Lord Best’s final report of the working group set up to recommend on the best way to regulate property managing agents was released in July 2019. The detailed report includes recommendations for appointing a regulator for the sector, a new code of practice and mandatory qualifications for all licensed managing agents.
In addition to these largely expected proposals there are also recommendations that will have a profound impact on the way service charge accounts are prepared and presented. These proposals are largely to be found in ANNEX A to the report with the aim being to improve transparency of service charges.
A new Code of Practice
The report recommends a new code of practice to be introduced and for it to be enforced by an appointed regulator and legislation. This will lead to the withdrawal of the existing best practice codes including the RICS Code and the ARHM Code. Both of these codes have the approval of the Secretary of State and this means that the codes can be used for evidential purposes before courts and tribunals. Within both codes there is a requirement to follow the best practice accounting guidance note, TECH03/11. This gives TECH03/11 a similar status to the RICS and ARHM codes. There’s no acknowledgement in Lord Best’s report of the role played by TECH03/11 in the presentation and reporting of service charge information. Perhaps, this is not surprising given that the working party had no representation from the accounting profession.
The report also recommends that the new regulator set up a working group that’s representative of the sector to develop the new code. It’s hoped this new working group does include representation from the accountancy profession and that the important role of the reporting accountant in service charge reporting is recognised.
A standardised service charge form to improve transparency
Another major recommendation in Lord Best’s report is the mandatory use of a standardised charges form to detail and present service charge information to lessees. The report refers to the HCLG Select Committee’s report on Leasehold Reform as also recommending the use of a standardised service charge form. However, Section 68 of the Select Committee’s report refers to a standardised form for the “invoicing” of service charges that identifies the component parts of the service charge. This is similar to a service charge budget report that most managing agents prepare anyway as part of the annual process of raising service charges.
The proposal in the Lord Best report goes much further than this and leaps from a budget/invoice form to a standard form to be used for all service charge accounts. Lord Best’s report also advocates that standard industry cost codes are used when presenting annual service charge accounts. The RICS guidance for service charges in commercial property also adopts this approach.
I’m not convinced by these arguments. Where’s the evidence a standard form for the preparation of service charge accounts will improve transparency or that it will allow lessees to make meaningful comparisons of service charges? A standard form can work against the goal of transparency by imposing a straightjacket on the presentation of service charge information. In my view, the main reason for a lack of transparency in service charge reporting is that Managing Agents (largely non ARMA members) and Landlords have not followed TECH03/11.
Enhanced disclosures in service charge accounts
There are various references in Lord Best’s report for increased disclosure to lessees to improve transparency. These include mandatory disclosure of commissions, managing agent fees, anticipated major works and relevant contact details signposting to routes to resolve disputes. This increased disclosure is to be welcomed.
However, some consideration must be given to the additional cost of preparing and auditing these additional disclosures. Before the regulatory code is finalised, lessees should be asked if they’re willing to pay for the extra cost of preparing this additional information. As a firm, we’ve experimented with various forms of additional disclosures to lessees. In many instances, lessees are happy to receive the additional information but not if it means paying higher accountancy fees. It must be recognised that these additional reporting demands come with a price and that price will have to be paid by lessees in the form of additional management fees and accountancy fees.
Where are the Accountants?
The working group set up by Lord Best did not include a representative of the accounting profession. This is completely understandable as the purpose of the working party was to recommend on how to regulate property agents. However, this should’ve been addressed when the remit was extended to consider the presentation of service charge information. No doubt there will be opportunities for the accountants to have their input in future consultations but that’s not quite the same as being there from the start.
A statutory right to receive a TECH03/11 report
My overriding recommendation to improve the standards and transparency of service charge accounting is to give all lessees the statutory right to demand service charge accounts prepared in accordance with TECH03/11. If the new regulator is given the power to enforce this right then the impact on service charge reporting will be significant and will have a far greater impact than using a standardised cost form to report on service charges.
Lord Best’s report recognises the important role that the 3rd RICS Residential Code has played in improving standards in the sector and the intention is for the new code to build upon the RICS Code. Let’s also hope that the new code does not undermine TECH03/11 or even confine it to the dustbin…
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