Written evidence submitted by Devonshires Solicitors LLP [RSH 039]
This response has been prepared by Devonshires Solicitors LLP. Devonshires are solicitors who specialise in advising participants in the social housing sector in the United Kingdom. This includes advising social housing providers of all kinds (registered and unregistered, for-profit and non-profit, local authorities and private registered providers), their funders and suppliers.
We have advised the housing regulator and the National Housing Federation, which represents primarily private registered providers (RPs) not trading for profit on key strategic issues including the formulation of the Housing and Regeneration Act 2008, and on partial deregulation of social housing providers in 2016 following the reclassification of RPs to the public sector by the Office for National Statistics in 2015.
We have provided this evidence as we wish to make some suggestions as to potential reform of the regulation of social housing. At the same time we have highlighted some aspects of the current regulatory framework which work well, and where reform may not be productive.
We set out below an executive summary, followed by responses in full. In each case we follow the questions set out in your call for evidence.
What is the impact on social housing providers’ resources, and therefore their ability to maintain and improve their housing stock, of the need to remediate building safety risks and retrofit their homes to make them more energy efficient?
These are together a significant drain on the resources of longer standing not for profit RPs, principally in and around London. Health & Safety compliance has priority because of potential loss of life and liability of the RP and personal liability of its officers. Decarbonisation and new homes must be relegated. Building safety and decarbonisation will not result in higher balance sheet values or rents to cover these costs. They will limit the financial capacity of many of the largest not for profit RPs to provide new homes without additional grant.
Is the current regime for regulating social housing fit for purpose?
The regulatory framework addresses the key areas of regulatory concern. It contains flexibility to respond to changes in the markets. There is a contrast between robust regulation of governance and financial viability, which is reflected in a mature market with strong market confidence and almost no failures, and more limited regulation of consumer standards; also more regulation of private RPs than local authorities.
The regulatory framework takes a principles-based and outcome-focused approach with the aim of allowing innovation, which (it was believed) was suppressed by the level of prescriptive and detailed requirements in the previous regulatory regime. Instead, the Regulator sets out areas for regulatory concern in the annual Consumer Regulation Review and Sector Risk Profile. It also takes a co-regulatory approach which places responsibility for monitoring compliance on the RP itself. This approach gives RPs the flexibility to develop their own strategy for compliance with core expectations.
Our view is that in general, the current approach incentivises RPs to deliver the required outcomes, allows for the Regulator’s position to evolve in order to achieve the regulatory outcomes required to meet its statutory objectives; and allows the Regulator increased flexibility to follow up what it believes are regulatory breaches. It is to be preferred to the previous more prescriptive regime. The current approach may be regarded as less transparent, and runs the risk that smaller RPs may struggle to develop their own best practice.
Further detail in the consumer standards may be beneficial as part of strengthening consumer regulation, and further guidance on the rent standard would be beneficial.
In general, the Regulator has a comprehensive set of powers for intervention and enforcement in relation to private sector RPs, though its powers are more limited in relation to local authorities. The powers are more graduated than under the previous regime. The Regulator has to balance use of those powers against the need to maintain market confidence in the sector and, through this, the supply of private sector finance to the wider sector on favourable terms. As a result, the enforcement powers have rarely been used. To date, where problem cases have arisen, the Regulator has been able to facilitate a satisfactory resolution without the need to resort to extensive use of its intervention and enforcement powers. This typically involves a merger. But size does not always correlate with best performance or encourage local innovation. A risk arising from growth of RPs through merger is the creation of organisations which are “too big to fail” without emergency Government support.
It remains to be seen whether the Regulator will continue to take this approach with for-profit providers as they become more prevalent, and in relation to consumer standards if the Regulator becomes more proactive in relation to these.
How clearly defined are the roles of the Regulator of Social Housing and the Housing Ombudsman (HOS)?
The roles of the Regulator and the HOS are well defined in the revised HOS Scheme and Complaints Code, and the revised MoU between them. It still needs to be made clear to residents that their complaints are for the HOS not the Regulator. Both bodies could do more to communicate direct with residents about their role.
Does the current regime allow tenants to effectively resolve issues?
The requirement for a resident to bring complaints via a designated person or wait 8 weeks, under the Localism Act 2011, could deter residents seeking redress with the HOS.
There has been a significant increase in the volume of claims in recent years, and this needs to be matched by increased resource into the HOS. We recommend greater use of alternative dispute resolution (ADR) to resolve complaints both at RP level and at HOS level, including (on complex complaints) expert determination or early neutral evaluation.
In respect of the Regulator, there is no effective recourse for breaches of consumer standards by local authorities, which have been frequent.
Do the Regulator and ombudsman have sufficient powers to take action against providers?
The Regulator has rarely exercised its powers under the Housing and Regeneration Act 2008 (2008 Act). Some have never been used. There is, in general, no need to widen them. Some of the enforcement powers (in particular, to direct a merger) only apply to certain non-profit private RPs (not including local authorities) and some only apply to social housing.
The Regulator’s powers were reduced in 2016 in order to reverse reclassification of social housing to the public sector. We suggest that the Regulator has sufficient means to regulate the relevant areas without seeking to reintroduce these powers.
Regarding housing management and housing services, the HOS’ powers have been sufficiently enhanced by Complaint Handling Failure Orders.
Will the reforms proposed in the social housing White Paper improve the regime and what progress has been made on implementing those reforms?
A start has been made with changes to the HOS Scheme and new Complaint Handling Code and power to issue Complaint Handling Failure Orders, and improvements in the speed of resolution of complaints by the HOS. Abandoning the serious detriment test for Consumer Standards will be welcome. There should be more guidance on the new Consumer Regulation Standards; retention of case precedents in the annual Consumer Regulation Review; and campaigns to improve residents’ understanding of the roles of the HOS and Regulator, and the new regime.
There should be a separate grading system for compliance with the Consumer Standards by RPs of all kinds, rather than the current indirect route of showing a breach of the Governance standard.
A move to proactive regulation of consumer standards involves a huge step change in activity for the Regulator which will need a substantial increase in resourcing.
What changes, if any, should the Government make to the Decent Homes Standard?
The DHS should focus on improving the quality of new-build and renovated properties to ensure good quality development and building practice. Housing conditions and repair during a social housing tenancy should be left to the existing law. Currently DHS requirements overlap too much with landlords’ legal obligations. Either the DHS should be dropped for existing properties and a Standard introduced which simply requires landlords to comply with the law, or it should just cover areas of building quality which are not addressed by the law. In our view landlord and tenant law now addresses previous “gaps” in housing disrepair which the DHS sought to address. So, for existing properties, the DHS should focus on areas of building quality which are not covered by existing legal obligations on landlords, for example building energy efficiency: insulation, efficient heating systems, ventilation etc.
Should the Decent Homes Standard be amended to include energy efficiency and other means of mitigating climate change, and if so how?
Yes, energy efficiency is a sensible addition to the DHS. But setting any strict regulatory requirements on energy efficiency could be problematic and difficult to achieve due to the age and nature of RPs’ stock. In relation to new stock, aside from the DHS, grant providers are making sustainability a condition of provision of their grant.
Should all providers of social housing, not just councils, be required to register with the Regulator?
Currently the main “driver” for registration of a social housing provider is to attract grant funding and planning agreements Arguably, in view of the low “purchasing power” of social tenants and the need to ensure minimum decent standards of housing, registration should be compulsory.
A number of regulatory standards and enforcement powers only apply to an RP’s social housing, and a for-profit RP is required to keep non-social housing activity to a minimum. An option may be to ensure that the core activities of all charitable RPs are “social housing”, including specialist supported housing that is held by an RP but not treated as sub market rent, or to extend the Regulator’s enforcement powers to all an RP’s stock but to distinguish between housing and non-social housing. An obvious example would be the Rent Standard which does precisely this.
The Regulator may not be best equipped to manage specialist supported housing activity. Another agency, e.g. CQC or local authorities as commissioners, would be better.
The 2008 Act anticipated a permissive RP registration system. Following issues which arose, the system has evolved and now focuses on assurance that the applicant has the resources and intention to provide social housing. There should be greater clarity for well-run businesses about the registration process and significant timescales involved.
What challenges does the diversification of social housing providers pose for the regulatory system?
Size: RPs range in size from private landlords and almshouses with under 10 units under management to groups with well over 100,000 units under management. It is difficult for the Regulator to devise and operate an appropriate regulatory regime for all. The Regulator already distinguishes between RPs with below and above 1,000 units under management and may need to consider a more sophisticated gradation of sizes and types of RP.
Non-social housing activities: RPs’ and their groups’ activities have diversified into non-social housing activities including market rent and sale; supported housing; nursing and domiciliary care; student accommodation and management for third parties. The Regulator’s main route to engage with an RP here is through the governance and financial viability and value for money standards.
In relation to non-profit RPs the Regulator does not seek to limit the proportion of non-social housing activity. Instead it emphasises the need to identify, plan for, “stress test” and manage liabilities and risks, whether these arise from core social housing or non-social housing activity, so as to protect the RP’s social housing. In the case of RPs trading for profit, to prevent their social housing being used to support other activities of the for-profit group, the Regulator limits non-social housing to 5% of capital or turnover. In our view all this is the right approach.
Complex structures and risk: RPs have entered into structures which are complex in terms of financing; corporate structure; long term projects; and asset holding structures, including structures under which ownership of the primary asset sits outside the RP and the RP has a medium term lease. Some seek to disconnect the legal and beneficial interest in a property, and so generate proceeds for additional housing.
The Regulator does not write specific requirements for each structure but relies on its general expectations on governance and financial viability. Most market participants welcome this flexibility, which enables the sector to remain innovative. RP boards and officers need to understand the risks of new structures.
For-profit and non-profit: Since the 2008 Act allowed entities trading for profit to register as an RP, several substantial for-profit groups have successfully established RPs. The Regulator has incorporated specific regulatory requirements for for-profit RPs. These address the need to protect a for-profit RP’s social housing assets from being put at risk for non-social housing activities within the for-profit group, and protecting the financial viability and corporate integrity of the RP entity. This is a good approach.
Replies to questions in the call for evidence
1 How widespread and serious are the concerns about the quality of social housing?
As lawyers we are not proposing to address this.
2 What is the impact on social housing providers’ resources, and therefore their ability to maintain and improve their housing stock, of the need to remediate building safety risks and retrofit their homes to make them more energy efficient?
The impact on resources represents a significant drain on the resources of the longer standing Not for Profit RPs, principally those with housing in and around London. Because of the primacy of the need to comply with Health & Safety needs because of the impact on potential loss of life and liability to the legal entity (as well as personal liabilities), the other priorities of decarbonisation and new homes must be relegated. We note in this respect the Memorandum of Understanding with the Building Safety Regulator.
Once building safety and decarbonisation are added together, the combined impact will adversely affect the financial capacity of many of the largest Not for Profit RPs to provide new homes without additional grant support – not least because all of the works required for building safety and decarbonisation will not result in higher balance sheet values or rents (in order to cover these costs).
3 Is the current regime for regulating social housing fit for purpose?
3.1 Does it address the right things?
The regulatory standards and related guidance cover the key areas of concern: quality of accommodation, security of tenure, rent levels, community integration and, at a corporate level, good governance, financial viability and value for money. It contains flexibility to respond to changes in the markets.
The divide in approach between economic and consumer standards (see our comments below) has contributed to the current situation in which on the one hand RPs represent a mature market in financial and governance terms, with strong market confidence and almost no failures, but on the other hand there have been many failures in compliance with consumer standards. The proposal in the White Paper to address this is welcome (see section 7 below) and this needs proper thought and resourcing. There has historically been a divide between the regulatory approach to regulating local authorities (more limited) and private RPs (more active). This has also contributed to large failure in compliance with consumer standards.
3.2 Is the regime clear enough in articulating what the Regulator expects?
Up to 2010, the Regulator (then part of the Housing Corporation) issued a combination of directions and good practice notes (GPNs). The GPNs, in particular, went into some detail as to the Regulator’s expectations in relation to such matters as quality of accommodation; the extent to which RPs could engage in non-social housing activity; treasury management and in particular the extent to which RPs could enter into interest rate derivatives; the regime on payments and benefits for board members and officers of RPs. Some of these (for example, the limits on non-social housing and on derivatives) were complex and, in places, difficult to interpret.
In 2010 this regime was swept away and replaced by “principles based” regulatory standards with the aim of allowing innovation, which it was believed was suppressed by the level of detail in the previous regulatory regime. They have been supplemented by guidance on specific areas such as notification of restructurings (mergers, conversion of corporate vehicle etc.), notification of disposals and other provision of information. The Regulator has issued codes of practice for the governance and financial viability and (more recently) value for money standards, but not any of the other standards. These remain outcome focussed. This regime is underpinned by guidance on the Regulator’s own approach to regulating the standards, and on how it uses its intervention and enforcement powers.
By way of overview
There is room for debate whether the current structure is an improvement on the previous regime, or whether there were advantages to the previous more detailed guidance.
3.2.2 Advantages of current structure
3.2.3 Dangers of current structure / Advantages of previous detailed guidance
The housing market has become materially more mature and complicated over recent decades. RP organisations and their groups are diversifying in size, approach, funding, risk appetite, and the types of partnerships in which they participate. It is not realistic to have a prescriptive approach to regulation. Any serious review and reform of regulation of social housing needs to start with a clarity of principle as to what government wants the role and nature of the social housing market to be. Assuming that the social housing sector continues in its current direction of travel and trajectory, we suggest that a less prescriptive approach is essential. Moreover, RPs are incentivised to deliver the outcomes.
3.3 Does the Regulator use the tools it has?
Various factors limit the use of the Regulator’s powers.
As we comment below, the Regulator has a fairly comprehensive set of powers to intervene and/ or take enforcement action where an RP is in breach. However many of these powers are rarely used.
In practice, where the Regulator is concerned that an RP may be in breach, it may issue a regulatory judgment by reference to governance and financial viability.
A clear apparent lacuna here is that governance and financial viability together account for just one of the seven regulatory standards. Where there has been a breach of the value for money or rent standard or any of the consumer standards, this has to be “shoehorned” into one of the available categories, normally by saying that a breach of any of these must be evidence of failings in the RP’s governance. Would it not be more straightforward and transparent for the Regulator to be empowered to issue judgment grades directly by reference to the other categories?
Where appropriate it will award a non-compliant grade in its regulatory judgment. In many cases the RP will give a voluntary undertaking to the Regulator incorporating a plan for achieving compliance. Where the Regulator considers that an RP may not be viable either immediately or in the medium to long term as an autonomous entity it will encourage it to seek a merger partner. This is a relatively simple fix; but does bring with it the longer term implication that RPs will continue to grow in size; and that size does not always correlate with best performance or encourage local innovation. No RP is without risk and therefore the growth in size of RPs through merger could lead to the creation of organisations which are “too big to fail” without emergency Government support.
So why does the Regulator so rarely use its more robust intervention and enforcement powers – for example to direct a merger or appoint a manager?
4 How clearly defined are the roles of the Regulator of Social Housing and the Housing Ombudsman?
Since the revised HOS Scheme and Complaints Code the roles of the Regulator and the HOS are well defined. This is backed up by the revised and expanded MoU between the two. As the revised MoU was issued in September 2020 it is still ‘bedding in’ however the early signs are that this has given greater definition to the roles of the Regulator and HOS but it is really about getting the message across to residents about where they should go with complaints i.e. the HOS not the Regulator. Generally we think both the HOS and the Regulator (in particular) could do a lot more to communicate direct with residents about their role. This would give positive reassurance to residents that their interests were being looked after.
5 Does the current regime allow tenants to effectively resolve issues?
The requirement for a resident to bring complaints via a designated person or wait 8 weeks as introduced by the Localism Act 2011 could be a deterrent to residents who wish to seek redress through the HOS
Aside from these specific issues, the fault (if there is any) does not lie with the regime itself; it is all about resourcing investigation of complaints. Delays at the HOS in resolving complaints had become excessive until recently, but we have seen a reduction in those delays, with investigations being resolved more speedily. Increased resource into the HOS would improve the position as we appreciate there has been a significant increase in the volume of claims in recent years. We would also highly recommend greater use of ADR to resolve complaints both at RP level (through stronger recommendations in the HOS Scheme and Code) and at HOS level itself. Often, the most difficult complaints comprise multiple issues (and sometimes hidden issues) which would be highly amenable to mediation; on occasion, an expert determination or early neutral evaluation might also be an appropriate form of ADR to employ.
The lack of real powers regarding breaches of consumer standards by local authorities (of which been many in recent years) is a weakness in the current regime.
6 Do the Regulator and ombudsman have sufficient powers to take action against providers?
The fact that the Regulator has rarely exercised its powers under the Housing and Regeneration Act 2008 (2008 Act) (some of which have never been used) indicates that there is no imperative to widen those powers. From a housing management/housing services perspective the HOS’ existing powers have already been enhanced with the introduction of Complaint Handling Failure Orders and we do not see a need for any further powers. As indicated above, the issues as we see them relate to bearing down on unacceptable delays in processing complaints (which appears to be in hand already) and effective communication with residents.
We would reiterate the comment made above regarding the potential impediment to the exercising of the enforcement powers available to the Regulator.
We would also note that, whilst the powers are extensive, some of the enforcement powers only apply to non-profit RPs, many of these apply to local authorities and some powers can only be applied in respect of a provider’s social housing. This is commented on further below (and in response to question 10).
In October 2015 the Office for National Statistics issued a decision which reclassified regulated social housing to the public sector, by reference to the European Standard of Accounting. Following this decision, the powers of the Regulator were reduced by the Housing and Planning Act 2016 – what is known as deregulation. A general review of the Regulator could include consideration of whether deregulation should remain in place. Deregulation was put in place not because it had been determined, on the merits, that the relevant powers were excessive in themselves, but rather to achieve a reversal of the reclassification. This in turn was important because the UK Government did not want private sector lending to RPs to sit on the public sector balance sheet.
Our understanding is that currently, following the end of the transitional Brexit period, the ONS is still using the European System of Accounting (ESA) as a basis for (among other things) determining public sector status. So long as this remains the case, the deregulatory measures will need to remain in place. It is possible that in future, post Brexit, the ONS will consider placing less reliance on ESA and develop its own principles for assessing public sector status. In deciding whether to do so, the ONS would need to consider any impact on the UK’s trading and other relationship with the EU and other countries which abide by the ESA.
Would there be any merit in reversing deregulation or should it stay as it is? Looking at the specific elements of deregulation:
Overall, the powers of the Regulator to take intervention and enforcement action are comprehensive in relation to private RPs. The powers regarding intervention at a corporate level do not extend to local authorities. In relation to private RPs, there are some gaps and anomalies: in particular, as regards the “nuclear button” of directing a merger. Under 2008 Act section 255 the Regulator can direct an amalgamation between non-profit RPs which are registered societies (RSs). And under section 253 the Regulator can require a transfer of land to itself or to another RP, though in the case of a for-profit RP this power only applies to social housing and associated land. Historically a substantial majority of non-profit RPs have been registered societies under the Co-operative and Community Benefit Societies Act 2014 (RSs). There are limitations to these powers
Various other intervention and enforcement powers of the Regulator only relate to non-profit RPs. Consideration should perhaps be given to revisiting these and extending these to for-profit providers:
7 Will the reforms proposed in the social housing White Paper improve the regime and what progress has been made on implementing those reforms?
As indicated above, the changes made to the HOS Scheme and the introduction of the Complaint Handling Code as well as the power to issue Complaint Handling Failure Orders have already gone some way to implementing the reforms anticipated in the White Paper in relation to the HOS. Equally, we have already seen, albeit anecdotally an improvement in the speed of resolution of complaints at the Service (again, as expected of the HOS in the White Paper).
As far as the Regulator is concerned, simplifying the process for investigating breaches of the Consumer Standards by abandoning the serious detriment test will be welcomed and the sooner this occurs, the easier it will be for providers and social housing residents to understand how the process works. However, we would like to see more guidance alongside the new Consumer Regulation Standards so that providers have a clear picture of what is considered a material breach. A proper understanding of the Regulator’s approach to the existing Standards which were introduced in 2012 has only really been possible through the creation of case precedents as reported each year in the Consumer Regulation Review. We consider it would be helpful if that existing “library” of precedents was not lost but built on under the new regime so that those cases remain relevant. Equally, guidance alongside the new Standards explaining what the Regulator would consider to be a material, reportable breach would be welcome.
As we have said above, an information campaign to improve residents’ understanding of the respective roles of the HOS and Regulator, and also the new regime would in our view be eminently sensible, and reflect the importance of resident communication which was found to be lacking in relation to the Grenfell tragedy.
In respect of gradings for compliance with the Consumer Standards, the current grading system does not take into account Consumer Standards. Breaches of Consumer Standards may result in a regulatory notice, which in turn may feed into a finding of non-compliance with the Governance Standard. This seems a round-about way of enforcing the Consumer Standards and it would be worth considering a separate gradings system for compliance with the Consumer Standards by RPs of all kinds. This might also benefit residents in understanding the performance of their landlord where, currently, the gradings do not tend to reflect matters which are of most (or obvious) concern to residents, unlike the Consumer Standards which are very much about issues and concerns which directly impact residents.
A move to proactive regulation of consumer standards would be a very positive development, but this will need to involve a huge step change in activity for the Regulator. There will therefore need to be a substantial increase in resourcing within the Regulator for this approach to be a success.
8 What changes, if any, should the Government make to the Decent Homes Standard?
The main focus of the DHS in our view should be about improving the quality of new-build and renovated properties to ensure good quality development and building practice. Issues relating to housing conditions/ repair during the continuance of a social housing tenancy should be left to the existing law, such as the Landlord and Tenant Act 1985, Housing Act 2004 and the Environmental Protection Act 1990. This would make the DHS much easier for residents to understand as, at the moment, the requirements of the DHS overlap too much with landlords’ existing legal obligations.
In our view, either the DHS should be dropped altogether for existing properties and a Standard introduced which simply requires landlords to comply with the law, or it should be amended to specifically cover areas of building quality which are not addressed by the law. Our own view is that the changes which have already been made to landlord and tenant law, specifically the Homes (Fitness for Human Habitation) Act 2018 have already addressed the previous “gaps” in housing disrepair which the DHS sought to address. In respect of existing properties therefore, the DHS should, in our view, focus only on areas of building quality which are not covered by existing legal obligations on landlords. This could include for example building energy efficiency: insulation, efficient heating systems, ventilation etc.
9 Should the Decent Homes Standard be amended to include energy efficiency and other means of mitigating climate change, and if so how?
Yes, we agree that energy efficiency is a sensible addition to the DHS, given what we say above. We are concerned however that setting any strict regulatory requirements in relation to energy efficiency could be problematic and risk setting standards which certain providers would be unable to achieve due to the age and nature of their existing stock. Care will need to be taken to avoid putting those organisations into immediate breach by setting standards they cannot reasonably meet.
In relation to new stock, we note that, quite aside from the DHS, grant providers are making sustainability a condition of provision of their grant.
10 Should all providers of social housing, not just councils, be required to register with the Regulator?
Currently, a private provider of social housing (unlike a local authority which is a social landlord) has the option whether to register as a provider of social housing. There are powerful incentives to do so, in particular the availability of planning agreements with local authorities and the availability of grant from Homes England and other sources. But some providers have decided to stay outside the regulatory framework for social housing.
Arguments for keeping registration voluntary are
Arguments for making registration compulsory are
For those that are RPs, a number of the standards (and the Regulator’s enforcement powers) only apply to the provider’s social housing (as defined in the 2008 Act. This has created some difficulties for the Regulator in managing those operating in the supported housing sector (particularly those whose rents are not (by virtue of the related services) below a market rent). The standards provide that for-profit RPs must keep non-social housing activity to a de-minimis level. No such equivalent applies to the not for-profits.
One option may be to revisit the definition of “social housing” (as defined in the 2008 Act) to ensure that the core activities of all charitable RPs fall within that definition. This would include, for example, specialist supported housing that is held by an RP but not treated as sub market rent. This should still be social housing. An alternative is to extend the Regulator’s enforcement powers to all an RP’s stock, but to distinguish in the standards between social housing and non-social housing. An obvious example would be the Rent Standard which does precisely this.
Turning back to specialist supported housing providers, we believe that the Regulator may not be the best entity to manage this important activity – given its poor fit with the legal and regulatory regime which applies and is based around the much more substantial provision of housing without high levels of support. We believe that another agency, say CQC, or the local authorities themselves as commissioners, would be better regulators for this subsector.
The registration system is one which could perhaps be updated. The legislation anticipated a permissive registration system. Our experience is that this has evolved into one which is more restrictive focussing on assurance that the applicant has the resources and intention to provide social housing, in response to previous issues that had arisen. This is an uneasy fit with the primary legislation, and therefore in our opinion greater clarity could be included so that well run businesses can have greater clarity about the registration process and the significant timescales for this.
11 What challenges does the diversification of social housing providers pose for the regulatory system?
RPs range in size from private landlords and almshouses with under 10 units under management to groups with well over 100,000 units under management. It is difficult for the Regulator to devise and operate a regulatory regime which is appropriate for all. This is partly recognised in that its reporting and monitoring regime, as reflected in Regulating the Standards, distinguishes between RPs with up to or above 1,000 units under management, and the Regulator recognises its own duty to act proportionately.
The smallest RPs still find the regulatory burden onerous. Prospective RPs need to take this on board in assessing whether the benefits of registration merit this level of regulatory burden. Looking at the cohort of RPs over 1,000 units, these also represent a wide variety in terms of complexity of structure and activity. We suggest that the regulatory framework needs to recognise a more sophisticated approach of targeting Regulator resources.
As regards larger RP groups, the following sections pick up some of the issues which can arise.
11.2 Non-social housing activity and risk
RPs have for many years diversified into activities which fall outside the definition of social housing. These include market rent and outright sale (frequently undertaken as a way to cross subsidies social housing); supported housing; nursing and domiciliary care (which frequently complement social housing activity); student accommodation; management for third parties (Code of Practice for the Governance and Financial Viability Standard, 53).
The Regulator’s main scope for engaging with an RP in relation to these activities is through their impact on the governance and financial viability of the RP and also through challenging the value for money of the activities. The rent standard and the consumer standards do not, in general, directly apply to them.
The Regulator previously sought to limit the proportion of an RP’s activity which was “diversified” i.e. not the provision and management of social housing. In relation to non-profit RPs the Regulator has not pursued this route. Instead its governance and financial viability standard emphasises the need to identify, plan for, “stress test” and manage liabilities and risks, whether these arise from core social housing or non-social housing activity, with the core aim of protecting the RP’s social housing.
It seems to us that this is the correct approach. The key issue is whether an RP manages risks so as to maintain its viability and protect its social housing, regardless of where those risks arise. The previous approach gave rise to sterile and arguably unnecessary debate as to what constitute core social housing or diversified activity and perverse incentives to carry on the activity off balance sheet or using leasing structures, which ultimately carried greater risk for the RP.
In the case of RPs trading for profit the Regulator takes a different approach, and non-social housing in these RPs is limited to no more than 5% of capital or turnover. This recognises the need to ring fence the social housing activity and protect it from being used to support other activities of the for-profit group.
11.3 Complex structures and risk
Some RPs have entered into structures which are complex in terms of
some are likely to look at exploring the extent to which disconnecting the legal and beneficial interest in a property can generate proceeds that can be recycled to deliver additional housing.
The Regulator has not sought to write specific guidance for each type of structure but again relies on its overall approach to sound governance and protection of financial viability as described above. Most market participants welcome the flexibility which this provides. Where things have gone wrong for an RP, it has frequently been because the board and/or officers did not fully understand the risks of the structure they were entering into. It is difficult for a Regulator to legislate in advance for each type of structure, and if it limits RPs to certain approved formats of structure it risks stifling innovation.
11.4 For-profit and non-profit
The 2008 Act extended the ability to register as an RP to entities trading for profit. After a slow initial period, a number of substantial for-profit groups have successfully established RPs.
The Regulator has incorporated specific provisions in its regulatory framework to accommodate for-profit RPs. These largely address the need to protect a for-profit RP’s social housing assets from being put at risk for non-social housing activities within the for-profit group, and protecting the financial viability and corporate integrity of the corporate RP entity.