Financial failures in social housing and the role of the Regulator

Rob Beiley looks at the prospect of financial failures in the social housing sector, and examines the role of the Regulator of Social Housing.

Insolvencies in the Housing Association sector are mercifully rare; only in a handful of cases has it been necessary for the Regulator of Social Housing (RSH) to use its statutory powers following the financial failure of a Registered Provider.  

The RSH have broad powers to receive financial (and other performance) data relating to Housing Associations which are registered with (and regulated by) them and the RSH (and its predecessor bodies) have historically intervened quickly when a Registered Provider has faced financial difficulty; the vast majority of "rescues" in the regulated sector have happened on a voluntary/informal basis (albeit facilitated by the RSH) but without the use of the RSH's statutory intervention powers.  It remains the case that no secured creditor to a provider has lost money as a result of a Registered Provider's insolvency. 

It is this strong track record that has given rise to the notion of a quasi "state guarantee", yet the RSH are at pains to stress that there is no such thing; to be clear, there is no government guarantee of an RP or the RP sector more generally; and the RSH have specifically stated (in their April 2019 "addendum to the Sector Risk Profile") that " The sector has a strong track record of performance and where major failures have occurred the RSH has intervened to protect tenants and public money using its regulatory and enforcement powers as appropriate to the presenting issue. However, the RSH does not guarantee the performance of financial obligations of RPs in general or the viability of any individual RP. While past solutions have included stronger providers taking on the obligations of a failed provider this form of rescue cannot be presumed."

Insofar as creditors to the Housing Association sector are concerned there are some important market trends that we have recognised:

• There are an increasing number of housing providers who operate in the temporary accommodation or supported housing sectors (typically incorporated as Community Interest Companies) who- whilst providing affordable housing in the broadest sense- are not registered with or regulated by the RSH. For these providers, the RSH have no jurisdiction and no powers of intervention and the statutory Housing Administration regime does not apply.
• A number of Registered Providers operating in the supported housing sector are thinly capitalised and operate by way of acquiring long leasehold interests in their properties (see Lease-based providers of specialised supported housing). Where these providers have faced financial difficulties, the RSH have found it impossible to engineer a "rescue" the same way as traditional Housing Associations have been facilitated and so a formal Housing Administration or CVA is perhaps a more likely outcome should an insolvency arise. It is also worth noting, of course, that a Landlord of a "lease based provider" is not a secured lender and so will not enjoy the same protections under the statutory regime that a secured lender benefits from.

• A recent development in the sector has been the growth of "For Profit" registered providers and we have not yet seen how the RSH would intervene were an FPRP to face financial difficulty; it may be reasonable to assume that preservation of shareholder equity would not necessarily be a priority for the RSH.
• Housing Association groups are ever more complex (groups will often encompass subsidiaries that engage in open market housing, development for sale and other commercial activities); it is clear that the RSHs focus on insolvency would be on the regulated social housing aspects of the business and the rescue of the non-social housing elements of a group cannot be assumed.

Rob Beiley is a partner at Trowers & Hamlins.