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Part 2 - Modernising regulation

2.1 Introduction

In part 1 we discussed how changes to the law on Right to Buy could help to safeguard our stock of social housing for future generations. In this part of the paper, we describe our plans for modernising and streamlining how social housing is regulated, so that tenants and taxpayers get better value from past and current investment in social housing.

Social housing is a valuable national asset. It needs to be managed and maintained efficiently for the benefit of current and future generations of tenants and taxpayers.

Government plays a role in securing these benefits, mainly by setting national standards for the sector, such as the Scottish Housing Quality Standard ( SHQS). But council housing and homelessness services and registered social landlords ( RSLs) are the key players. They have a contractual relationship with their tenants through the rents that the tenants pay for their homes. This is defined in the tenancy agreement between landlord and tenant. Working with their tenants to identify local priorities, they are responsible for managing their stock to deliver services that meet the needs of their tenants and of the communities in which they operate.

Regulation ensures that social landlords meet these obligations, helping to compensate for the lack of choice for tenants that is the result of demand for social housing outstripping supply. At present, it is based on powers in the Housing (Scotland) Act 2001, which created a single regulatory framework for RSLs and council housing and homelessness services. The Act gives Scottish Ministers powers to:

• register and de-register RSLs;
• inspect RSLs and council housing and homelessness services;
• regulate RSL governance and financial viability; and
• intervene to improve services following inspections.

Scottish Ministers exercise the regulatory powers in the 2001 Act through an executive agency - the Scottish Housing Regulator ( SHR). The SHR operates independently of Ministers but is accountable to them for its performance and use of public funds. Ministers in turn are accountable to the Scottish Parliament for the work of the SHR.

At the heart of the regulatory framework are Performance Standards for all social landlords and homelessness functions ¹. These national standards have been agreed and published jointly by the SHR, SFHA and COSLA. They are a common set of standards for both RSLs and local authorities and let all social tenants know what they can expect from their landlords. Performance Standards are issued by Scottish Ministers as statutory guidance under the 2001 Act. They provide a framework for the regulator to assess performance and for landlords to self-assess their own performance.

The Act places great emphasis on inspection as the means of understanding the quality of landlords' services. Clearly, the ability to inspect is an important means of gaining such an understanding. Over the years, inspections have helped raise expectations and drive up standards of service across the sector. Tenants in particular have welcomed the assurance that independent, external inspections of services provide.

However, relying too heavily on a planned programme of inspections can place a disproportionate burden on landlords that are performing well and delivering high-quality services, and can divert staff time from frontline services. It may also divert the regulator's attention from landlords that are most at risk of failing their tenants and can be an expensive use of the regulator's time and efforts.

In view of this, the SHR has been changing how it operates. It has been moving from an approach based on inspecting every landlord once every five years towards one that is more targeted on risk, with interventions that are proportionate to the kind and level of risk identified. Inspection remains one of the SHR's tools, but others include requiring landlords to provide information; self-assessment submissions; business plan reviews; or independent investigations ².

In the case of local authority landlords, the SHR has been working closely with the Accounts Commission and other scrutiny bodies to develop a co-ordinated, risk-based approach to the scrutiny of local authorities, including their housing services. This approach will continue to be developed over the next few years. Key to this is the SHR's participation in the shared scrutiny risk assessment process led by Audit Scotland on behalf of the Accounts Commission ³. This risk assessment process will be used to plan proportionate and risk-based scrutiny activity in the local government sector. The approach will take greater account of Single Outcome Agreements and the role of the Accounts Commission Local Government Scrutiny Co-ordination Strategic Group. The diagram on the next page illustrates how this shared risk assessment would operate. (Chart 2)

We believe that these changes in operational practice that SHR has been making should be developed further. But the powers in the 2001 Act, geared so closely to inspection and subsequent interventions, do not provide a basis for doing so. That is why Firm Foundations proposed that we should legislate to modernise the whole regulatory regime.

Chart 2 - the framework for shared scrutiny risk assessment⁴

2.2 Purpose of a modernised regime

Firm Foundations noted that the SHR's current powers are relatively severe and intrusive and are not balanced by powers that enable it to adopt lighter-touch interventions where these might be required. So the SHR has limited ability to operate as flexibly as it should on behalf of tenants. More generally, we recognised the need to revise and update the regime of regulation as a whole, not least to bring it into line with the principles for scrutiny that we have accepted in our response to the independent Crerar Review of regulation, audit, inspection and complaints handling of public services ⁵.

Thus, Firm Foundations suggested the following objectives for modernising the SHR and the regulatory regime as a whole:

• The modernised SHR should have an explicit duty to promote and protect the interests of current and future tenants of all social landlords.
• The modernised SHR should be independent of Ministers.
• Standard setting and assessment of performance should be separate, with Ministers setting standards and the SHR assessing performance. Responsibility for meeting standards, improving performance and achieving value for money should rest with housing providers.
• The burden of regulation and inspection should be reduced, with self-evaluation by landlords the starting point for scrutiny; an end to routine inspections; and lighter-touch regulation for better performers.
• The regulator should gather consistent, reliable performance information from housing providers to support sound risk assessments and enable tenants, RSL governing bodies and elected council members to be well informed about services and performance.
• The modernisation of regulation should be set within broader developments in performance management and evaluation frameworks for local government as they develop.
• There should be a wider range of enforcement and intervention measures that can be used in a more flexible way than the SHR's existing powers.

Responses to Firm Foundations generally supported this approach. In light of this, we undertook to consult stakeholders on the development of detailed proposals for creating a modernised system of regulation for 'ensuring that tenants and taxpayers receive the value they have a right to expect'. ⁶

We started this process in July 2008 in a workshop at a Registered Tenant Organisation ( RTO) Regional Network event. During the autumn we attended other events where we outlined the Government's proposals and listened to tenants' views. Over recent months we have had discussions with COSLA and the Association of Local Authority Chief Housing Officers ( ALACHO), the Equality and Human Rights Commission, the Council of Mortgage Lenders, Consumer Focus Scotland, the Chartered Institute of Housing ( CIH) and the Scottish Federation of Housing Associations ( SFHA).

Stakeholders expressed particular views on and priorities for the new regime that reflected their own perspectives, experiences and interests. Nevertheless, they generally agreed that the broad purpose of a modernised regime should be to focus the efforts of social landlords on the three main objectives of:

• meeting tenants' priorities;
• continually improving performance and value; and
• commanding the confidence of public and private investors in social housing.

A regime based on these objectives would fit well with our wider vision for scrutiny, confirmed in the Scottish Government response to the Scrutiny Improvement Action Group recommendations ⁷. This vision is that scrutiny should provide independent assurance that services are well managed, safe and fit for purpose; and that public money is being used properly within a framework where:

• public services are focused on and contributing to the Government's Purpose and Strategic Objectives ⁸;
• public services are performing well - they are responsive, efficient, continually improving and achieving outcomes;
• service users are given assurance about the standards of services they receive and, where appropriate, given protection; and
• organisations are able to evidence continuous improvement through robust self-evaluation, and scrutiny is targeted at those organisations where performance is poor.

We would welcome your views on whether our proposed purpose for the modernised regime is right and invite your response to the following questions:

2.3 Modernising regulation - overview

We set out in the draft Bill provisions intended to create a regulatory regime capable of achieving the purpose we describe in section 2.2 above. We include them here to inform your responses to this consultation. We will amend them to take account of your responses before introducing the Bill in the Scottish Parliament.

To make the legislation as comprehensive as possible, we propose that the Bill should contain all provisions relating to the regulation of social landlords. So, as well as several new provisions, the draft Bill includes many that appear at present in the 2001 Act, along with provisions from that Act that have been revised to make them better fit for purpose. The provisions have two main purposes:

• Creating a transparent process of co-operation, by which the Scottish Parliament, the Scottish Government and all stakeholders can work together to define clearly the outcomes social landlords should be achieving for tenants and taxpayers. This would involve introducing a Scottish Social Housing Charter, prepared by Ministers in consultation with stakeholders, which would require the approval of the Scottish Parliament before it could take effect. It would secure our objective of separating the setting of standards from the assessment of performance against the standards, demonstrating both operational independence and the transparency of scrutiny.
• Ensuring the right mix of powers to achieve proportionate and risk-based regulation in the interests of tenants. This would mean giving the SHR statutory independence with the objective of promoting the interests of existing and future tenants and a range of modernised functions to enable it achieve that objective. Statutory operational independence and modernised functions would enable the SHR to build on its work of raising standards of practice and standards of service across the sector, ensuring that landlords continue to provide good-quality housing, operate efficiently and - in the case of RSLs - continue to be well governed and financially sustainable.

2.4 Streamlining regulation of social landlords

Our proposals are for a modernised regime of regulation that is risk-based, proportionate and targeted at the poorer performers. They would build on the significant changes made by the SHR over recent years to create a streamlined regime that would place self-evaluation by landlords at its heart. Having completed its shift away from cyclical inspections, the SHR would focus on poorly performing organisations and adopt a lighter-touch approach to those that perform well.

This approach would apply to and benefit council landlords and RSLs, but would recognise that they have different financial and governance arrangements. It reflects the key principles for scrutiny of public services that we have adopted. These follow from the recommendations of the independent Crerar Review and of the action groups established to consider how to implement them. They also reflect shifts in regulation and scrutiny in the private sector.

In particular, the proposals recognise the place of the Accounts Commission as the lead scrutiny body for councils and the partnership that exists between the Commission and the SHR (and the other scrutiny bodies for particular services). They would enable the SHR to build on its participation in the joint scrutiny planning exercises to deliver better co-ordinated and more streamlined scrutiny of local government.

The SHR's role in scrutinising services to council tenants would sit within the Accounts Commission's joint scrutiny planning framework (see chart on page 25). This framework will inform decisions about what scrutiny is required in each council and how it would be carried out. In this model the Accounts Commission's next phase of Best Value audits ( BV2) ⁹ will become the single corporate assessment framework for local government, delivered in partnership with, and relying on evidence provided by other local government scrutiny bodies such as SHR, the education inspectorate ( HMIE), social work inspectorate ( SWIA) and the Care Commission. The Accounts Commission would continue to rely on the SHR's detailed knowledge and expertise of housing service delivery to feed into those corporate and service performance assessments. The SHR would only undertake scrutiny of a council following agreement through the Accounts Commission-led shared risk assessment.

Reducing the regulatory burden on social landlords and fitting within the broader aim of streamlining the scrutiny of public services are important elements of our approach to modernising regulation. We would welcome your views on whether there is further scope for doing so while ensuring that the interests of tenants are safeguarded and promoted, for example, by the SHR withdrawing from any role in respect of local authorities. We invite you to answer the following questions.

2.5 Finding another term for 'social housing'

As well as introducing the idea of a Scottish Social Housing Charter, the draft Bill introduces the term 'social landlord', which it defines as including an RSL or a local authority landlord. This reflects the common purpose of council landlords and RSLs in providing accommodation on the basis of a Scottish secure tenancy. It acknowledges that the term is used widely in practice and is understood by tenants, landlords and stakeholders.

We believe that the common nature of the service that RSLs and council landlords provide justifies having a common term to define it. Despite their different status and governance arrangements, council landlords and RSLs provide a unique form of housing that is distinct from that provided by landlords in the private sector.

We are concerned, however, that the term tends to stigmatise council and RSL housing and those living in it and contributes to the sense that this housing is set apart from the mainstream. In reinvigorating social housing, we want to find a term for it that reflects its potential to play a full and equal part in meeting housing need alongside other tenures. We would welcome your views on the merits of having a single term to describe council and RSL housing, and invite your response to the following questions:

2.6 The Scottish Social Housing Charter

Sections 29-31 of the draft Bill provide for a Scottish Social Housing Charter that would define the outcomes that landlords should be aiming to achieve. The Charter is intended to provide a statement of the main purposes of social landlords and the value that they should give existing and future tenants.

Section 31 places on Ministers the duty to prepare and consult on a draft Charter and to submit it to Parliament for approval. This would ensure that the contents of the Charter are developed through the process that we outline below.

We plan to begin with a series of informal discussions between the Scottish Government, the SHR and other stakeholders, including the RTO regional networks, social landlords and their representatives, private lenders and housing charities. These discussions would help Ministers to prepare the draft Charter as a starting point for the subsequent formal statutory consultation.

In practice, Ministers would be initiating and leading a public debate, or national conversation, about the role and purpose of social housing, what it should be delivering for current and future tenants, and how it can contribute towards wider policy objectives. This would provide a transparent and inclusive means of identifying and ordering the priorities for social housing on matters such as those identified at section 30(1).

Section 79 of the 2001 Act already enables Ministers to issue guidance on these matters. Performance Standards, referred to above in Section 2.1, are published under these powers. By repealing that section and replacing it with those on the Charter we would be able to create a more systematic and unified approach to setting outcomes.

The conversation between the Scottish Government and stakeholders should result in a challenging but realistic set of outcomes that reflect tenants' priorities and landlords' capabilities. The outcomes would also need to take account of other relevant factors, such as public expenditure plans and assumptions; any targets for building new social housing - and their cost implications for Government and landlords; the state of the capital markets; and the financial strength and performance of the social landlords.

Section 30(2) allows flexibility in how the Charter sets outcomes in respect of different matters or different landlords. For example, outcomes may be more or less detailed, depending on their nature. It may also set different outcomes for different classes of landlords and different target dates for achieving different outcomes.

This flexibility would enable the Charter to identify national outcomes that all landlords should be achieving and also areas where landlords should be setting local outcomes after consultation with their tenants.

The ability of the Charter to identify areas that should be the subject of local outcomes is vital. It recognises the importance of the relationship between landlords and their tenants and of not stifling or inhibiting the development of services tailored to meet local needs and circumstances. So we propose that the Charter would be set in terms of the outcomes that social landlords should be achieving. It would not specify how landlords should organise themselves or deploy their financial and other resources to achieve the outcomes. These would be matters for landlords to decide in consultation as necessary with their tenants.

The Charter would not be the means of setting or allocating the resources, whether public or private, available to landlords to achieve the outcomes. Public spending levels would continue to be decided in the normal way through spending reviews and the Budget Bill; and investment in new stock would be distributed under the arrangements to be decided following the recent consultation on investment reform.

As the Charter would focus on the outcomes that landlords achieve for their tenants and not the means by which the outcomes are achieved, we propose that it should not be used to address matters relating to RSLs' financial management and governance. We recognise the importance that RSLs, their tenants and their lenders attach to these matters. That is why section 3(1)(b)(ii) gives the SHR specific functions in respect of financial management and governance, which are separate from its functions in monitoring performance against the Charter.

The process of discussion and consultation involved in preparing the Charter are intended to give tenants, social landlords and others a stake in the final version of the Charter that Parliament approves. To ensure that it does not become simply a statement of aspirations, the Charter as approved by Parliament would have the same effect as a legal direction, and a landlord that failed to comply with any of the Charter's requirements that applied to them could face enforcement action by the SHR.

In proposing a highly consultative and inclusive process for developing the Charter, we recognise landlords' independence, status and values - whether as local authorities or as private bodies with strong roots in the charitable and voluntary sectors. In proposing that the Charter should have legal force, we aim to give tenants, Registered Tenant Organisations, landlords and other stakeholders clarity and certainty about the direction of social housing.

The Charter would be a new departure in social housing policy in Scotland. It would provide for the first time a single statement of the value that all tenants should be receiving from their landlords. We would welcome your views on whether it would contribute towards the purpose we have proposed for the modernised regulatory regime and invite your response to the following questions :

2.7 Status of the Scottish Housing Regulator

To put the regulation of social housing on a footing of statutory independence, we propose establishing the SHR as a non-Ministerial department with its own Board. Part 1 of the draft Bill makes the SHR a separate body independent of Ministers with its own Board.

We propose that the Board should comprise at least three non-executive members, one of whom would chair it, and the Chief Executive. Ministers would appoint the non-executive members through the public appointments process. Ministers would have other limited powers over the SHR, in matters such as remuneration, staffing, pay and fees. But section 4 provides that in all other respects, they would have no power to direct or control how the SHR performs its functions.

These arrangements, in making the regulator independent, would meet the key governance principles recommended by the Accountability and Governance Action Group ¹⁰ that have been accepted by the Government. We believe that they would give tenants, landlords, lenders and other stakeholders confidence that the SHR would exercise its new functions without fear or favour. We would welcome your views on our plans for giving SHR full statutory independence and invite you to answer the following questions:

2.8 Scottish Housing Regulator's objective to safeguard and promote tenants' interests

The SHR, when established as a non-Ministerial department, would have a range of modernised regulatory functions. Many of the regulatory and inspection powers under the 2001 Act that SHR exercises at present on behalf of Ministers would transfer to the SHR. But some of these powers would be revised and supplemented with new powers. Taken as a whole these changes would put into law many of the developments in regulatory practice that SHR has applied over several years.

To ensure that modernised regulation follows best practice and complies with the Government's wider policies for scrutiny bodies, section 3(2) states that the SHR must carry out its functions in a proportionate, accountable and transparent way and target its actions only where action is needed. Among other things this would mean that the SHR would take a lead from the Accounts Commission in terms of how the relationship with local government would evolve. The Bill would assist this by allowing the SHR to rely less on potentially burdensome powers of inspection and more on self-evaluation by landlords. It would also provide an explicit statutory basis for the SHR to focus its efforts on areas of greatest risk and on driving up landlords' performance by measuring and reporting on performance and through target setting.

Above all we want the SHR to have a clear remit to work and act in the interests of existing and prospective tenants. Therefore, section 2(1) gives the SHR the statutory objective of safeguarding and promoting the interests of tenants and future tenants and of others using, or likely to use, the services of social landlords.

The effect of this objective would be to ensure that the SHR would always work in a way that best served the interests of tenants. This would apply not just to the individual functions that we are proposing for the SHR, such as reporting on landlords' performance or safeguarding RSLs' financial strength. It would also influence more general activities, such as ensuring that its response to the consultation on the Scottish Social Housing Charter was calculated to promote the interests of tenants.

We would welcome your views on the objective for the SHR set out at section 2 of the Bill, and invite you to answer the following questions:

2.9 Scottish Housing Regulator and other housing services

At present, the SHR carries out Scottish Ministers' regulatory responsibilities for homelessness services provided by councils and services for Gypsies/Travellers and the owners of factored properties. We propose that the modernised SHR should assume responsibility for these duties. We would welcome your views on this point and invite you to answer the following question:

2.10 Measuring performance and value and encouraging improvement

The purpose of the Scottish Social Housing Charter would be to describe through a set of outcomes the value that tenants should be receiving from their landlords. Landlords would be responsible for delivering that value. In the case of local outcomes landlords, in consultation with their tenants and RTOs, would be responsible for identifying the value they should be delivering in terms of local circumstances and tenants' priorities. The SHR would be responsible for assessing landlords' performance against the Charter.

Section 35 would give the SHR the function of assessing the performance of all social landlords. This includes assessing the value of a landlord's performance in terms of the quality of the services they provide weighed against the level of the rents that they charge and their performance in achieving the outcomes set in the Scottish Social Housing Charter. The SHR would do this mainly by collecting, analysing and publishing information based on landlords' self-evaluation of their performance against the outcomes specified in the Charter.

We recognise that social landlords already provide a wealth of information to a range of different bodies. RSLs submit an annual performance and statistical return to the SHR but councils do not report their performance on housing or homelessness services to the SHR in the same way. We envisage that the SHR would negotiate with other information collectors about what its information requirements are, who is best placed to collect that information from councils in future, and how this fits in with the Single Outcome Agreement performance monitoring framework.

This data collection and reporting role would be central to the modernised regulatory system. The SHR would use self-evaluation by social landlords as an important means of assessing and reporting on the value - in terms of the standards of service delivered weighed against the rents charged - that landlords provide for their tenants.

Section 36 would place a duty on the SHR to report annually on its assessment of landlords' performance. Under this duty, the SHR would make available information and analysis on the performance of all social landlords. In addition to reporting on landlords' performance the SHR would be able, under the power at section 15, to conduct studies across all landlords into matters such as tenants' perception of the quality and costs of the services they receive. This would assist the SHR in measuring the value being given by different landlords.

Putting such information into the public domain is intended to help drive improvements in performance by helping tenants, governing body members, councillors and management to compare performance among peers. This would be the first step in understanding how to improve the performance of individual landlords in ways that meet the priorities and aspirations of their tenants and communities.

An important part of the modernised SHR's role would be to analyse and communicate information so that tenants, landlords and other stakeholders could identify the improvements they wanted to see.

It would undermine the relationship between tenants and landlords, and stifle local innovation, if the SHR were to intervene at every turn with targets for local improvements. However, tenants of landlords who persistently underperform need to know that the SHR will be able to act on their behalf where this is justified. So section 46 would enable the SHR to require landlords failing, or at risk of failing, to achieve the outcomes required in the Scottish Social Housing Charter to prepare performance improvement plans setting out an approach and timescale for complying with the Charter.

Section 46 would also enable the SHR to require an improvement plan for a landlord whose performance in respect of anything not covered by the Charter was harming tenants' interests. The SHR would be able to monitor performance against those plans and - under section 47 - enforce compliance with them if necessary.

We also want to see performance across the sector improve over time, so that tenants benefit from constant improvement. Therefore, section 32 provides a separate power for the SHR to set performance improvement targets. As its understanding of landlords' performance against the Charter develops the SHR would be able to set targets for those landlords whose performance did not match the best being achieved by their peers.

Taken together the powers for the SHR to assess, report on and as necessary enforce performance standards will enable it to work over time to improve the value that tenants and taxpayers receive from social housing. We would welcome your views on this approach and invite you to answer the following questions:

2.11 Inquiries and information

The shift to assessment by the SHR on the basis of annual reporting and self-evaluation by landlords is central to creating a regulatory regime that minimises the burden on good landlords and concentrates efforts on improving performance. Another aspect of modernisation is ensuring that the SHR has the right set of powers, and the flexibility to use them, to collect information and undertake various forms of inquiries into landlords. In this section, we outline our proposals for such powers.

We propose that Ministers' powers under the 2001 Act to inspect RSLs and council housing and homelessness services should be repealed and replaced by sections 37âˆ'40 of the draft Bill. These would give the modernised SHR new powers to carry out a range of inquiries and to decide the extent of those inquiries. They would allow the SHR to shape the scale and scope of the inquiry so that it could target areas of concern.

We propose that the SHR should use these powers to carry out a range of inquiries, of different scale, depending on its assessment of risk or its need to capture information about practice across the sector. These inquiries would range from lower-level requests for specific information, through validation of self-assessment performance information, to higher-level inquiries such as targeted investigations into a service delivery area, analysis of a business plan, or a wider inquiry into the organisation's activities. The types of inquiry might include:

• planned inquiries;
• unannounced inquiries to check aspects of an individual landlord's performance and management;
• inquiries into the governance and financial management of RSLs; and
• thematic studies and inquiries into performance by a number of landlords against a particular outcome in the Charter or across a specific geographical area.

To ensure that the SHR's exercise of these powers is transparent and proportionate, the Bill would require the SHR to consult on, and then publish guidance about, how it would use its powers of inquiry.

Sections 41 and 42 would give the SHR the power to request information from a landlord to:

• enable it to assess the landlords' performance;
• meet SHR's objective of safeguarding and promoting tenants' interests; or
• ensure the good governance and continued financial viability of the RSL sector.

This would include requests for self-evaluation of performance to enable the SHR to assess landlords' performance against the Scottish Social Housing Charter. The SHR would also be able to require an RSL to provide information on its financial management, its governance, and the relationship between it and its parent or subsidiary bodies.

We propose to repeal the powers in part 4 of Schedule 7 to the 2001 Act that allow Ministers to appoint a person to conduct a statutory inquiry into an RSL's affairs. This very broad-ranging power would not sit well alongside the modernised powers of inquiry in sections 37 to 40. Section 37(3)(b) would allow the SHR to take more targeted and proportionate action to tackle financial viability and governance issues. These are discussed in more detail in section 2.12 of this paper.

The new powers for the SHR to conduct inquiries and collect information are intended to replace the current inspection powers with a more flexible and proportionate set of powers. We would welcome your views on the nature and scope of the proposed powers and invite your answers to the following questions:

2.12 Scottish Housing Regulator's intervention powers

As part of a more proportionate approach to regulation, we propose that the modernised SHR should have a broader range of enforcement and intervention powers to enable it to protect and promote the interests of tenants and future tenants.

Sections 43 to 50 incorporate the existing intervention powers under the 2001 Act and supplement them with powers that would enable the SHR to take enforcement action requiring a landlord to:

• comply with the Scottish Social Housing Charter;
• meet a performance improvement target; or
• implement a performance improvement plan.

To enable the SHR to respond to risk effectively and to operate in a targeted and proportionate way, it would not have to follow a set sequence or escalation of enforcement powers. Instead, it would have practical discretion to decide how it would use its powers of intervention in light of the circumstances of any particular case. It would be important to do this openly and transparently. So the SHR would be required to consult on, and then publish guidance on, its criteria for deciding how to use its intervention powers.

For councils this would mean that the SHR no longer had to carry out an inspection before it took enforcement action.

The power at section 46 to require a social landlord to submit a performance improvement plan would replace the existing power to require a council to produce a remedial plan.

2.13 Securing the financial viability and good governance of RSLs

The financial viability and good governance of RSLs are of critical importance to RSL tenants. Any weakness in these matters undermines the sustainability of the business, the confidence of its lenders and ultimately its ability to continue delivering services for its tenants. So it is essential that the SHR continues to have specific powers to address any risks to RSL finances or governance.

We propose that the SHR should be able to monitor, assess and report on the financial viability and governance of RSLs and to satisfy itself that each RSL has the financial strength to continue the delivery of its social landlord services to current and future tenants.

Section 51 of the draft Bill onwards contains a series of suggested provisions that aim fully to equip the SHR to safeguard the viability and good governance of RSLs. Given the technical and complex nature of these provisions, we will establish a small working group, whose members will include representatives of the RSLs and their private lenders, to discuss and identify means of improving the provisions before the Bill is introduced in the Parliament. Meantime, we offer the following summary.

Part 6 of the Bill covers the accounting and audit requirements for RSLs. The provisions of the 2001 Act would be repealed and the SHR would have the power to set accounting requirements. RSLs would have to comply with these requirements and their auditors' reports would have to state whether or not they did comply.

Where the SHR identified a risk to an RSL's financial strength, or problems with governance that might create such a risk, it would be able to intervene in various ways. The existing provisions in the 2001 Act would be repealed and replaced by a modernised set of powers that would enable the SHR to take proportionate and targeted action to protect tenants' interests and safeguard an RSL's social housing assets for future use. Central to these would be the power to carry out an inquiry into an RSL's financial or other affairs. As noted above, this falls within the section 37(3)(b) powers to make inquiries about social landlords.

Once it had conducted an inquiry under section 37(3)(b), the SHR would have discretion to take the following action:

• Section 49 - where it had established that there had been misconduct or mismanagement, it would be able to appoint, or require the RSL to appoint, a manager for financial or other affairs to the RSL.
• Section 52 - suspend an officer of an RSL (a committee member of an Industrial and Provident Society or a director of a company limited by guarantee).
• Section 53 - remove an officer where it considered that there has been misconduct or mismanagement of the RSL's financial or other affairs.
• Section 56 - appoint a new officer, or an additional officer, to ensure the proper management of the RSL's financial or other affairs.
• Section 58 - transfer the RSL's land and assets to another RSL.

Schedule 8 of the 2001 Act deals with the insolvency of RSLs. Its provisions are imported into the Bill by the provisions at part 7, which would give the SHR the power to develop proposals to rescue an insolvent RSL.

Following the collapse of Ujima, a social landlord registered by the Housing Corporation, we reviewed the powers and duties in Schedule 8. These are similar to the powers available to the Housing Corporation under the comparable English legislation when dealing with Ujima. We believe it is essential in the current financial climate to ensure that the powers in the Bill would allow the SHR to deal promptly and effectively with an insolvent RSL so that it can protect tenants' interests.

In light of that review we propose making several changes to the existing powers. These do not appear in the draft Bill, but, subject to views expressed through the consultation and in our technical working group, they would be included in the version of the Bill that we introduce in the Scottish Parliament.

Our proposals are for the following provisions:

• triggering the SHR's powers earlier in the winding-up process ( SHR would be able to take action either when the RSL's governing body takes the decision to present, or another party presents, a winding-up petition. At present the powers are triggered when the Court grants a winding-up order);
• Streamlining the requirements to trigger a moratorium on the winding up of an RSL so that a creditor or lender would only have to submit one notice to the SHR; and
• only those creditors who can be identified, rather than all creditors, need to agree to the SHR's proposals for rescuing a failing RSL.

The overall purpose of the insolvency process is to allow the SHR to put a rescue package in place to protect tenants' interests and to secure and safeguard the social housing assets for the future. This process is important, but where the SHR knows that an RSL is facing insolvency it should be able to act in the tenants' interests without going through a cumbersome and complex process. We consider that in these circumstances the SHR should have the power to direct a transfer of assets and engagements to an RSL willing to receive them without using the complex inquiry process set out in Schedule 8 of the 2001 Act.

Governance describes the arrangements for the leadership, direction and control of an RSL. Strong governance in an organisation will allow it to deal effectively in an open and accountable way with any problems, while poor governance can lead to problems in service delivery and financial management.

Part 1 of Schedule 7 of the Housing (Scotland) Act 2001 sets out certain legal restrictions that apply only to RSLs on payments and benefits to governing body members and employees. The rules seek to prevent governing body and staff members benefiting from their positions. The SHR can moderate the restrictions by setting classes of exemptions.

In 2006 the SHR consulted on proposals to consider the repeal of Part 1 of Schedule 7 and to replace it with an ethical code of conduct. It pointed out that the legal restrictions in Schedule 7 had been in place in earlier forms of law for over 20 years. It also noted that they were at odds with a proportionate and risk-based regulatory framework and did not always promote a culture of self-reliant, self-reflective, high ethical standards. There was some support for abolishing the restrictions.

We recognise the importance of ensuring that the law continues to protect the good name of the RSL sector. The Bill would provide an opportunity to replace existing law with law that would permit a more proportionate approach. Section 34 of the Bill would require the Regulator to issue a principles-based, ethical code of conduct following consultation with the sector. RSLs would be required to comply with the code of conduct and the SHR would be able to use its intervention and enforcement powers to take action against an RSL that breached this code.

We would welcome your views on the provisions for safeguarding the financial viability and governance of RSLs and your response to the following questions:

2.14 Setting and applying regulatory criteria for those seeking to become RSLs

At present only companies limited by guarantee and industrial and provident societies are eligible for registration as a social landlord. We want to allow for the possibility of a wider range of bodies being eligible to become registered as social landlords, including profit-distributing organisations. We also want to enable bodies to be registered that will carry out only some of the activities generally associated with RSLs.

The provisions in the draft Bill for registration of RSLs would allow for these changes by introducing a new approach. Section 22 would allow Ministers, through regulations, to specify which types of body are eligible for registration - the legislative registration criteria. Ministers would have to consult on the regulations before they laid them before Parliament. Ministers would have to review the eligibility criteria for registration from time to time and, following such a review, they could amend or add to the types of body that can apply for registration. This should allow greater flexibility in the governance arrangements and objects of the bodies that might be eligible for registration by the SHR.

Separately, section 23 would enable the SHR to set regulatory registration criteria for eligible bodies based on their financial situation, their management arrangements and the housing services that they provide. This would give the SHR, with its knowledge and understanding of RSLs' finances, business operations and governance, the power to assess the fitness and competence of eligible bodies through its registration process.

The SHR would have to consult stakeholders on the proposed criteria and to publish these along with guidance on how it will assess applicants against the criteria. Using its knowledge and understanding of RSLs' finances, business operations, service delivery and governance, the SHR would then consider whether or not applicants that are eligible under the legislative registration criteria meet the published regulatory criteria.

At present the draft Bill does not allow for specific intervention powers for the SHR to deal with profit-distributing bodies that have problems or fail. The types of powers that we would consider introducing are:

• a power to fine the profit-distributing body; and
• a power to transfer the social housing assets in the control of a profit-distributing body to another RSL.

When setting the purposes and classes of bodies that are eligible for registration Ministers would have to take account of the European Union Services Directive. The Directive aims to reduce barriers to businesses operating across the EU and is regarded as applying to RSLs because they do not solely provide housing for people in need. The practical implications of this are that Ministers would not be able to specify that organisations eligible to register must have a registered office in Scotland. Decisions on compliance with European legislation are reserved to the UK government.

Section 19 allows for landlords that are on the register when the Bill is enacted to remain on the register for a period of 24 months after that section of the Bill takes effect. During that period all RSLs would have to satisfy the SHR that they meet the regulatory registration criteria if they wish to remain a registered social landlord.

Sections 25 to 27 deal with de-registration. Section 25 sets out the criteria that the SHR must consider before it de-registers a body. Section 26 allows the SHR to set criteria for the voluntary de-registration of a social landlord. Section 27 gives a registered body a right to appeal to the Court of Session against a decision by the Regulator either not to register the body or to remove it from the register.

We would welcome your views on the proposals to introduce legislative and regulatory criteria for the registration of RSLs and your response to the following questions:

2.15 Constitution, rule changes, amalgamation and dissolution of RSLs

Part 8 imports the existing requirements in part 2 of Schedule 7 of the 2001 Act. These deal with the constitution, change of rules, amalgamation and dissolution of RSLs. We propose making these requirements more streamlined and proportionate for RSLs by reducing the administrative requirements around rule changes. These do not appear in the draft Bill, but, subject to views expressed through the consultation and in our technical working group, they would be included in the version of the Bill that we introduce to Parliament.

Our proposals are for the following provisions.

The Housing Bill should set out three areas where consent for rule changes would be required. These would be changes that:

• alter the objects of the RSL;
• concern the distribution of assets to an RSL's members; or
• enable the society or company to become, or cease to be a subsidiary or associate of, another body.

Otherwise, RSLs would simply have to notify the SHR of any rule changes within 28 working days.

We would welcome your views on this proposal and invite you to answer the following questions:

2.16 Disposal of land by RSLs

Part 9 of the draft Bill provides for the disposal of land by RSLs. A disposal means the sale, lease, security, charge or any other disposal of an RSL's land or assets. Ministers' powers to grant consent to disposals by RSLs in Sections 65 and 66 of the 2001 Act would be repealed. These powers would be transferred to the SHR under sections 96 to 107 of the Bill. Ministers would retain the power to grant consent for councils to dispose of land.

We will discuss these proposals in more detail in our technical working group during the consultation period, but we would welcome your views on any aspect of this matter.

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