Response to Affiliated Entity Arrangements

General

The role of the primary Registrar is not to approve affiliated entity arrangements. The primary Registrar will use information about affiliated entity arrangements to assess the impact, if any, on the provider’s tier of registration, and on its assessment of whether the provider is complying with its obligations under the National Law, or is likely to comply with those obligations.

The extent of a provider’s affiliated entity arrangements, and the nature of those arrangements may have an impact on the way the primary Registrar regulates that provider.

Determining tier of registration

Registrars will consider affiliated entity arrangements when determining the appropriate tier of registration.

Relevant factors include:

• the number of entities in the corporate group and the nature, scale and scope of their operations
• the geographical spread of the group’s operations, including whether any members of the group operate outside Australia
• whether the community housing provider, or members of its group carry out operations other than community housing operations, and the nature of those operations (i.e. how diversified the group is)
• whether the main business of the group is the provision of community housing
• whether the provider outsources any of its functions
• whether the affiliated entities are regulated as community housing providers or otherwise regulated under a different regulatory scheme
• each entity’s business case
• the nature of any financial arrangements which form part of the provider’s affiliated entity arrangements.

Impact on risk assessment and regulatory oversight

Affiliated entity arrangements are likely to affect the Registrar’s determination of the risk inherent in the community housing provider’s operations. The risk profile of a provider will affect the level of regulatory engagement required, and the nature of that engagement. Community housing providers must have adequate systems, policies and procedures in place to manage, monitor and control all forms of risk arising from their association with affiliated entities (including with respect to reputational risk, corporate entity risk, governance risk and financial risk).

Group structures

There are a number of matters that the primary Registrar will examine when assessing providers in group structure arrangements, including:

• the need to implement and maintain effective financial reporting, including where relevant as between entities, and effective financial forecasting taking into account the related party arrangement and its likely impact on operations, and obligations under relevant corporations law
• terms and management of any cross guarantees
• terms and management of debt financing
• the need to ensure operations are subject to sound governance and decision making processes
• terms and management of any other agreements with group entities relevant to the community housing provider’s compliance with its obligations under the National Law and to fulfilling the performance requirements of the National Regulatory Code, including service provision agreement
• risk planning and risk mitigation strategies (including with respect to reputational risk, governance risk, corporate entity risk, and financial risk).

Community housing providers should be financially viable on a stand-alone basis, even if another member of the group is also a registered community housing provider.

A registered community housing provider must carry out its obligations under the National Law and must have structures in place to manage any conflicts of interest between those obligations and the interests of any group member.

Agreements with group entities

Community housing providers should be aware of particular risks arising from agreements entered into with associated entities which are members of the provider’s group.

Risks arising from those relationships should be addressed by the provider at least as strictly as it would address exposures to unrelated parties. It is also prudent to set limits on exposures to related entities at both an individual and an aggregate level.

The types of issues that a primary Registrar will examine include:

• whether the provider has properly assessed the risks arising from entering into financial support to an entity within its group and the degree of exposure to group entities
• whether the provider has clearly identified any cross-collateralisation, guarantees, equity investment or lending within the group in its business plans and financial reports
• whether the provider has ensured that any agreements with group entities are properly documented
• whether the provider has entered into agreements with group entities on terms which are the same or better than the terms it would be reasonable to expect the provider to have made if the negotiations were at arms’ length
• whether the provider has clear and transparent policies or agreements on affiliated entity arrangements where services are being procured or delivered between entities, including terms to ensure compliance with the National Regulatory Code and review mechanisms
• whether service provision between related entities is set out in written service level agreements or contracts
• whether the provider regularly reviews the efficiency and effectiveness of service provision within the group, taking into account the scale of the service provision. It is for community housing providers to decide, taking appropriate professional advice, whether there is a requirement to expose existing services to competition, in their particular circumstances.

Control and independence

Primary Registrars expect parent community housing providers to exercise high-level control, by monitoring the activities and performance of their subsidiaries. They also expect parent

community housing providers to take timely and effective action if their subsidiaries do not operate within approved limits or fail to meet agreed standards of performance.

The balance between strategic control by the parent and operational independence for subsidiaries is for the group members to decide. Community housing providers should be able to demonstrate that the balance reflects the group’s objectives, the legal status of its members and the risks involved. For example, a community housing provider whose subsidiaries deliver core landlord services to tenants would typically exercise a higher level of control over its subsidiaries. However, a subsidiary set up to deliver entirely commercial activities might operate on more of an arm’s length basis, to minimise risk to the parent.

Primary Registrars expect community housing providers to take suitable professional advice to inform their decisions about the appropriate level of strategic control/operational independence and how to achieve this. Community housing providers should identify any risks arising from the arrangements they put in place.

Primary Registrars also expect community housing providers that are parent entities to establish clear financial and other limits within which the provider’s subsidiaries should work. Examples of ways this could be managed include:

• establishing a group strategy and objectives
• the parent approving its subsidiaries’ business plans
• through an independence agreement or similar procedural document
• making clear what group policies, if any, subsidiaries are expected to apply
• a clear reporting framework
• through governing body composition.

Governance issues

It is important for community housing providers to ensure operations are subject to sound governance and decision-making processes. The Evidence Guidelines set out a list of governance issues which must be appropriately addressed in relation to arrangements with entities which are related to the provider.

• relevant corporations law in relation to directors’ duties and exposure to liabilities in relation to non-wholly owned subsidiaries
• actual or perceived conflicts of interest and conflicts of duty in the board’s decision making where there are shared directors or executives
• protocols for managing directors’ duties and the sharing of information in accordance with relevant corporations law
• the independence of the chairperson (non-employee of the provider or related parties)
• appropriate balance between independent directors and executive directors
• clear and transparent policies and/ or agreements on related party arrangements where contracting or sharing services that are relevant to achieving performance outcomes under the National Regulatory Code
• corporations law requirements (particularly in relation to shadow directors, insolvent trading scheme, and consolidated financial reporting)
• the provider’s risk management framework should deal with the risks associated with the outsourcing of a material community housing activity
• outsourcing arrangements should be evidenced by a written, legally binding agreement
• outsourcing agreements should include a clause that allows the primary Registrar access to documentation related to the outsourcing arrangement and requires the service provider to cooperate with the Registrar in relation to the Registrar carrying out its regulatory functions under the National Law as if it were a registered community housing provider
• providers must monitor the ongoing performance of service providers
• providers must maintain control over activities that impact on their compliance with the National Law
• providers must appropriately deal with any actions by service providers that breach or may service level agreements or which breach or may result in a breach of the provider’s obligations under the National Law.
• risks in relation to reputation, governance, corporate
  entity and financial.

Providers must also:

• maintain a risk and audit committee (or similar governance
  mechanism), formed with a majority of independent directors
• maintain appropriate delegation schedules.

Outsourcing agreements

Registered community housing providers which enter into outsourcing arrangements (whether with a group entity or with another entity) should be aware that:

• although outsourcing may result in the service provider  taking day-to-day managerial responsibility for the activity, the community housing provider remains responsible for  complying with its obligations under the National Law and  remains responsible for all performance requirements that  relate to the outsourced activity.
• providers should have measures in place to ensure that due  skill and care is taken in choosing suitable service providers
• the provider’s risk management framework should deal with the risks associated with the outsourcing of a material community housing activity
• outsourcing arrangements should be evidenced by a written, legally binding agreement
• outsourcing agreements should include a clause that allows the primary Registrar access to documentation related to the outsourcing arrangement and requires the service provider to cooperate with the Registrar in relation to the Registrar carrying out its regulatory functions under the National Law as if it were a registered community housing provider
• providers must monitor the ongoing performance of service providers
• providers must maintain control over activities that impact on their compliance with the National Law
• providers must appropriately deal with any actions by service providers that breach or may service level agreements or which breach or may result in a breach of the provider’s obligations under the National Law.