In July 2019 Lord Best released the final report of the working group set up to recommend on the best way to regulate property managing agents. 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 were 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 and centre on the desire to improve transparency of service charges.
A new Code of Practice
The report recommends a new code of practice to be introduced by the new regulator. The code will be enforced by the regulator and backed up by 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 include a requirement to follow the best practice accounting guidance note, TECH03/11. This approval means that the codes can be used for evidential purposes before courts and tribunals and by implication this gives similar status to TECH03/11.
There is no acknowledgement in Lord Best’s report of the role played by the 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 will set up a working group that is representative of the sector to develop the new code. It is hoped that the working group includes representation from the accountancy profession and that the important role that the reporting accountant plays in the process for reporting on service charges is recognised by this group.
Standardised service charge form to improve transparency
Another major recommendation of the 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 that 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. The report goes onto to advocate standard industry cost codes as used in the RICS Commercial service charge.
I am not convinced by these arguments. Where is the evidence that 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 straight-jacket on the presentation of service charge information. 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 to increased disclosure of information to lessees in order to improve the standards of service charge reporting. 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 this additional information. Before the regulatory code is finalised lessees should be asked if they are willing to pay for the cost of preparing this additional information. As a firm, we have experimented with various forms of additional disclosures to lessees. In many instances, the feedback is that the information is welcome but they would rather not pay any additional accountancy fees to receive the information. 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. That is completely understandable when the purpose of the working party was to recommend how best to regulate property agents. However, this should have been addressed when the remit extended to consider the presentation of service charge accounts. No doubt there will be opportunities for the accountants to have their input in future consultations but that is not quite the same as being there at the start.
A statutory right to receive a TECH03/11 report
The overriding recommendation I would give to enhance and 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 regulator is given the power to enforce this right then the impact on service charge reporting will be profound and far greater than using a standardised cost form.
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.
