CMA Update Paper - Please don't add further Complexity.

Unnecessary complexity?

The CMA update paper for its market study of residential leasehold management fails to understand some fundamental tenets of the leasehold system and cannot succeed until it gets them right. Perhaps they would benefit from some IRPM training?!

But more seriously, this is a real reflection of why consumers misunderstand the role of managing agents consistently. Let's face it, residential leasehold is complex and further complicated by layers of ownership that lead to misunderstandings about who is freeholder or head leaseholder and who is landlord or has landlord's covenants. The CMA have still not nailed this one.

Given the highly detailed response to this part of the consultation undertaken by Jeff Platt on behalf of the IRPM, I did not respond directly this time but contented myself with the knowledge that IRPM have really covered everything.

The full 35 page response can be found here:

http://www.irpm.org.uk/docs/public/CMAMarketStudyupdatepaperresponsefinal.pdf

It is well worth a read.

I do think it is important that we are aware of the limitations of the CMA's understanding so far. Allowing these errors to permeate into any final recommendations will do no one any favours - excepting those who make a living pulling apart badly drafted legislation, regulation and codes in the tribunals.

We operate in a complex legal framework with case law dating back many years and enshrined within that is the concept of 'reasonableness'. This shapes our behaviour as agents. When it doesn't consumers have various routes to achieve redress, shortly to include ARMA Q. All agents are required to be members of an Ombudsman and the sector has it's very own tribunal. Both RICS and ARMA members are bound by the RICS UK Residential Property Standards. In fact all agents are bound by the RICS Code since it has statutory backing.

There is much talk in the review of 'switching' opportunities. I think there as a misunderstanding of the relative ease with which this is taking place now, particularly where the threat of RTM is sufficient to either force a change of behaviour or for a landlord to agree to switching in order to avoid the RTM process. RTM is a fairly big and effective hammer given it is a 'no fault' right. Just the threat of it has caused both agents and landlords to change their approach. There is no mention of this in the report.

Switching of agents is currently, in part, being driven by price. But managing agents are not selling a simple one-stop product, it is an essential and relatively complex one. Prices should reflect that level of complexity and not be driven entirely by cost. We need to see our industry valued as essential and professional and not treated as a simple commodity. That alone will allow standards to continue the push to service excellence. Understanding what agents do is the responsibility of not just agents but intermediaries across the purchase process.

Finally, there is the education of managers and other suppliers. Specialist qualifications are now the norm for those involved in block management and more and more specialist topics are being added, including finance, mixed use, PRS and soft skills such as customer services. Managers are better equipped and qualified than ever before.

Residential management is on the right trajectory. Any poorly drafted interference in that process has the potential to create yet more confusion and potentially ignores the raft of regulation and case law that already envelops surrounds consumers in this sector.

A simple recommendation that all agents must abide by the RICS Code and must aim to meet the requirements of the self regulatory regime ARMA Q within a stated period would more than exceed the ambition of the CMA as reflected by their interim report. Poorly performing agents are being weeded out by increased barriers to entry, significantly higher levels of competition and increased consumer understanding. Further complexity helps no one.

Resources for managers and leasehold owners.

Information is the missing link in our world. So many issues would be alleviated were we all up to speed with current legislation, regulation, the snappily titled First-Tier Tribunal (Property Chamber) (FTT(PC)) and the overwhelming amount of knowledge needed to understand leases, budgets, accounts, consultation process and the myriad other areas involved in running residential blocks.

Suffice to say there are  few of us who can claim to have a handle on all of it. Not me.

So here is a list of great places to keep in your bookmarks and to review whenever you have a spare moment:

• ARMA  http://www.arma.org.uk - a brilliant source of guidance with over 300 notes for members and much more besides. Even non-members and leaseholders are well served by the freely available documentation and there is so much more if you join.
• Leasehold Advisory Service  http://www.lease-advice.org - again a fantastic source of well written and clear advice as well as case updates.
• IRPM  http://www.irpm.org.uk - great resource for members in particular and growing source of quality analysis
• FPRA http://www.fpra.org.uk/ The Federation of Private Residents' Associations is a not for profit organisation dedicated to supporting leaseholders and lobbying on their behalf. An excellent resource for residents' groups it should also be followed by conscientious managers.
• ALEP http://www.alep.org.uk/ everything you could ever want to know about enfanchisement.

• SLC Solicitors - http://www.slcsolicitors.com/ have an excellent section on their website entitled 'Guides'
• Brady Solicitors - http://bradysolicitors.com/ likewise
• Brethertons - http://www.brethertons.co.uk/

• www.lawandlease.co.uk/  Amanda Gourlay's (of Tanfield Chambers) eloquent dissection of all the latest case news and, for my money, the best sector analysis out there. If you have any involvement in this sector you have to keep this one bookmarked and visit regularly.
• http://leaseholdlawyer.wordpress.com/ - Chris Alexander's blog is also an excellent source of comment.
• http://www.leaseholdlife.info
• www.leaseholdknowledge.com/
• www.leaseholdinfo.com/
• The Residential Manager https://davidclark'sblogspot.co.uk  - In all honesty this one is rubbish.

• News on the Block - http://www.newsontheblock.com/ growing web resource
• FlatLiving - http://www.flat-living.co.uk/ similarly a growing resource
• Property Week - http://www.propertyweek.com/ the old favourite and a little more engaged with the residential sector than Estates Gazette in my opinion.

Is your managing agent solvent?

 There will soon be a perfect storm that includes the CMA (OFT) report into residential leasehold management, ARMA Q going live, increased competition and ongoing consumer pressure that will lead to many small to medium managing agents throwing in the towel once and for all. Some will find sale or merger opportunities, some will simply shut up shop and one or two, possibly, will run off with your money. It's coming, I promise.

Sounds dramatic, but I have researched my case well. I have looked at many  managing agents  financials (more than 30) in detail over the last month and I have spoken to many. Balance sheets and histories are freely available on sites like Duedil and they tell a sorry story for some, well quite a lot actually. Reduced turnovers, negative balance sheets, tiny net worth, squeezed profits, senior staff leaving or worse.

For me it is the financial history of many firms that is most telling where, despite what we are being told, turnovers are static and profits are being squeezed by growing wage demands and increased and often justified client and customer requirements for visible value for money.

Those that are succeeding have two things in common; they have scale and they offer a wider range of integrated services. Whether as estate agents, facilities managers or general practice surveyors, you need a broader slice of the delivery cake to make residential leasehold management work as a business proposition. Self delivery of health and safety compliance, surveying, soft services such as cleaning and concierge and debt collection all make businesses more stable and embedded. Look to the commercial facilities management industry for a potted history.

Those promising different levels of service, new standards of response, less units per manager, etc.etc. are still having to deliver at the same or at lower price per unit. We are in a period of unprecedented competition and that is driving service standards and pricing. This is a good thing but inevitably it will shake out the weakest, good or bad.

I get asked a lot by leaseholders what they should look for when deciding on an agent. There are the obvious things that all guides will give you but they rarely mention the financial aspects. So here are my easy steps to ensure that you, as a freeholder, a director of an RMC/RTM company or simply as a leaseholder need to do, in addition to the obvious things, to ensure you are protected:

1. Have a look at your managing agents financial history. Use one of the freely available web services which will give you much of the information you need like turnover, profits, balance sheets, ratios and ownership. Buy the last accounts - usually no more than a few £s.
2. Take into account the size of the business and the number of staff relative to the service promises being made. Are you happy that turnover and profit is sufficient for the type of business.
3. Are they trading solvently? Are they improving their numbers year on year? Do they have the scale to survive a major loss of business such as a big instruction?
4. Is their client base varied and broad?
5. Is your money properly protected and held in trust in a separately identifiable account?
6. Are they ARMA Q accredited or working towards it. If not, why not? (Being a member of RICS does not cut it as a substitute for Q- they may well audit periodically but they will not be looking for the same signs.) If they imply that cost is prohibitive then that in itself tells you something important. Regulation should not be optional.
7. Ask about the plan for the business, succession, retirements, sale etc.

Remember it doesn't matter how good your agent is, how solid their reputation is, if they are unable to trade at a profit or to meet their commitments. Add this to the list of essentials when looking for a new one...

FRED 50 - unhelpful, unfriendly and getting on a bit, WLTM clear thinker.

Just one comment to the Financial Reporting Council, to start with:

It's a Residents' Management Company NOT a Residential Management Company. Look at any lease with an RMC for clarification.

This demonstrates a fundamental misunderstanding of what it is that you are dealing with. Whilst it may only be semantics in some eyes, in my view it is an entirely different thing and at very least is confusing for consumers and members/shareholders of RMCs.

This is the first of many areas that need clarification, most of them raised by respondents to the FRED 50 consultation (see below).


 The consultation document can be seen here:

 http://www.frc.org.uk/Our-Work/Publications/Accounting-and-Reporting-Policy/FRED-50-Draft-FRC-Abstract-1-Residential-Managemen-File.pdf



Read the fascinating responses to FRED 50 here:

https://www.frc.org.uk/Our-Work/Publications/Accounting-and-Reporting-Policy/FRED-50-Draft-FRC-Abstract-1-Residential-Managemen/Responses-to-FRED-50.aspx

Farewell ARMA, hello ARMA Q

Fifteen years is a long time to be involved in your trade body, some might argue too long. During that time I have gone from being a property manager to a partner, then managing director and owner and now a non exec. I have experienced a massive residential boom and a huge increase in the complexity of managements followed by the worst recession in living memory. Make no mistake, ARMA has been a significant element in my career, a source of the highest calibre information and a meeting of the best brains in the industry. I will miss it greatly.

Best of all, and despite what you might hear from a decreasing minority of detractors, I have never met a more focussed, determined and engaged group. All of them want to improve the industry, all of them give freely of their time and they have in the last 20 years greatly changed for the better the way that agents and landlords operate.

My own highlights were the creation of the Institute of Residential Property Management (IRPM) in 2002, an idea born out of the ARMA Education Committee and built on a shoestring. Now numbering 2,800 members and growing, IRPM is seen as the essential qualification for property managers, provides a direct entry route to RICS and is a valuable signifier for both employers and consumers.

The second highlight will come out of the need for independent regulation, something brought sharply into focus when I was, for a brief period, chair of the practice committee. It is right and proper that we do not sit in judgement of our peers and I believe ARMA has managed to attract the highest quality individuals to sit on the independent regulatory panel. ARMA Q must set the standards for the future and must be embraced by all in the industry – including those that, for one reason or another, choose to remain outside of the ARMA umbrella. This work has been undertaken by a dedicated secretariat headed by CEO Michelle Banks, their absolute determination to see it through has been extraordinary and I am filled with admiration.

Now comes the really tough bit, implementation of ARMA Q and making certain that it becomes the accepted standard and is endorsed at the highest level. I will follow with interest from the sidelines, shouting occasionally like a bad football dad…

Qualified and Competent - Fire Risk Assessors

Not all fire risk assessors stand up to scrutiny and obtaining a ‘suitable and sufficient’ assessment comes down to more than just qualifications. Guest Blogger Kevin Boreham explains:

Building fires not only threaten lives and property, but can also lead to enforcement action, prosecution, stiff fines and even jail. Employing the services of a competent fire risk assessor is therefore paramount for landlords, property managers and company owners.

The Regulatory Reform (Fire Safety) Order 2005 (FSO) stipulates that a person shall be regarded as competent ‘ ...where he has sufficient training and experience or knowledge’. But how much raining, experience or knowledge is sufficient?

There are currently no formal qualifications required to become a fire risk assessor, although there are a number of excellent training programmes available. But regardless of the knowledge gained in a classroom setting, there is nothing like practical experience.

Having assessments peer reviewed or scrutinised by a local fire inspector can really highlight weaknesses in methodology and report formats, and experience shows that even big-name health and safety service providers can get it wrong.

When we recently took on a property, we scrutinised the fire risk assessment provided and found some worrying gaps. A further report by an in-house specialist uncovered some startling and basic omissions:

• dry-riser systems would not hold water as the bolts were only finger tight

• complete stairwells lacked any working emergency lights

• security was compromised, allowing indiscriminate entry

• plant rooms were used as storage facilities by residents

• the automatic smoke-ventilation system was not in working order.

When questioned, the staff on site remarked that the previous assessor had spent less than half an hour on the premises. This might have been enough time for a small apartment block, but not for this substantial property, which consisted of 12 cores over 10 to 12 floors, plus two levels of undercroft parking and several plant rooms.

It is doubtful how a ‘suitable and sufficient’ risk assessment can be conducted with this approach.

Conflict of interest

Formal qualifications are only part of the requirements to become a good fire risk assessor. An understanding of building regulations, construction methods and building materials enable better risk judgements to be made. Yet health and safety journals regularly carry advertisements placed by companies seeking serving or ex-fire officers to be fire risk assessors.

While studying for my formal qualifications, I once asked a serving fire officer for clarification on some of the finer points of fire-risk assessment and was surprised by his response: “How should I know? I just turn up with a hosepipe to put the fire out.”

Apart from the conflict of interest resulting from serving officers acting as fire risk assessors (and especially those who act as enforcers of the FSO), some doubt exists as to their ability to supply a suitable and sufficient risk assessment.

Enforcing the FSO and writing reports to help others abide by it are two entirely different things. Enforcement is a black-and-white issue – a building is either compliant or not. But adherence has real life to deal with, including staffing levels and human interaction.

So what is a ‘suitable and sufficient assessment of the risks’? This depends on who is asking the question, the knowledge of that person and to what type of property it relates. On 8 July 2011, Nottingham Crown Court jailed a fire risk assessor and a hotel manager for eight months for failing to carry out a suitable fire risk assessment, among other offences. In this instance, the enforcing authorities and the courts made the decision as to suitability.

Having assessments peer reviewed by a local fire inspector can really highlight weaknesses in methodology and report formats

After several years of regularly conducting risk assessments in residential, retirement and office blocks, I believe that I can produce ‘suitable and sufficient’ assessments for such properties.  However, an attempt by me to assess industrial sites or shopping complexes would likely be ‘unsuitable and insufficient’. Without the appropriate knowledge and observational skills, it is highly likely that deficient, inappropriate or missing passive/active fire-protection measures will go undetected.

So, who is competent and how can you tell? These are important questions for freeholders, managing agents, residents’ management companies and others with managerial control of properties.

The fire safety industry is attempting to address this issue as a whole. The new BAFE SP205 Life Safety Fire Risk Assessment Scheme, with a guidance document for certification bodies, has been developed for organisations that provide fire risk assessment services. While the document mentions competency, it clearly states that “it is not the purpose of the scheme to assess the competence of the individuals involved”. Whether it goes far enough remains to be seen. While using registered organisations on the scheme will provide some protection, consumers may still end up with unsuitable fire risk assessments.

There are some things you can do to ensure a suitable assessment:

• seek out assessors with formal qualifications, preferably more than a one-day course

• check their area of specialism; those doing assessments in residential properties require a different  

   knowledge base to those working in other areas

• ask to see samples of previous risk assessments

• use an established company

• ensure that access is provided to all areas of the property and relevant information is made

available to the assessor

• read and question the results to ensure that the assessment is not done as a tick-box exercise.

Enforcement is a black-and-white issue, but adherence has real life to deal with

Conclusion

All clients want value for money and there are providers that will cut their prices to gain business. The reality is that low barriers to entry leave the market open to abuse by those looking to ‘cash in’ on what is seen as a lucrative market. The outcome is assessments that do not stand up to scrutiny and are likely to fail the ‘suitable and sufficient’ test. Be aware: best price does not equal the best results.

So, how do you know a fire risk assessor is truly competent? When they supply a suitable and sufficient assessment that protects you and your clients and stands up to scrutiny, when they take their time when visiting the property and ask the relevant questions, and when the assessment is not seen as a retail opportunity.

Finally, and most importantly, when the assessor is prepared to stand up and be accountable for what they have provided to the client.

More information

Competency Criteria for Fire Risk Assessors (Fire Risk Assessment Competency Council): www.britishfireconsortium.org.uk/fire_risk_assessment_competency_document.pdf

The Regulatory Reform (Fire safety) Order 2005:

www.legislation.gov.uk/uksi/2005/1541/contents/made

Kevin Boreham is the head of Mainstay Group’s Health, Safety and Compliance team. He is a member of the Institute of Residential Property Managers, a specialist member of the International Institute of Risk and Safety Management and a technical member of the Institution of Occupational Safety and Health. kevinboreham@mainstaygroup.co.uk

This article was published in the RICS Residential Property Journal January-February 2013. For full details of RICS and their services please go to www.rics.org