HM Insights

New legislation to be introduced to restore classification of registered social landlords

The Office of National Statistics (ONS) has come to the decision that registered social landlords (RSLs) in Scotland are to be classified as public non-financial corporations for the purpose of national accounts and other ONS economic statistics. This follows a similar review last year, which classified private registered providers of social housing in England as public bodies. This classification of Scottish RSLs applies with effect from 18 July 2001, being the date of Royal Assent to the Housing (Scotland) Act 2001 (which introduced the current system of regulation of RSLs).

Housing Social Landlords Public Bodies Law Scotland

The ONS judged that RSLs should be considered as institutional units as they have the ability to incur liabilities and hold assets on their own accounts, enter into contracts and exhibit sufficient decision making autonomy. The ONS also concluded that RSLs are subject to public sector control due to high levels of regulatory control by the Scottish Housing Regulator (SHR), which itself is a statutory body directly accountable to the Scottish Parliament. The SHR currently has significant powers over the management of an RLS, powers over constitutional changes and powers of consent in relation to the disposal of land and housing assets (now contained in the Housing (Scotland) Act 2010.

The decision to classify RSLs as public bodies is not unexpected following a similar decision in England last year, but it does mean that in excess of £4 billion of RSL borrowing has been added to the Scottish Government's balance sheet.

Scottish Government Response - new legislation to be introduced

On the same day as the ONS published its decision to classify RSLs as public bodies for accounting purposes, the Scottish Government announced that it intends to introduce new legislation to ensure RSLs are re-classified as private bodies. Given that one of the primary reasons for the ONS's decision was that the SHR can exercise a number of powers over RSLs, Housing Minister Kevin Stewart confirmed that the aim of the proposed legislation is to adjust and limit the powers of the SHR, to allow the ONS to reclassify RSLs as being part of the private sector.

The ONS came to the same decision in relation to Registered Providers in England last year and Westminster has already added the Housing and Planning Act 2016 to the statute books, to introduce a series of changes to the English system of regulation, and to the powers of the Homes and Communities Agency, in order to reduce the level of public sector control which the ONS considered to be critical to its determination. It is expected that the Scottish Bill will contain similar measures to those in the Housing and Planning Act 2016 and are likely to include:- the removal of the need for SHR consent to the disposal of assets by RSLs; limitations to the SHR's powers to appoint and remove members, staff and managers of RSLs; and removal of the need for SHR consent to the restructuring, voluntary winding up and dissolution of RSLs.

It is also likely that the Bill will seek to limit or control any existing arrangements between those RSLs in Scotland which received transfers of stock from local authorities, where the local authorities have preferential voting arrangements or the right to nominate members on to the RSLs' boards, to ensure that these arrangements cannot continue to be seen as public sector control. Again, in England, similar arrangements have been proposed, albeit by way of separate regulations which have not yet been published.

It is not clear yet when the Bill will be introduced. Scottish Government will first consult with and discuss its plans to legislate with the Scottish Housing Regulator, bodies representing RSLs, their tenants and lenders during the development of the Bill.

What does all this mean?

One of the main effects of re-classification of RSLs as public corporations the substantial amount of bank borrowing which has been added to the UK public sector balance sheet (about £63 billion in total), a prospect which both Westminster and Holyrood are keen to avoid. By committing to pass deregulation measures, the Scottish Government aims to ensure that Scottish RSL borrowing continues to be treated as private borrowing.

If a significant number of the SHR's control, consent and intervention powers are removed or significantly curtailed, then the Regulator itself will need to re-consider how it engages with, and monitors, RSLs, in order to achieve its primary purpose of protecting the interests of current and future tenants. Without the implicit threat of a big stick, it is to be hoped that the nature and level of engagement will be positive and constructive.

One interesting point will be the position of tenants in relation to constitutional restructurings of RSLs. Currently (unlike in England) the SHR may not give its required consent to a proposal where one RSL intends to become the subsidiary of another unless it is satisfied that the tenants of the intended subsidiary RSL have been balloted and a majority have voted in favour of the proposal (sections 104A and 124A of the Housing (Scotland) Act 2010). If, therefore, one outcome of the anticipated legislative de-regulation is to dispense with the need for regulatory consent to such a restructuring, it is difficult to see how the approval of a majority of tenants (most of whom will typically not be shareholding members of the RSL) can still be an essential pre-requisite of the restructuring proceeding. It is understood, however, that Scottish Government remains committed to preserving a role for tenants in relation to this situation.

As with any changes to existing systems, people will need to be alert to the consequences of change. Any dilution of the current regulatory regime is likely to cause some nervousness among lenders to the sector, who have traditionally relied on the SHR to identify and manage problems within RSLs, so that lenders never suffer actual losses. Indeed, in England the ratings agencies have already indicated that government de-regulation in response to the ONS determination may be seen as “credit-negative”. RSLs may therefore anticipate higher loan pricing in the future, and certainly increased scrutiny and diligence requirements from existing lenders when borrowers are seeking approval or consent.

Also, depending upon any changes which may be brought in, it may be necessary to revisit the question of whether RSLs are contracting authorities for other purposes, such as the application to RSLs of the Environmental Information (Scotland) Regulations or the public procurement regulations. Currently, RSLs are seen as contracting authorities for procurement purposes, but if the extent to which they are subject to regulatory control is lessened, then conceivably it may become appropriate to classify RSLs – or at least those which have not received significant levels of funding support from Government – as private commercial entities, free to procure works and services as they see fit.

The decision of the ONS does not have a direct bearing on the management structure, ownership or legal status of the organisations but as discussed above will have a direct effect on fiscal management. However, the new legislation to be introduced by the Scottish Government will seemingly change the regulatory control of the SHR. Until the bill is passed there will be uncertainty amongst RSLs and lenders in Scotland which will need to be carefully monitored and managed. Once passed, the legislation will introduce a new chapter in the relationship between RSLs and their regulator, which will take all parties some time to adapt to.