The Housing Finance Corporation Limited (THFC) was incorporated in Great Britain in 1987, with limited liability under the Industrial and Provident Societies Acts 1965 to 2002. Its principal objective is to lend money to registered social landlords. It has established a number of wholly owned subsidiaries to cater for the varying interests of stockholders and bank lenders in different forms of financial instrument and the reports and accounts for all companies within the THFC group (the Group) are available separately on request from T.H.F.C. (Services) Limited, 21 Ironmonger Lane, London EC2V 8EY.

The consolidated operating surplus before taxation for the year ended 31 March 2004 was £189,000 (2003 - £60,000).

Under its rules, THFC cannot ‘trade for profit’. It is, however, the intention of the Directors that it will continue to make operating surpluses each year. Any such surpluses may not be distributed either directly or indirectly to shareholders and are accumulated as reserves to act as an additional protection for investors. On a winding up of THFC, any surplus reserves must be passed back to borrowers from THFC in a manner and with an allocation to be determined by the Board of THFC.

The reserves are held as cash deposits. Investment strategy remains broadly unchanged from prior accounting periods.

THFC makes no political donations.

Details of Directors, their service periods for the year and the shareholders of THFC are set out in the table below. The biographies of the current Directors appear here.

One third of the Directors are required under THFC’s rules to retire each year in rotation and may offer themselves for re-election.

Accordingly, at the forthcoming Annual General Meeting, David Creed and Michael Boohan are retiring and offer themselves for re-election. Jon Rouse, as a Director appointed since the year-end, is also offering himself for election at the Meeting.

Jon Rouse joined the Board on 1 April 2004, replacing Dr Norman Perry.

Piers Williamson and Colin Burke, Chief Executive and Company Secretary respectively, held those positions throughout the year. The Chief Executive has defined powers of authority and responsibility which are delegated to him by the Board of THFC, and the Company Secretary is responsible for ensuring Board procedures are followed.

Directors’ remuneration is established by the Board in the light of periodic advice from financial advisers. None of the current Directors receives pension benefits, bonuses or benefits in kind with the exception of the Chief Executive who is paid a salary and certain other employee benefits in accordance with guidelines determined by the Board. Jim Coulter’s and Norman Perry’s fees were remitted to their employers. After a three-year standstill the fees of the non-executive directors were increased by 4% on 1 April 2004.

The Directors as set out above (all of whom are non-executive with the exception of the Chief Executive) comprise the Board of THFC and its subsidiaries, with the exception of T.H.F.C. (Capital) PLC which has an additional Director, John Shinton of the Royal Bank of Canada. Jon Rouse is nominated by The Housing Corporation and Jim Coulter represents the National Housing Federation. The Board is responsible for the overall direction and strategy of THFC and its subsidiaries, establishing an adequate control framework within which the executive can operate effectively, monitoring performance, ensuring adequate resources are available and taking all borrowing and lending decisions.

The Board meets a minimum of five times per year to conduct its regular business with further meetings as required to approve and execute all new loan transactions. The Board has established two sub-committees:

Nominations and personnel committee
Considers potential nominees to the Board and personnel matters including recommendations to the Board on senior executive remuneration and appointments. Comprises David Creed (chairman), Pam Alexander and Jim Coulter.

Audit committee
Reviews internal controls, financial reporting, annual financial statements, the performance and recommendations of external auditors and compliance with laws and regulations. It considers financial and operational risks as a precursor to these matters being reviewed by the full Board at its scheduled meetings. Members comprise Michael Boohan (chairman), Jon Rouse and Sadru Visram. Piers Williamson and senior members of staff attend when required.

There are no other permanent committees of the Board and all matters reviewed in committee are reserved for decisions to be considered by the Board at one of its scheduled meetings. Matters of Board governance are considered only by the Board. Directors are entitled to take independent professional advice.

Board members of THFC and its subsidiaries are appointed under the following conditions which were established in 2002:

• Individuals who had not served on the Board prior to 2002 may be appointed to the Board for no more than three successive terms, each term being of three years’ duration, unless they are nominated Board members (those nominated by The Housing Corporation or the National Housing Federation)
  
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• Nominated Board members will be allowed to serve any number of successive terms provided they have the consent and continuing support/approval of their sponsoring organisations (however, it has been agreed by those organisations that the normal practice will be for nominated members to follow the nine-year limit that applies to the other non-executive directors).
  
  
• No Board Member (other than a nominated Board member) may serve on the Board for a cumulative total of more than 15 years.
  
  
• No Board member is eligible to serve after the age of 70 unless by unanimous agreement of the Board, such agreement to be reconfirmed annually.
  
  
• Following retirement or resignation from the Board, an ex-Board member cannot submit him/herself for re-election until three years have elapsed from the date such member last served on the Board.
  
  
• No member can serve as Chairman of the Board for a continuous period in excess of five years.

The Board will select each Chairman in accordance with the Rules of THFC, under which the Chairman must stand for re-election every year.

The Board is responsible for the Group’s system of internal control and for the regular review of its effectiveness. It should be recognised that the internal control system has been designed to manage rather than eliminate the specific business risks faced by the Group and can only provide reasonable and not absolute assurance against material misstatement or loss.

• The Board discharges its responsibilities for internal control through the following key procedures:
  
  
• the establishment of an organisational structure with clearly defined levels of authority and division of responsibility;
  
  
• a comprehensive system of reporting, budgeting and planning against which performance is monitored;
  
  
• the formulation of policies and of approved procedures in key areas such as loan administration and treasury operations.

Key business risks, and their likelihood and potential impact, have been considered by the Board during the year and appropriate controls and mitigating action implemented. All loans to borrowers are matched in terms of their maturity, interest and repayment profile to the equivalent bond issue or bank loan. Therefore primary operating risks relate to the credit monitoring of borrowers, the completion of appropriate loan security, timely collection of all payments due and the achievement of a secure return on investment income. Quarterly reports on these subjects are made to the Board.

The Board has decided that the establishment of a staffed internal audit function would not be appropriate for an organisation with a total staff complement of nine. The internal audit function is undertaken by Michael Boohan, a non-executive director, who reviews adherence to financial controls and the collation of management accounts on a quarterly basis.

The Directors considered a report on the adequacy of internal controls during the period to 21 June 2004 and no significant weaknesses have been identified which resulted in material loss or require disclosure.

After making enquiries, the Directors have formed a judgement at the time of approving the financial statements that there is a reasonable expectation that THFC has adequate resources to continue in operational existence for the foreseeable future. For this reason the Directors continue to adopt the going concern basis in preparing the financial statements.

The Industrial and Provident Societies Acts 1965 to 2002 require the Directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of THFC and the Group and of the surplus or deficit of THFC and the Group for that period. In preparing those financial statements the Directors are required to:

• select suitable accounting policies and then apply them consistently;
  
  
• state whether applicable accounting standards have been followed subject to any material departures disclosed and explained in the financial statements;
  
  
• make judgements and estimates that are reasonable and prudent; and
  
  
• prepare the financial statements on the going concern basis unless it is not appropriate to presume that THFC will continue in business.

The Group’s financial statements are published on THFC’s website (www.thfcorp.com) and the Directors are responsible for the maintenance and integrity of that website. However there is currently uncertainty regarding the legal requirements in publishing information on websites, compounded because information published on the internet is accessible in many countries with different legal requirements relating to the preparation and dissemination of financial statements.

The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of THFC and the Group and to enable them to ensure that the financial statements comply with the Industrial and Provident Societies Acts 1965 to 2002 and with the Companies Act 1985. They are also responsible for safeguarding the assets of THFC and the Group and hence for taking reasonable steps for the prevention of fraud and other irregularities.

PricewaterhouseCoopers LLP have been engaged by the Board as auditors of all Group companies, and a resolution for their reappointment will be proposed at the Annual General Meeting.

By order of the Board

Colin Burke
Company Secretary

The Housing Finance Corporation Limited
21st June 2004