Stress testing failures ‘to lead to downgrades’
Housing associations face governance downgrades if their stress testing is insufficient, the regulator has warned as it publishes its latest update to its official approach.
The latest version of Regulating the Standards, published this morning, sets out a tougher line on the requirement to ‘stress test’ business plans against identified risks.
It is understood the regulator has been frustrated by some providers’ approaches to stress testing, with some identified risks untested or tested insufficiently.
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“We expect stress testing to be pivotal to, and integrated with, providers’ overall approach to business planning, risk and performance management,” the document said.
“We will seek evidence that providers go beyond simple sensitivity testing to include multivariate analysis, which tests against relevant serious economic and business risks and demonstrates the effects on cash, covenants and security.”
Regulating the Standards sets out the Homes and Communities Agency’s (HCA) approach to regulation.
Jonathan Walters, deputy director of performance and strategy at the HCA, said: “We think stress testing has proved its importance and we will be taking a less lenient approach going forward.
“We have seen some examples of people doing excellent, very thorough testing but others where they may have a risk on their register and when we ask if they have tested it, the answer is no.”
He added that the new approach would start coming through in judgements issued from September. Where providers needed to carry out specific work with regards to making buildings fire safe, the financial impact of this should be robustly tested alongside other risks, he said.
The regulator said housing association Severn Vale Housing Society’s stress testing was “not comprehensive” as it downgraded the organisation to a G2 earlier this week.