Introduction
1.1
This guidance is for:
- Registered Social Landlords (RSLs) in group structures, whether they are the group parent or a subsidiary;
- RSLs considering creating a group structure, including setting up unregistered and registered subsidiaries;
- RSLs considering joining a group structure as a subsidiary; and
- organisations seeking registration with us as part of a group, either as the group parent or a subsidiary.
1.2
The guidance explains what RSLs and organisations seeking registration need to do to comply with legislative and regulatory requirements in relation to:
- developing group structure proposals and notifying us about this (existing RSLs);
- joining a group structure as a subsidiary (existing RSLs);
- registering a new RSL which will be a parent or a subsidiary in a group; and
- the operation of group structures.
1.3
All RSLs, whether constituted as a parent or subsidiary, must comply with the requirements set out in the Regulatory Framework, including the Standards of Governance and Financial Management (the Standards), the Constitutional Requirements and all related guidance.
1.4
In complying with this guidance, RSLs will meet the requirements relating to group structures in chapter 3 of the Regulatory Framework including the Standards, Constitutional Requirements and all related guidance.
1.5
This guidance aims to help RSLs comply with the legislative and regulatory requirements relating to forming and operating group structures. It is not legal advice and RSLs should seek their own appropriate, professional advice when operating group structures or considering any of the organisational changes set out in this guidance.
Other guidance
1.6
RSLs considering setting up or joining a group structure, including setting up unregistered subsidiaries, must ensure that they comply with Standard 7 and are satisfied that that the proposed organisational changes safeguard the interests of, and benefit, current and future tenants.
1.7
RSLs considering joining a group structure as a subsidiary of another body must additionally comply with section 104A and 115-120 of the 2010 Act, which sets out regulatory notification and tenant consultation requirements, and our related guidance on Tenant Consultation and Approval.
1.8
In both of the above situations, RSLs must comply with our guidance on Notifiable Events. The guidance explains how and when to notify us about proposals for developing group structures.
1.9
Organisations seeking registration with us as a group parent or subsidiary must comply with Chapter 9 of the Regulatory Framework, which sets out the registration criteria for RSLs, and the registration application process.
Principles
2.1
An RSL that is part of a group, as parent or subsidiary, must meet the regulatory requirements set out in section 3 of the Regulatory Framework including:
- the Standards of Governance and Financial Management and related guidance, including this guidance
- the Constitutional Requirements
2.2
An RSL should not establish an unregistered subsidiary or group structure, or join a group structure where that would impede in any way its ability to meet the above requirements.
2.3
RSLs should manage effectively any risks to the RSL and to tenants’ and other stakeholders’ interests from operating within a group structure.
2.4
When developing group structure proposals RSLs must ensure that they comply with Standard 7, which requires that:
- 7.1: the governing body discusses and scrutinises any proposal for organisational change and ensures that it will benefit current and future tenants.
- 7.2: the RSL ensures that its governance structures are as simple as possible, clear and allow it to meet the Standards, Constitutional Requirements, and this guidance.
- 7.3: the RSL ensures adequate consultation with, and support from, key stakeholders including tenants, members, funders and local authorities as well as other regulators.
- 7.4: the governing body is satisfied that the new (or changed) organisation will be financially viable, efficient and will provide good outcomes for tenants.
- 7.5: the RSL establishes robust monitoring systems to ensure that delivery of the objective of the change and of commitments made to tenants are achieved.
- 7.6: charitable RSLs seek consent/notify OSCR of changes to their constitution and other changes as appropriate
- 7.7: the governing body ensures that organisational changes fit with the RSL’s objectives and business plan, and that its strategy is sustainable.
- 7.8: the RSL complies with all relevant regulatory guidance, for example on notifiable events and tenant consultation.
2.5
RSLs which are charities or have charitable subsidiaries must ensure that group structure proposals allow the RSL to meet its obligations and duties under charity law and should refer to charity law and to guidance produced by the Office of the Scottish Charity Regulator (OSCR) available on its website. Trustees of charitable RSLs (generally governing body members) will need to take full account of their obligations and duties under charity law when developing proposals to create or join a group structure, and when operating within a group structure.
2.6
RSLs which are registered societies should refer to relevant law and to guidance issued by the Financial Conduct Authority (FCA) available on its website.
2.7
RSLs which are incorporated as companies should refer to relevant law and to guidance issued by Companies House available on its website.
2.8
RSLs must ensure that their governance and financial arrangements, and those of the group, allow us to regulate effectively, and exercise our full regulatory powers.
2.9
Where the parent of a group is an RSL, our main regulatory relationship is with the parent. The parent should ensure in the first instance that the other RSLs within the group comply with the Regulatory Framework and regulatory guidance. We may on occasion require to engage directly with subsidiary RSLs and will set out the rationale for any direct engagement to the parent, prior to any such engagement.
2.10
Some RSLs are constituted as subsidiaries of Registered Providers in England. In these circumstances, our regulatory relationship is with the subsidiary RSL. We liaise with the social housing regulator in England to get appropriate assurance about the parent Registered Provider.
2.11
RSLs must comply with these principles and this guidance when developing proposals for organisational change. Likewise organisations seeking registration with us as part of a group structure must also comply with this guidance and the relevant principles above. Both RSLs and organisations seeking registration must ensure that the proposed group structure can operate in accordance with the guidance set out in section 5.
2.12
Where there may be an impact on people – such as tenants, other service users and employees – RSLs should undertake an Equalities Impact Assessment (EQIA). It should be done early in the process and it’s outcomes taken account of.
Setting up a group structure and unregistered subsidiaries
3.1
RSLs considering setting up a group structure with unregistered subsidiaries must ensure that they comply with all regulatory requirements relating to both establishing and operating this type of group. These are set out below.
3.2
When developing group structure proposals, RSLs must ensure that they comply with Standard 7 which requires that any organisational changes safeguard the interests of, and benefit, current and future tenants.
3.3
The governance arrangements of the group must also enable the RSL to comply with all regulatory requirements, including the specific requirements for RSLs which are constituted as parents of another body. These include:
Standard 4.5:
Where the RSL is the parent within a group structure it fulfils its responsibilities to:
- control the activities of, and manage risks arising from, its subsidiaries;
- ensure appropriate use of funds within the group;
- manage and mitigate risk to the core business; and
- uphold strong standards of governance and protect the reputation of the group for investment and other purposes.
Constitutional Requirements 9-13 and 25(d):
- 9. Each organisation within the group must have a distinct legal identity and separate constitution. The constitutional and financial relationships between all organisations in the group (registered or non-registered) must be documented formally and in terms that are transparent and understandable.
- 10. If any of the organisations within the group are charities, the RSL’s role and relationships with other group members are consistent with charity law.
- 11. The constitutions of group members must enable the parent to exercise control and to take corrective action where required.
- 12. There are procedures in place designed to avoid conflicts of interest, particularly where members of the subsidiary’s governing body are also members of the parent’s governing body.
- 13. Where it is constituted as a subsidiary of another body, the RSL’s constitution permits control by the parent but with sufficient independence to carry out its business, within limits set by the parent.
- 25(d).Where an RSL has subsidiaries it must ensure any payments and benefits to subsidiary governing body members are included in the relevant policy.
3.4
Our Notifiable Events guidance sets out that major restructuring within the RSL or group and plans to set up a non-registered subsidiary are notifiable events. RSLs must notify us of proposed organisational change in accordance with this guidance.
3.5
RSLs should contact us at an early stage in the process of considering setting up a group structure.
3.6
An RSL considering setting up a group structure must ensure that the proposed structure:
- is consistent with, and contributes to, the RSL’s purpose and objectives
- does not impede in any way the RSL’s ability to meet all regulatory requirements
- allows the RSL to manage effectively any risks to the RSL and to tenants’ and other stakeholders’ interests
- allows the RSL to meet its obligations and duties under charity law or the law relating to registered societies where appropriate
- is sustainable financially.
Joining a group structure as a subsidiary
4.1
RSLs considering joining a group structure as a subsidiary must ensure that they comply with all legislative and regulatory requirements relating to becoming a subsidiary and joining and operating the group structure. These are set out below.
4.2
RSLs must comply with Sections 104A and 115-120 of the 2010 Act which set out the regulatory notification and tenant consultation requirements for this type of organisational change. RSLs must also comply with our related guidance on Tenant Consultation and Approval and Notifiable Events.
4.3
This means that before making the change to become a subsidiary theRSL must:
- consult its tenants in accordance with sections 104A and 115 of the 2010 Act (as amended by the Housing (Scotland) (Amendment) Act 2018);
- carry out a ballot or seek the written authorisation of its tenants;
- notify us of the results of the ballot or authorisation as soon as reasonably practicable, which we consider to be within 10 working days; and
- have regard to our Tenant Consultation and Approval and Notifiable Events guidance on this.
4.4
When developing proposals to join a group structure as a subsidiary, RSLs must ensure that they comply with Standard 7 which requires that any organisational changes safeguard the interests of, and benefit, current and future tenants.
4.5
The governance arrangements of the group must also enable the RSL to comply with all regulatory requirements including the specific requirements for RSLs which are constituted a the subsidiary of another body. These include:
- Standard 4.5, referenced at section 3.3 above; and
- Constitutional Requirements 9-13 and 25(d), also referenced at section 3.3 above.
4.6
A charitable RSL seeking to change its constitution to become a subsidiary of another RSL must obtain OSCR’s prior consent if the change to the constitution includes a change to the RSL’s purposes. RSLs with registered care services must comply with the Care Inspectorate’s procedures if the proposed change will affect a registered care service.
4.7
RSLs must notify us as soon as reasonably practicable after the proposal to become a subsidiary takes effect, and no later than 28 days after, in accordance with our Notifiable Events guidance.
4.8
An RSL considering joining a group structure must ensure that this:
- is consistent with, and contributes to, the RSL’s purpose and objectives
- does not impede in any way the RSL’s ability to meet all regulatory requirements
- is in the best interests of its tenants and service users
- allows the RSL to manage effectively any risks to the RSL and to tenants’ and other stakeholders’ interests
- allows the RSL to meet its obligations and duties under charity law where appropriate or the law relating to registered societies where appropriate
- is sustainable financially.
Registering a new parent or subsidiary RSL
5.1
RSLs considering setting up a registered subsidiary, and organisations considering registering as part of a group as parent or subsidiary, must comply with the legislative and regulatory registration requirements. These are set out below.
5.2
Any organisation seeking to register as an RSL must meet the legislative and regulatory registration criteria set out at section 9 of the Regulatory Framework. This and our associated registration guidance also explain how to apply to us to become an RSL and the registration process.
5.3
Section 9 also provides specific guidance for applicants seeking to register as an RSL which will be part of a group structure and constituted as the parent or subsidiary of another body. These applicants must set out the proposed group governance arrangements and clearly show:
- the roles and relationships between each part of the group structure
- that the parent has ultimate responsibility and effective control over any subsidiary
- that the subsidiary has sufficient independence to effectively manage its affairs
- that it complies with this guidance and the proposed group can operate in accordance with the guidance set out in section 5. that we will be able to regulate effectively to protect the interests of tenants and other service users, the social housing assets, and public and private investment
5.4
All RSLs, whether constituted as a parent or subsidiary, must comply with the requirements set out in the Regulatory Framework, including the Standards, the Constitutional Requirements and all related guidance. These include some specific requirements for RSLs which are constituted as the parent or subsidiary of another body:
- Standard 4.5, referenced at section 3.3 above; and
- Constitutional Requirements 9-13 and 25(d), referenced at section 3.3 above.
5.5
Section 9 explains that we will take account of the applicant’s role within the group, and its group governance and arrangements, when assessing it against regulatory registration criterion 2: the applicant must demonstrate it can meet the Standards and Constitutional Requirements.
Operating group structures
6.1
This section applies to all RSLs in group structures, whether they are the group parent or a subsidiary.
Governance arrangements
6.2
The parent must ensure that the group governance arrangements:
- make clear the identities, roles and responsibilities of each part of the group
- assign accountability for decision-making
- give the parent powers of control through the governing instruments of subsidiaries, taking account of the legal status of members of the group
- have people with the skills and expertise needed in the governance and management of the subsidiary or subsidiaries to successfully take forward and sustain the proposed activities of the subsidiary or subsidiaries
- have people in the RSL with skills and expertise to monitor the activities of the subsidiaries, and to correctly identify and manage any risks arising from the activities of the subsidiaries
- ensure people who are governing body members in more than one organisation in the group have a clear understanding of their governance responsibilities
- ensure that each organisation in the group has a different Chairperson.
6.3
The RSL should ensure that the group has a comprehensive Intra Group Agreement (IGA) or similar document, defining all aspects of the parent/subsidiary relationship and how the group is to operate.
6.4
The RSL should ensure that the group has an appropriate code of conduct for all governing body members and staff that applies to all organisations within the group.
6.5
A parent should ensure that the operation of audit and risk management within the group is effective.
6.6
The group must ensure that relationships and transactions between group members are described in individual and group financial statements as required by accounting standards, prescribed by the Determination of Accounting Requirements issued under section 68(1) of the Housing (Scotland) Act 2010, and the Housing Statement of Recommended Practice.
6.7
The group should regularly review the effectiveness of governance and control arrangements within the group, and that they comply with statutory and regulatory requirements and reflect current best practice.
Control and independence
6.8
The proposed structure must give a parent constitutional control over subsidiaries. Constitutional control is not the same as control over operational decisions: the subsidiary may exercise independent control over operational matters, within the limits set by its parent and to standards agreed between the two bodies. A parent should establish clear financial and other limits within which its subsidiaries should work.
6.9
A parent should formally define the scope of a subsidiary’s activities, describing any limits that apply, including financial limits.
6.10
A parent must give a subsidiary sufficient independence to manage its affairs without undue interference in operational matters by the parent organisation. Subsidiary RSLs must have sufficient autonomy to plan, manage and deliver their services in a way which is responsive to their local context and the views of their tenants.
6.11
A parent must ensure a subsidiary cannot exercise control or undue influence over the parent.
6.12
Constitutional control by the parent should normally be exercised through:
- powers to control the majority of votes at a general meeting of a subsidiary, and/or
- powers to appoint and remove a majority of the subsidiary’s governing body (ensuring that any RSL subsidiary has a quorum of governing body members who are not also members of the parent’s governing body).
6.13
Parents should monitor the activities and performance of their subsidiaries. Parents should take timely and effective action if their subsidiaries do not operate within approved limits or fail to meet appropriate standards of performance.
6.14
Parents must have clearly defined rights to step in and take action if a subsidiary does not adhere to financial or other agreed limits or does not achieve agreed standards.
6.15
Parents must have appropriate step-in rights where a subsidiary or its governing body is experiencing serious problems. Step-in rights must include the power to appoint and, where necessary, remove members of the subsidiary’s governing body.
6.16
The group must set out service provision between group members in written service level agreements or contracts, with clear costs and charges, and review them regularly. It is for RSLs to decide, taking appropriate professional advice, whether there is a requirement (such as from procurement legislation, directives and regulations) to expose existing services to competition.
Governing body membership
6.17
The governing body of a parent must be able to make objective decisions about the RSL’s relationships with its subsidiaries. A parent must ensure that not all of its governing body members serve on the governing body of a particular subsidiary, to have members who are free from any potential conflict of interest between the parent and the subsidiary.
6.18
Where a subsidiary is an RSL, its governing body must as a minimum have sufficient members to form a quorum independently of any members who are also governing body members of the parent organisation. This does not restrict the constitutional rights a parent may have to appoint or remove governing body members of a subsidiary or to use any other step-in rights.
6.19
The governing body of a unregistered subsidiary should include some members who are independent of the parent’s governing body.
6.20
Governing body members must always act in the interests of the organisation’s governing body on which they are serving. The management of conflicts of interest must be governed by the code of conduct and by the terms of the Intra Group Agreement (or similar document). The group must provide governing body members with clear guidance on declaring and managing conflicts of interest which may arise.
Finances
6.21
The parent must keep a comprehensive register of loan agreements, conditions and covenants for all borrowing within the group, and a comprehensive and up to date asset register for each organisation within the group. Each organisation within the group must keep appropriate financial and borrowing information in line with regulatory requirements.
6.22
An RSL lending to, investing in, or providing financial support to another organisation within a group must legally be able to do so and must manage the risks effectively. The trustees of an RSL that is a charity must ensure that the terms of any loan, including the interest rates, comply with charitable obligations and duties. The RSL must ensure that such arrangements are formalised, with appropriate arrangements for monitoring and control.
6.23
The RSL should ensure that any on-lending is:
- on terms that impose no additional cost on its tenants
- in accordance with the terms of any funding agreement that relates to the money being provided to the other organisation
- on terms that make it a ‘qualifying loan’ in accordance with HMRC rules, if the RSL is charitable
- on arm’s length terms and minimise the risks to which the RSL is exposed.
6.24
A parent should have contractual limits for any guarantees entered into by the parent on behalf of the subsidiary.
6.25
A parent should ensure that any cross-collateralisation, guarantees (including cross guarantees), equity investment or lending is clearly identified in the group members’ business plans, budgets, financial reports and annual accounts.
6.26
A parent should not take general financial responsibility for any non-registered subsidiary, nor imply to third parties that it will do so. The extent of an RSL’s liabilities for the debts of a non-registered subsidiary should not exceed any guarantees it has provided and/or its available resources. Governing bodies of RSLs with non-registered subsidiaries must consider any risks to the RSL, and be satisfied that providing financial support is in the RSL’s best interests, and will make a demonstrable contribution to achieving its objectives.
Connected bodies and inquiries
7.1
We also have powers under section 42 of the 2010 Act to make inquiries about bodies which are or were connected to a social landlord, and in the course of an inquiry to have access to information or documentation relating to the social landlord.
7.2
A subsidiary of an RSL or the parent of an RSL is a connected body.
7.3
When making inquiries or otherwise for a purpose connected with our functions, we have powers to require any person to provide us with any document or other information relating to an RSL, or a body which at the material time is or was connected to an RSL. These powers are provided for by section 48 of the 2010 Act.