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Knock-on effects
Housing Today – 2 May 2002

When West Hampstead Housing Association collapsed, all concerned were taken by surprise. Now two reports suggest its ramifications may be felt throughout the sector, says Mark Smulian

It started with a malfunctioning information technology system, and it looks as if it will end with the Housing Corporation having to make substantial changes to its confidentiality policy.

The story of the demise of West Hampstead Housing Association, laid bare this month in reports from both the corporation and an increasingly angry Camden council, is unusual.

Most housing associations that get into trouble see the inevitable approaching, even if they do nothing effective to stop it. West Hampstead did not even realise it was in trouble.

The investigation commissioned by the corporation from consultant Hacas Chapman Hendy states that the regulator was "more effective" in spotting problems at the association than had been West Hampstead's managers or auditors.

That is likely to be cold comfort for Camden, which had to fork out a 300,000 loan to West Hampstead, and which faces additional costs of a further 200,000. These sums have, unsurprisingly, given the council's scrutiny committee plenty to think about, and led it to some trenchant criticisms.

West Hampstead was founded in 1974 to provide short-life housing, and started to receive development grants to branch out into permanent homes in 1989.

By 1999 it worked in 15 London boroughs, owned 430 homes, and had 2,700 leased or licensed from other owners. It was reporting a satisfactory financial position to the corporation.

Then disaster struck. The Hacas report notes that during 2000/01, "the association experienced catastrophic financial difficulties, which it had not anticipated".

The corporation stepped in, unusually, with an overdraft guarantee.

"A major contribution to the association's problems was a failure of its IT software, which meant that accurate financial and management information was unavailable from April 1999 until after the organisation lost its independence," the report notes.

That might be enough to sink any RSL. But West Hampstead had particularly acute problems because of its reliance on short-term leasing.

As Hacas puts it: "Short-term leasing is a highly volatile activity with low margins, and the immediate cause of the failure was the loss of management information systems at a critical moment."

West Hampstead took no action to stem its losses, because it had no idea it was making losses in the first place.

Even if it had, the Hacas investigation suggests that little could have been done to put matters right. "Short-term leasing social housing requires tight controls, but there was weak administration throughout the organisation, compounded by a willingness to take on new projects which had marginal or negative financial viability."

Many other social landlords had had their fingers burnt in short-term leasing, but West Hampstead's previous success with this had convinced it that it could take on projects shunned by others.

At first, corporation officials who received unreliable information from West Hampstead assumed this would be put right once glitches in the IT system were rectified.

Yet as far back as August 1998, the corporation had produced a report, nicknamed 'Icebergs', about RSLs at potential risk. It noted that West Hampstead was purchasing "a new and untried IT system and that its financial position was volatile because of its dependence on temporary housing".

After the system was installed in April 1999, the flow of information became erratic, but the corporation still thought it was dealing with nothing more than a troublesome computer.

Indeed, it was relaxed enough to almost double West Hampstead's allocation from 4.2m in 1999/00 to 8.1m in 2000/01.

The corporation was facing bids from several boroughs to involve West Hampstead in projects, and could not refuse these allocations without "implying to the local authorities that it had lost confidence in West Hampstead's suitability to receive them".

As 2000 began, the local authorities were oblivious to the growing problem. The corporation had undertaken in 1998 not to reveal information about any RSL to a local authority "that may be prejudicial to their competitive position".

In January 2000 the corporation told West Hampstead there would be no funding for new projects until it submitted satisfactory financial returns.

West Hampstead took no action to stem its losses because it had no idea it was making losses in the first place

But the corporation believed it should not reveal this condition directly to the local authorities. It twice even gave West Hampstead further allocations because to have withheld them would have forced the regulator to reveal that it was worried - and it could not do that because of the confidentiality policy.

This placed corporation officials in the surreal position of holding talks with local authorities about West Hampstead at which they could not disclose concerns about the association, even though they knew these to be relevant.

"Maintaining confidentiality in these circumstances does not appear to be a desirable or workable policy," the Hacas report dryly observes.

As the trouble mounted, West Hampstead told an astonished corporation on 1 August 2000 that its IT supplier was about to go out of business, and that the association was the system's only user in the UK.

Quite why it bought this system, and what exactly was wrong with it, are two of the remaining unanswered questions from the West Hampstead morass.

On 20 September, the corporation received what must have been a staggering message from West Hampstead: the 28,000 surplus it had supposed itself to have was in fact a deficit of 212,000.

On 2 October 2000 the corporation told Camden it was looking at ways to divert funds to other associations because of the suspension of West Hampstead's programme.

Notes of the meeting record that the association had not told Camden it was in difficulty, let alone of the suspension.

As queries mounted from other concerned councils, West Hampstead was put under supervision, and four statutory appointments made to its board. On 22 November, the association projected a deficit for the year of 1.5m. This forced the corporation to offer the 3.5m overdraft guarantee to meet cash flow needs.

By February, West Hampstead had been absorbed into Genesis Housing Group.

A year after this debacle, Camden's scrutiny committee carried out a detailed study of what happened.

This did not mince its words: "In 2000, West Hampstead Housing Association faced a serious financial crisis for which Camden council was unprepared...if [it] had been allowed to become insolvent, thousands of tenants could have lost their homes."

Camden approved a rescue package in October 2001 in which it waived clawback on some vacant homes recently acquired from the council by West Hampstead, which by then had to be sold to help cover the loss. It also agreed an interest-free loan of 300,000.

Its other losses, mainly comprised of the loss of nominations rights to homes that have been sold and the interest lost on the loan, total around 200,000.

Camden has made a raft of recommendations, in particular about the corporation's policy of keeping the problems of associations that it regulates confidential. Scrutiny committee chair John Rolfe denounced this as "unsustainable and indefensible."

The corporation has conceded that local authorities should be told if conditions are placed on an approved development programme allocation.

Local authorities around the country may now become more alive to this issue, and more searching in their questions about the soundness of the housing associations with which they deal.

The Camden report states: "We are concerned that many of WHHA's other cultural inadequacies may be common to a number of housing associations... we encountered evidence that many housing associations operate secretly."

In West Hampstead's case the fault seems to have been not so much keeping its finances secret, but not knowing what they were.

Meanwhile, the corporation is thinking about squaring a very difficult circle.