The rise of for-profit housing providers and the Regulator’s powers

Posted: 11/06/2021

In March, Birmingham-based for-profit registered provider of social housing (RP) Green Park, was de-registered by the Regulator of Social Housing (the Regulator) following a series of governance and viability failings. This is one of a seemingly increasing number of for-profit RPs that are facing scrutiny from the Regulator. In May the Regulator revealed that, by the end of March 2021, it estimated that close to 20,000 homes are now owned by for-profit RPs and that 50 applications to register for-profit RPs were in the pipeline.

In the press

Sector headlines have raised concerns regarding some for-profit RPs, particularly those that focus on exempt accommodation and lease-based models.

The publication of ‘The charter for social housing residents: social housing white paper’ (the White Paper) in November 2020 brought a number of proposals that looked to strengthen the Regulator’s powers in relation to the economic standards. These included tightening the definition of ‘non-profit’ registered providers (to ensure that landlords are properly classified) and, notably, a new ‘look-through’ power that will enable the Regulator to follow money paid to bodies outside the regulated sector (and who are therefore not directly regulated) and therefore identify where transactions may inappropriately advance third-party interests.

The proposals seem to link to fairly high-profile failures and near misses, particularly in relation to lease-based providers. The Regulator has said that some RPs are little more than ‘pass through’ vehicles to investors and that they will do what they can with their existing powers in relation to these RPs.

The Regulator’s existing powers

When it comes to de-registration, the Regulator’s powers are set out in sections 118 (compulsory) and 119 (voluntary) of the Housing and Regeneration Act 2008. Compulsory de-registration is where the Regulator can take action, within prescribed circumstances, to remove a RP (including local authorities) from the register. The prescribed circumstances include where the Regulator thinks that the RP in question is no longer eligible for registration.

The Regulator's enforcement powers differ slightly when it comes to dealing with for-profit RPs. In this case, the Regulator:

• is unable to remove/appoint board members;
• does not have the power to impose restrictions on their dealings; and
• cannot suspend/remove officers and/or employees during or following the use of its inquiry powers.

For-profit RPs do not have to notify the Regulator (under the 'restructures and constitutional changes' notification regime) when certain changes are made to their constitution or structure. Similarly, they do not have to notify the Regulator (under the 'disposals' notification regime) when they dispose of any land that is not a dwelling.

The pros and cons of for-profit registered providers

For-profit RPs are not a recent invention. The Housing and Regeneration Act 2008 (the 2008 Act) introduced the ability for RPs to register as ‘for-profit’ RPs. The driving force behind this was to attract alternative funders to the sector and, in-turn, increase affordable housing development levels.

Take up of the for-profit structure was initially slow; there were 54 profit-making RPs on the Regulator's register on 2 June 2021 (this is compared to around 1,357 not-for-profit RPs). However, interest in the model is growing at a pace. Many developer and investor clients that are entering the social housing sector for the first time are looking to do so on a for-profit basis. Similarly, faced with so many competing priorities for the sector alongside delivering new homes, RPs are considering alternative methods of delivery including creating and/or working with a for-profit RP.

For-profit RPs are usually able to distribute dividends to their shareholders. There are no limits on the level of dividends that can be distributed by a for-profit RP, subject to the RP being able to demonstrate that it can still discharge its landlord duties and responsibilities and comply with the Regulatory Standards.

Some specific expectations are included within the Regulatory Standards that are applicable to for-profit RPs only. This includes the Governance and Financial Viability Standard (and its accompanying Code of Practice), which states that non-social housing activity of a for-profit RP cannot exceed 5% of its capital or turnover. This is much stricter (and much more explicit) than what applies to not-for-profit RPs.

There is much to be welcomed from the presence of for-profit RPs in the sector, particularly in relation to the additional investment that they may help to generate. However, the new powers proposed by the White Paper will assist in tackling current gaps in the model.

Although it’s not clear yet how the look through power proposed in the White Paper will work in practice given that the Regulator has no jurisdiction over private companies, we also have to bear in mind the deregulatory measures that were brought in under the Housing and Planning Act 2016 after the reclassification of RPs as public bodies by the Office of National Statistics (ONS). There will need to be a careful balancing act in implementing some of the changes to ensure that the ONS re-reclassification isn’t jeopardised. Similarly, there are likely to be limits on how these powers can work in practice given that the Regulator only has powers over RPs and not private organisations.

What’s next

With a disproportionate focus on for-profit RPs (when compared to the number of not-for-profit RPs) there has been some debate within the sector about whether the for-profit structures fits with the nature and purpose of social housing. However, what is clear is that the model is here to stay.

The importance of good governance within an organisation should never be under-estimated. However, when it comes to for-profit RPs and the greater potential for profit and asset distribution, it is even more vital that oversight and management is as robust as it can be. As the pipeline of for-profit RP registrations grows, it is likely that so will the Regulator’s interaction with for-profit providers where potential issues are identified and the push to drive through the proposals contained in the White Paper to strengthen the Regulator’s existing powers.

Get in touch if you have any questions in relation to for-profit RPs.

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