Distributed to
All registered social landlords

Summary
Describes the Housing Corporation's policy in respect of registered social landlords who wish to set up or change existing group structures.

Legislation
Friendly and Industrial Provident Societies Act 1968 (Section 13, 14 and 15), Housing Act 1996 (Section 60 and 61), Companies Act 1989 (Section 144).

This circular replaces section B of circular R4 - 28/94.

1 Introduction

1.1 The purpose of this circular is to set out a revision to the Corporation's policy for registered social landlords (RSLs) and non-registered subsidiaries within group structures. The revision reflects:

1.2 This circular sets out the Corporation's policy for the structures formed by RSLs. It does not set policy guidance for the activities that RSLs (and any unregistered subsidiaries) undertake. The Corporation's standards for RSL's governance are currently being reviewed and reformulated. This work includes a review of RSLs' core business, the use of public assets, permissible activities, the possible use of prudential limits on non-core activities, diversification and risk. The review will also encompass RSLs' relationships with, and relative scale of, their unregistered subsidiaries.

RSLs should note that the outcome of this review may affect the Corporation's group structures policy. However, this circular is being issued in advance of the review to enable RSLs to respond to the recent policy developments.

1.3 An appropriate definition of subsidiaries and associates is given in Sections 60 and 61 of the Housing Act 1996 and is reproduced as Annex A to this circular.

2 Policy objectives

2.1 In determining the principles for policy guidance for RSLs constitutional and structural relationships with other RSLs and with unregistered subsidiaries the Corporation has the following objectives:

· to protect public investment in the social housing sector
· to protect reputation of the sector and its ability to secure private finance
· to protect tenants' interests
· to ensure the main focus of RSLs (individually and within groups) is the provision of social housing
· to allow RSLs to structure their operations in an efficient and business like way

2.2 In the light of these objectives the Corporation will require that, in any newly created group structure or in amendments to existing structures, RSLs (individually and within groups) primary objects and activities are and remain as set out in their governing instruments as approved at registration.

3 Principles applying to RSLs within a group

3.1 Drawing upon these objectives the Corporation has the following requirements for relationships between RSLs within a group:

3.2 All RSLs are required to be explicit, within their annual regulatory and statistical returns and annual accounts, about their horizontal and vertical relationships with other RSLs and unregistered organisations. Such annual disclosure includes the degree of any cross-collateral liability, equity investments in subsidiaries or associates, and any on-lending arrangements.

3.3 RSLs' annual accounts should be used to make clear to lenders and other interested parties which are dealing with any member of the group (whether or not they are registered), the status of the entity with which they are dealing and its relationship with the parent and the rest of the group

3.4 As a consequence of recent policy development, parent RSLs are no longer required to be legally capable of supporting their registered subsidiaries, although are expected to support each registered subsidiary if legally capable of doing so. Subject to meeting the Corporation's regulatory requirements, this policy permits the registration of non-charitable subsidiaries of charitable parents and enables charitable subsidiaries to hold a majority of the group's total assets.

3.5 Each RSL within the group is expected to be financially viable on a stand alone basis.

3.6 In the event of a registered member of a group getting into difficulties the Corporation may consider the use of the following options depending upon the precise circumstances:

3.7 Parent and subsidiary RSLs should ensure that they have arrangements in place for dealing with situations where board members have a conflict of interest by virtue of their dual board membership. Additionally, parent RSLs must at all times be satisfied that they are in control of their subsidiaries.

4 Principles applying to non registered subsidiaries within a group

4.1 Pending the development of the Governance & Finance Standard, the Corporation has not amended its policy in respect of unregistered subsidiaries and RSLs should refer to Section C of circular R4 - 28/94 for further guidance.

5 Compliance

5.1 RSLs will need to seek their own legal advice in respect of their powers and objects and ensure that their structures achieve the principles set out in this circular.

5.2 Proposals for new group structures or changes to existing group structures will require approval by the Corporation if they involve the registration of new RSLs or a change in the governing instruments of existing RSLs. Compliance with this circular will be monitored through the Performance Review system. Existing lenders should also be consulted.

6 Enquiries

6.1 Any queries concerning this circular should be directed to the Assistant Director (Regulation) at the appropriate regional office of the Housing Corporation.

Annex A

Definition of Subsidiaries (Sections 60 and 61 of the Housing Act 1996)

Meaning of 'subsidiary' (Section 60)

1 In this part 'subsidiary', in relation to a registered social landlord, means a company with respect to which one of the following conditions is fulfilled -

(a) the landlord is a member of the company and controls the composition of the board of directors;

(b) the landlord holds more than half in nominal value of the company's equity share capital; or

(c) the company is a subsidiary, within the meaning of the Companies Act 1985 or the Friendly and Industrial and Provident Societies Act 1968, of another company which, by virtue of paragraph (a) or paragraph (b), is itself a subsidiary of the landlord.

2 For the purposes of subsection (1) (a), the composition of a company's board of directors shall be deemed to be controlled by a registered social landlord if, but only if, the landlord, by the exercise of some power exercisable by him without the consent or concurrence of any other person, can appoint or remove the holders of all or a majority of the directorships.

3 In relation to a company which is an industrial and provident society -

(a) any reference in this section to the board of directors is a reference to the committee of management of the society; and

(b) the reference in subsection (2) to the holders of all or a majority of the directorships is a reference -

i to all or a majority of the members of the committee, or

ii if the landlord is himself a member of the committee, such number as together with him would constitute a majority.

4 In the case of a registered social landlord which is a body of trustees, references in this section to the landlord are to the trustees action as such.

Meaning of 'associate' (Section 61)

1 In this Part 'associate', in relation to a registered social landlord, means:

(a) any body of which the landlord is a subsidiary, and

(b) any other subsidiary of such a body.

2 In this section 'subsidiary' has the same meaning as in the Companies Act 1985 or the Friendly and Industrial and Provident Societies Act 1968 or, in the case of a body which is itself a registered social landlord, has the meaning given by section 60.