sound case for doing so. The Scottish Ministers therefore do not currently intend to set an expense limit under the 2006 Act. To do so would not be consistent with the approach - under the Scheme of Assistance - of making a broad assessment of someone's ability to access a range of potential financial options to fund the required work. Against this background, the use of an expense limit would normally be inappropriate as it would artificially restrict assistance and would therefore contribute towards hindering the progress of works altogether.

3.321. Local authorities may opt to include an expense limit, or equivalent tool for limiting financial assistance, in their section 72 statement of assistance. For the reasons outlined above, this is discouraged for most circumstances in which grant is paid. It will normally be fairer to reflect priorities through the amount of grant than through an arbitrary cap on the value of works.

3.322. Authorities should note that section 76(7) of the Act prohibits them from setting an approved expense limit for adaptations and work to reinstate a property after adaptation work (see paras 3.254 to 3.258).

Q. Do you support this approach to approved expense limits?

Q. Are there circumstances where you see a continued role for local approved expense limits?

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