Corporate groups and the Victorian regulatory framework This document provides guidance for housing agencies wanting to operate in Victoria through a corporate group structure. It aims to promote best practice in the sector by identifying the expectations of the Victorian regulator in relation to corporate groups and their operation in Victoria. Corporate groups present unique challenges within the regulatory framework. One main challenge is the fact that, although the Housing Act 1983 (the Act) allows for the registration and regulation of entities operating within a corporate group, the Registrar may only request information pertaining to the registered entity. In order for the Registrar to regulate the Victorian group parts effectively, we require assurances covering independence and transparency within that structure. This will help ensure we are receiving all relevant information to enable us to come to a full regulatory judgement about a Victorian registered agency, and that all registered agencies are meeting Performance Standards, even when some group parts may be regulated within another jurisdiction. These assurances will help safeguard social housing assets, public and private investment and the interests of tenants and other service users. As the Act is silent on the specific requirements for a registered agency which is a part of a corporate group structure, this guidance is designed to clarify what we expect of corporate groups. The aim is to provide detailed and transparent guidance on the practicalities of parent-subsidiary relationships, as a result of the Act and the Performance Standards. It is intended for registered and non-registered housing agencies already in corporate groups, whether they are the group parent or subsidiary, those creating or joining a corporate group, and other connected bodies and interested parties. It is not the role of the Registrar to encourage or discourage corporate groups, or any particular model, or to formally approve the creation of corporate groups. We request information on these structures to ensure they comply with the requirements of the Housing Act 1983, including the Performance Standards, both at registration and for the entire regulation period. Depending on the nature of the group arrangement, these may impact upon how we regulate a particular agency. This guidance should be read in conjunction with the Act, the gazetted Performance Standards, as well as relevant guidance issued by the Registrar. The Victorian context Corporate groups are comprised of two or more entities that commonly involve a parent-subsidiary relationship. Historically, in Victoria, corporate groups have been established to address the concern of non-director funded assets and the Victorian winding up provisions (as well as assets that are subject to conditions which may be inconsistent with the requirements of the Act). As a national market emerges new structures are emerging, for example a Victorian registered parent with interstate subsidiaries and/or related companies. Victorian agencies should be mindful of this guidance when establishing corporate structures. The winding up provision, in schedule 7 paragraph 3(5), states that: ‘A provision must be included [in the Agency’s constitution] to provide that in the event of the rental housing agency being wound up, any surplus assets remaining after payment of its liabilities must be transferred to another registered agency under the Housing Act 1983, approved by the Registrar under that Act, with similar purposes and which is not carried on for the purposes of profit or gain to its members.’ 1|P a g e D15/74040 As there is no differentiation of asset types or exceptions described in this provision, all assets of a registered agency are affected by it. Accordingly, agencies may consider establishing a group structure to allow assets owned in another jurisdiction to be quarantined. Other reasons why housing agencies wanting to operate in Victoria may consider a corporate group structure include: The Registrar’s powers in Victoria are more extensive than in the national system (for example, the Registrar’s intervention powers) and, like the different winding-up clauses, these would be difficult to reconcile in one constitution to cover both jurisdiction’s requirements; and Current Victorian Government policy that directs public funding to agencies that are registered in Victoria. Proposals for new corporate groups, or changes to existing groups, will require approval by the Registrar if they involve the registration of new housing agencies in Victoria, or a change in the constitution of existing agencies. Specifically, s.82 of the Act allows the Registrar to approve the registration of a rental housing agency that is a subsidiary of a body other than a registered agency and s.103 allows the Registrar to approve a registered agency being a subsidiary of a body other than a registered agency.1 The Act states these approvals will be granted if the Registrar is satisfied that its status as a subsidiary will not adversely affect the ability of the agency to comply with the prescribed registration criteria and the Performance Standards. Early notification and discussion with the Housing Registrar is recommended before any consideration is given to the creation of alternative corporate arrangements. Regulatory requirements In any corporate group, the entity registered in Victoria must demonstrate to the Registrar that it has in place effective agreements to ensure it is, and will continue to be, able to act in accordance with the Act, the gazetted Performance Standards, as well as all other requirements of the Victorian regulator. This will include assurances that the Victorian agency is not overly controlled by the activities or influence of other group entities. The Regulator expects that in the development of a corporate group: Prompt discussions will be initiated with the Victorian Registrar, as well as any other relevant regulators, to enable an early understanding of the proposal and the options that are being considered for the possible structure; Appropriate professional advice will be sought where necessary, for example in relation to constitutional arrangements; Consultation with stakeholders will occur as required, including consultations with funders who may need to provide specific approvals; and A comprehensive risk analysis will be carried out, with risks to stakeholders managed effectively during the entire process. In line with the National Regulatory System for Community Housing (NRSCH), information that we may request from Victorian agencies in relation to their corporate group arrangements include: 1 Agencies acting as trustee should also be aware of the approvals required by the Registrar, as detailed in s. 82 and s.103 2|P a g e D15/74040 A group organisational chart showing the relationship between the community housing provider and all group entities; Details of group members (e.g. name, place of incorporation, board composition, nature of business and any other additional information required by the Registrar for a better understanding of the risk profiles of individual group members); Management structure of the group including key risk management reporting lines; Intra-group service level agreements; Intra-group financial exposures; The business case for the establishment of the group; and Other information required for effective supervision of the group.2 Governance In order to satisfy regulatory requirements, including the Performance Standards, certain governance arrangements will need to be addressed by agencies to ensure both independence and transparency within the corporate group. The Governance Performance Standard states: The registered agency is well-governed to support the aims and intended outcomes of its business, specifically in relation to the following. a. Ensuring coherent and robust strategic, operational, financial and risk planning. b. Ensuring effective, transparent and accountable arrangements and controls are in place for decision making to give effect to strategic, operational, financial and risk plans. c. Complying with legal requirements and relevant government policies. d. Ensuring that the governing body has members with appropriate expertise or that such is available to the governing body. Independence of the governing body The regulator’s expectation is that a registered Victorian agency will not have an identical board to another entity. In short, an identical board creates a regulatory impediment as we may only require the Victorian agency to produce information about itself in satisfaction of its reporting responsibilities, and not seek information about or from other corporate group entities. In this situation, where identical board members are making decisions for different entities, the Registrar would have to rely on the trust of the Victorian agency board to make decisions in the best interest of the agency. This is inconsistent with the role of the Registrar to provide assurance on the regulation of the sector. Furthermore, linking subsidiary board membership to a parent board means board members are appointed based on their suitability to the needs of the parent company and not necessarily the subsidiary. It also raises issues in regard to conflicts of interest between the group’s constituent parts, as it may become difficult for board members to be clear at all times whether they are undertaking a decision as board members of the parent or the subsidiary. Subsequently, we could not be assured that all decisions made by the board have been objectively made in the best interests of the Victorian agency. Where the Victorian registered agency is a subsidiary of a parent the regulator has no formal jurisdiction over the parent. Given that the Victorian government has invested considerably in this sector it needs to be assured that this investment is adequately protected. Equally this will apply if the Victorian registered agency is the parent. 2 National Regulatory System for Community Housing, Affiliated entity arrangements, 2014, p. 8 . 3|P a g e D15/74040 Based on experience it is expected that reasonable steps are taken to appoint independent members to the board of the Victorian registered subsidiary. In this case independence is seen as not having direct relationships with other companies or organisations in the corporate group. Having governing body members that are not identical, or ensuring there is at least an independent chair for each entity of the group, will help ensure conflicts of interest are managed effectively. An independent board will also provide reasonable assurance to the Registrar it is being governed in its best interests and according to its core purpose. Best practice guidelines relating to the composition of the governing body include: The board of the parent company will be constituted with an independent chair (i.e. not a director of, or having any other relationship with, another group entity); The subsidiary will be constituted with an independent chair (i.e. not a director of, or having any other relationship with, another group entity); The Victorian agency board will include an appropriate number of independent directors (i.e. not directors of, or having any other relationship with, another group entity) to enable independent board members to form the majority of the board, Independent directors are represented on each board committee, with at least two independent directors on each of the Audit committee and the Governance committee (or similar), with the Audit committee chaired by one of the independent directors; The Victorian agency has its own process for appointments and filling of vacancies to its board, as well as a requirement that board membership must include skills and expertise with reference to experience and understanding of the community housing sector and compliance frameworks in Victoria; The ability for the Victorian agency to prepare and approve its own set of board policies that are specific to its operations; and The group boards will meet separately, with proceedings separately minuted. Managing conflicts of interest In order for registered agencies to comply with the Performance Standards, governing body members must always act in the best interests of the entity of which they are a serving member. All governing body members must be provided with clear guidance on declaring and managing conflicts of interest, and there must be clear structures and procedures in place to manage any conflicts of interest that may arise within a corporate group. When considering the registration of a group part in Victoria, and in ongoing regulation, we will place high importance on the agency’s governance controls to ensure they appropriately address conflicts of interest, or potential conflicts of interest. This includes clear demonstration that intercompany transactions are subject to rigorous approval processes. To reduce the potential for conflicts, and to promote transparency in all dealings, governing body and operational policies, procedures and working practices should be clear about the identity of, distinct responsibilities of, and relationships between, each entity within the group. Key documentation The Registrar will require documentation that describes the governance arrangements within the corporate group. These will indicate where both responsibility and control lie within the group. Key documents include the draft constitution and the intra-group service level agreement. In the case of a Victorian registered subsidiary, the subsidiary’s constitution may permit control by the parent within limits that allow sufficient independence to carry out its business. For example, the parent may have the right in its constitution to appoint or remove governing body members of the independent subsidiary board where there are performance concerns. Such constitutional relationships between all entities in the group will need to be documented in a transparent manner. 4|P a g e D15/74040 Registered agency policies and procedures must be detailed to demonstrate that the Victorian agency is operating consistently with the Performance Standards. Policies of particular interest include the board charter, conflicts of interest, affiliated entities policy, delegations authority and the terms of reference of the audit and risk committee. We would expect that a regular review of governance and control arrangements was undertaken within the group to ensure these arrangements are effective and being properly implemented. Financial and risk management Victorian registered agencies must remain financially viable on a stand-alone basis at all times, regardless of any corporate structure that is in place. However, it is also reasonable to expect that group entities may provide, or be provided with, some form of financial support within the structure. Accessing the resources of the group as a whole, for example through cross guarantee or debt security, may allow for the negotiation of more favourable funding terms. Arrangements such as these, and indeed all financial management arrangements in a corporate group, should be entered into at least as strictly as those entered into with unrelated entities. Such arrangements may also increase the risk exposure and which is an issue for the regulator. Financial management Financial relationships within a corporate group are complex matters and require particular consideration from both the Regulator and housing agency. From a regulatory viewpoint, best practice guidelines for financial management include: The terms and management of any financial transactions between the different group parts, such as cross guarantees or debt financing, should be clearly identified in both group and individual financial reports; Any funding or lending arrangements should be formalised and properly documented, with appropriate monitoring and control mechanisms in place; Financial transactions must be made on arm’s length and commercial terms, meaning that the financial terms of these transactions are the same or better than had the negotiations been undertaken with an unrelated entity; When considering financial support across group entities, the governing body of the entity providing the support must be satisfied that doing so is in the best interests of the agency, is within intragroup transactions policy (or similar), and that the risks arising from the arrangement have been properly identified and considered; Intercompany loans are subject to the Housing Registrar’s reportable events mechanisms and need to be reported accordingly; Separate bank accounts should be kept for each group entity; Entities should maintain appropriate delegation schedules; Financial reporting arrangements must be provided in accordance with accounting standards; Victorian agencies registered with the Australian Charities and Not-for-Profits Commission (ACNC) as public benevolent institutions (PBIs) need to satisfy themselves regarding any implications arising from this status, tax or otherwise For agencies entering into a new corporate group arrangement, it is advisable they review all finance facilities for any specific consents that may be required from a change in structure. Risk management As a matter of best practice, any risks arising from the corporate group should be identified in an agency’s risk register where they can be managed effectively. Key risk management documentation includes an identification of both short and long term risks and the associated risk mitigation strategies. 5|P a g e D15/74040 Audit and Risk management Committee As good practice, all larger registered Victorian agencies are expected to have some form of Audit and Risk Management Committee. Directors for this committee should be selected based on their appropriate financial and/or risk management skills. To ensure independence and transparency, the committee should have an independent chair, be formed with a majority of independent directors, and report to its own board. Service provision Service provision between group entities should be formally documented in written service level agreements or contracts, with the governing body of an agency providing effective control and monitoring of these agreements. Best practice guidelines include: Agreements for procured services between entities are clear and transparent, and must include clear obligations about the standards of service to be provided by the service provider. The respective roles of each party for ensuring that tenancy and housing services are provided consistently in compliance with the Act must be clear; The service provider must have appropriate insurance and deal with personal information in line with the agency’s privacy policies; The agreement must allow the Victorian agency to monitor and access data and information on the service provider’s performance, including compliance with Performance Standards. The agreement must include appropriate performance monitoring provisions, e.g. regular reports on the service provider’s performance and the agency’s ability to access and audit records of the service provider in order to obtain evidence of acceptable performance; The Victorian agency should include a requirement that the service provider is to provide information so the agency can meet its reporting requirements under the Act; An agency must have express rights to require the service provider to rectify any breach of contractual obligations, or terminate the agreement if it fails to do so; The Victorian agency must be able to demonstrate its capacity to carry on its housing agency business in compliance with the Act through and following the termination period if the service provider terminates the agreement; There should be clear conditions under which the parties can terminate or amend the agreement; The Victorian agency needs to satisfy both itself and the Housing Registrar that any service agreement provides value for money to the agency and the cost sharing is based on fair and equitable costs of providing the services. The agreement could allow for market testing of the services on a periodical basis to ensure the agency receives value for money; These issues must be addressed in the agency’s risk plan and there must be an action plan in place in case any of these issues occur. The risk plan needs to identify how the agency would maintain services after the contract ends and how the agency would disentangle the funding from the service provider. Performance Standards Evidence Guidelines Performance Outcome 4: Governance Performance requirements - ensuring coherent and robust strategic, operational, financial and risk planning 6|P a g e D15/74040 Affiliated entity arrangements appropriately address: 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 affiliated entities) appropriate balance between independent directors and executive directors clear and transparent policies and/or agreements on affiliated entity arrangements where contracting or sharing services that are relevant to achieving performance outcomes under the Performance Standards corporations law requirements (particularly in relation to shadow directors, insolvent trading scheme, and consolidated financial reporting) risks in relation to reputation, governance, corporate entity and financial Performance requirements (b): Ensuing effective, transparent and accountable arrangements and controls are in place for decision making to give effect to strategic, operational, financial and risk plans independent chairperson (non-employee of the provider or affiliated entities) These guidelines follow the NRSCH Evidence Guidelines given that corporate groups may involve interstate entities. Further information For registered agencies wanting to discuss current or proposed group arrangements, please contact your lead regulatory contacts at the Housing Registrar. For further information, please contact the Housing Registrar: Phone: (03) 9651 1402 Email: housingregistrar@dtf.vic.gov.au Disclaimer This guidance does not constitute legal advice. It is intended to offer general guidance only to assist in understanding the operation of corporate groups within the Victorian regulatory framework. Entities should seek their own independent legal advice regarding the subject matter of this guidance. 7|P a g e D15/74040