General Response – We Submit

· That no social landlords, be they Local Authorities themselves, Registered Social Landlords, PFI contractors, Arms Length Management Organisations, Tenant Management Organisations or any other organisations, either as exist now or coming into being in the future to act as managing agents on Local Authorities behalf, should be exempt from the requirements of the Commonhold and Leasehold Reform Act 2002 to make landlords accounting transparent and accountable as set out in sections 2, 21A and 42A.

A Commonhold and Leasehold Reform Working Party has already submitted views that the public sector leaseholder is considerably disadvantaged and that it can find no logical reasons , in most cases, for their exclusion from rights enjoyed by or proposed for tenants of other landlords.

There is considered to be a substantial case for the provision of a level playing field for all leasehold tenants, with equity of rights and remedies irrespective of the status of the landlord.

The public sector manager currently has a privileged status which is entirely unjustified in the management of leasehold property.

The members of the working party which submitted this view included RICS and ARHM the two organisations with codes of practice recognised by the Secretary of State.

The Treasury Fraud report 2002-2003 stated that risk of fraud in the public sector was increased because of a lack of “ official’ or generally encoded Standards of Best Practice.

While these proposed Regulations do not require the imposition of any formal Standards of Best Practice on public sector or social landlords, they do give the government an opportunity to reduce risk of fraud in the public sector as it has a duty to do so.

Treasury Fraud Reports indicate that the main causes of fraud in the public sector are:

· Absence of proper controls.

· Failure to observe existing control procedures.

· Collusion.

The reports also indicate significant increases in these causes of fraud.

The Reports consider that the increase in frauds of collusion may indicate the way public services are increasingly delivered by third parties and that government needs to reassess the fraud risks in line with business changes.

Indeed Government policy has encouraged and enabled the externalisation of service delivery and in particular the emergence of Prime Contractors managing long term contracts, but there appears to be no reciprocal measures to reduce the risk of fraud in the public sector and of the public purse.

Tender requirements.

Relatively low value contracts, for example maintenance works tenders do not need to go to European tender yet the cumulative cost of fraud in this area can run into millions.

Manipulating tender prices.

Bid rigging to ensure that the odds are stacked in favour of a single supplier even though there is an “independent tender board” are not difficult to achieve.

Bogus invoices and Prime contractors.

The increasing practice of issuing Prime Contracts where the prime contractor employs a series of sub-contractors each of whom may in turn sub-contract certain portions of the project decreases the transparency and increases the capacity for fraud.

Inevitably the cost of fraud is built into the overall project by the prime contractor.

Inevitably collusion fraud exists at a low level several levels removed from the prime contractor and go unnoticed.

When all the individual invoices fraudulent and honest are collated for payment the information is transferred to a payment form for submission to a central payment agency.

This practice of retaining invoices by the prime contractor and not submitting them to the central agency strips away all visibility of fraud.

Again these findings come from government fraud reports so it was not surprising therefore to find in these reports that over a four year period External Audit failed to identify any fraud and internal audit uncovered less than 5% of identified cases and that in cases involving collusion third party information was often the only way fraud came to light.

These government findings on fraud risk in the public sector confirm our view that the current systems of accountability in the public sector are often ineffectual, that it is untenable to argue that Local Authorities and other public agencies should continue to be exempted from complying with any proposals intended to reduce the risk of fraud and that other measures do not go far enough in uncovering or discouraging fraud in the social housing sector.

Case study 1.

Housing Corporation overseeing Focus Housing Group (HC 365)

The NAO reported that

Acknowledged weaknesses in the Housing Corporations oversight of Focus allowed corruption to go unnoticed. Regulatory procedures failed to recognise the lax management culture and poor standards of internal control at Focus nor did the Corporation ascertain whether corrective action had been taken to address procedural weaknesses.

Case study 2.

In 2001 at a public meeting in a London Borough a councillor, who identified himself as the Chairman of the Housing Committee, apologised for the fact that ‘for the last 22 years all of our CCT contracts have been rigged”

That particular council subsequently settled a case with its leaseholders costing the public purse £3.5 million

We are not aware that the councillors allegation was ever formally investigated.

Case study 3.

On 11th August 2004 a local London newspaper, The Enfield Advertiser published a story about a dispute over ownership of gardens with tenants who had bought their houses through Right to Buy.

It was claimed that the reason for the dispute was because of “chaotic record keeping by the Council since the mid 1980s.

However Council departments were arguing amongst themselves as to the best policy with some concerned about the exposure of the chaotic record keeping.

There has been no denial of these facts by the Local Authority.

These sample case studies identify the fact that in the social housing market there appears to be no effective measures that reduce the risk of fraud or inspire confidence in tenants of social landlords.

It would appear that Government, by excluding these landlords from measures and measures proposed, is legislating for fraud in the social housing sector.

There can be no justification for excluding social landlords from these proposed regulations and there is an urgent need for systems of accountability to go beyond what is proposed.

The consultation document acknowledges that it is only landlords who do not use individual accounting methods that are opposed and those that practice it have not found it particularly onerous.

There is no reason why these accounts should not be extended to social landlords and indeed would assist in the Governments policy of introducing resource accounting practices across the public sector. Social Landlords should be required to hold service charges in separate accounts.

We are concerned that in the case of social landlords a Section 21 certificate would be meaningless , this is supported by the findings in the governments Fraud Reports which draw particular attention to the fact that increasingly in contracts involving a Prime Contractor many invoices and receipts are withheld from the client.

We support the need for a regime more rigorous than that proposed but are equally aware of the possible costs of such measures.

Since these proposals will not be introduced before 2006 and Government policy is that all Local Authorities should make arrangements for the management of social housing stock by measures other than direct council control by July 2005, then the impact of these measures should be minimal on Local Authorities and therefore we consider that any negative views submitted by Local authorities should be considered bearing this in mind.

Government has a duty to reduce the risk of fraud of the public purse and should not flinch from its opportunity to use these regulations to reinforce fraud reduction in the social housing market.

We also submit

That social landlords of all categories should be required by statute to apply all the rigours of best accounting practice that are required of other public bodies such as the National Health Service and Government Departments in general and namely, Resource Accounting and Budgeting (RAB).

We submit in particular

· That the implementation of Sections 42A, 21 and 21A be directed towards the empowerment of all tenants.

o The description of tenants rights and the presentation of accounts should be in plain English, simply and precisely structured for the ready understanding of the ordinary layman.

§ but there should be incorporated in it sufficient information to enable the tenant to request further detail, either by way of explanation, as might be found in other documentation, or financial information as should be found within the landlords’ accounting process.

§ Above all, when further detailed financial information is requested from the landlord, the tenant should find that the landlord

· has been required in law to have assembled that information

· that the information has already been assembled.

· and that it should be freely available.

To these ends it is paramount that all categories of social landlord be required, as local authorities are currently, to open their accounts for annual scrutiny as required under the Audit Commission Act 1998

When members of the public attempt to ‘drill down’ for further information they should not find that it is obscured below a false floor constructed out of a ‘need’ for commercial confidentiality or a lack of power to require information held by private contractors be they contractors or sub-contractors; domestic to the British Isles and subject to British law or foreign competitors over which the jurisdiction of British Law is limited. There should be a statutory obligation for social landlords to ensure that the depth of information both collected and available, irrespective of their contracting out procedures and irrespective of their delegation of management to other agents.

We need hardly add that whilst both the description of tenants rights and the presentation of accounts should be in plain English, these need to be available upon request in translation to other languages.

The requirement for the rigours of best accounting practice should be applied to local authorities as a whole and have been put forward by central government in the firm believe that they will foster a better use of both financial and other resources. The initial cost of implementing the changes that will bring in these practices should therefore be born by local authorities that own the assets and not be either passed on to the leaseholders in administration charges nor even the HRA so as to diminish the finances available for maintenance of the housing stock.

As HM Treasury states:-

Resource Accounting and Budgeting (RAB) is a system of planning, controlling and reporting on public spending for government.

RAB was launched in 1993, with a commitment to introduce resource accounting. This was followed by a White Paper in 1995 (Cm2929), which gave a commitment to use resource accounting as the basis of public expenditure planning and control.

Resource Accounting is the application of accruals accounting for reporting on the expenditure of central government and a framework for analysing expenditure by departmental aim and objectives, relating these to outputs where possible.

Our request for one additional facility of a ‘tick box’

Landlords should be required to place upon their invoices the appropriate tick box enabling tenants to give their approval to the passing on of their names and addresses to all leaseholders associations that those landlords recognise for the purpose of Section 29 of the Landlord and Tenant Act 1985 or which have made application to become so recognised with the proviso that those details shall not in addition be passed on for any commercial purpose.

This requirement is requested in view of the difficulty experienced by leaseholders associations trying to get in touch with their potential members in the face of the obstruction put up by local authorities supposedly based upon the limitations imposed on landlords by the Data Protection Act despite the information of leaseholders addresses at least already being in the public domain via the Land Registry. A difficulty which is experienced almost universally in London despite the common requirement imposed by local authorities upon such associations that as a condition of their recognition that they should be properly in touch with their members and accountable to them.

Answers as numbered in the ODPM’s Consultation document.

The New Section 42A

Q1 Do you agree with the commencement date of 1^st. April 2006

LFCLA Implementation should follow as quickly as possible.

Q2 Do you agree with the proposal that the account includes in its name the wording ‘section 42 account’ and that it bears a proper account number?

LFCLA A Section 42A account is easily recognisable. Its hallmarks must be that it is easily interpreted, its mechanisms user friendly and application understandable. The account must be appropriate for the purpose in which it is devised. This form of practicality will go a long way to ensure tenants of its pro-active elements. The tenants will be encouraged by an account that is legally and responsibly operated, easily identifiable and properly maintained.

Q3 Should any other general features for the account be prescribed in regulations (please specify)?

LFCLA The Section 42A account should specify details of the operator, what it is used for, be readily audited and properly controlled.

Q4 Do you agree with the proposed requirement that a section 42A account may only be opened and operated by persons aged 18 or over (if not please give reasons)?

Q4 Section 42A must prescribe a minimum age so that accountable standards are established from the outset.

Q5 Do you agree that there are no other circumstances which justify a specific exception from having to comply with section 42A (if not please specify with reasons)?

Q5 There is no specific exception or exemption that should apply to Section 42A accounts, which would enable private or public landlords from meeting its statutory requirements. Public authorities must be accountable and should indeed be held to a higher standard of accountability. Thus public authorities, social landlords, and development corporations with a public emphasis should be bound to Section 42A, and no exemption should apply.

Q6 Do you agree with the proposed definition of relevant financial institution (if not please specify)?

LFCLA The relevant financial institution is broad and inclusive. It encompasses the regulated financial institutions that operate within the financial markets. Good practice, financial regulation and statutory controls are an essential element of this component.

The Regular Statement

Q7 Do you agree with the minimum content proposed for the regular statement?

LFCLA The minimum content of the statement of account should contain a proviso whereby the tenant can obtain a further breakdown of a category of specific work done. Obviously this requirement cannot be imposed on the finance arm of the landlord. It would therefore foster a better practice and work relationship between landlords and their internal departments (or contractors and sub-contractors) as the case may be. The full rigours of Resource Accounting and Budgeting should be brought to bear on the social landlords assets, and the repair and management of them.

Q.8 If not, what should be different (please specify)?

LFCLA The minimum content should be itemised where relevant under headings of:-

· charges relating to tenants own premises

· block charges

· estate charges

In addition the minimum content should show charges itemised against job numbers and dates so that individual tenants have ready references to use if they find it necessary to seek further detail.

Q.9 Should the information included in the individual part of the statement of account for the tenant be drawn up or presented differently (please specify)?

LFCLA A standard format should be used for clarity, simplicity, and unanimity. This form should be used across England and Wales, such that no matter what part of the catchment areas all tenants would be able to recognise and understand it regardless as to location.

Q.10 & Q.11 Do you think there should be a requirement that items of expenditure above a specified threshold should be individually identified? If so what should that threshold be?

LFCLA All items should be shown separately where they have separate job numbers.

All items the subject of separate contracts should have separate job numbers.

All items the subject of separate sub-contracts should have separate job numbers.

All items rising above a current threshold so as to require a section 20 notice to be served should have separate job numbers.

Q.12 Should comparative figures be provided for expenditure in the previous year?

LFCLA This information should only be given in the first year and any other thereafter, when there are significant changes to the information shown. This to enable tenants to make their own comparisons

We believe to provide too much financial information may cloud the statement and make it more confusing. A proviso should be added to the bottom of the statement informing the tenant they should retain a copy of this years statement in order to compare it with last years statement. This would encourage tenants to save and review their documentation. This feature encourages a best practice measure.

Q.13 Should any budgetary figures be provided for direct comparison against actual expenditure?

Q13 A separate budgetary statement of overall expenditure should be provided along with the statement. This adds to overall transparency and understanding to the financial and fiscal process for the everyday layman.

Q.14 Should items of expenditure which were paid for out of monies in any Reserve Fund be separately identified?

LFCLA A separate line item should be used for Reserve Fund expenditures. This will provide tenants with a full understanding of income and expenditures from the various accounts.

Costs

Q.15 What are the cost implications of this proposal (please provide supporting evidence where possible)?

Q15 The landlords will have to ensure (internally and externally) that sufficient qualified and trained staff are used to carry out the financial management element. The nature of this requirement depends on the extent of the tenant client base.

Q.16 If items of expenditure above a specified threshold should be identified, what would be the cost implications?

LFCLA Costs incurred will be confined to the replication of the accounts for tenants. The detail required is no greater than landlords should be assembling in order to follow best practice for their own accounting and no greater than is necessary for bills to be assembled in the first place.

Q.17 Are there any “off the shelf packages” available?

LFCLA This is not for tenants to know but only to comment that with a common requirement placed by this legislation upon all social landlords, local authorities and RSLs should, liasing through the Association of Local Government and the Housing Corporation be able to present a coherent demand to the market so as to attract competitive software solutions without the necessity for each landlord to re-invent the wheel through the commissioning of bespoke packages. In turn small and private landlords should find that they in turn reap the benefit by having access to the same packages.

Section 21 Certificate

Q.18 Do you agree with the content of the section 21 certificate?

LFCLA The tenants agree with the contents of the certificate in so far as it provides a statement of accounts, and a Section 21 Certificate with the appropriate wording. Tenants believe there may be some merit in a general and standardised form of the certificate, as it would provide uniformity, and simplicity.

Q.19 If not, what changes do you propose and why (please be specific)?

LFCLA A standardised form may be appropriate for use as a best practise exercise. Its application would then be universal in the sense that it would become familiar to tenants throughout England and Wales. The certificate should state the accounting standards that have been applied.

In addition the certificate should state who has as the right to inspect the full accounts and give direction as to how they can do so.

Q.20 Does the proposed content of the certificate clearly show what work has been carried out and what work has not?

LFCLA The certificate should clearly state which work was carried out and which work was not. It should go hand in hand with the statement of accounts. The certificate must be clear, concise, and accurate in so far as its verification and application.

Proposed exceptions from providing the S21 Certificate

LFCLA

· As local authorities make changes to their social housing management structures following stock option appraisals any arguments that could be advanced for their being excepted from any obligations are being eroded.

· As the nature of tenants’ ownership becomes further complicated by sub-letting from the original head-leaseholders and the fact that many tenants do not have English as their first language the need to ensure that their rights are maintained increases.

These factors lead tenants to maintain that there should be no exceptions.

Q.21 Do you agree with the proposed exception 1?