Specialist provider failed to ‘act with due diligence’ over acquisitions

RSH releases damning finding over provider’s governance and compliance with consumer standards.

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A housing provider for ex-military personnel failed to “act with due diligence” in entering into its property acquisitions and activities – acquiring all of its assets using the same arrangements and with the same investor.

Today, the Regulator of Social Housing (RSH) releases a damning finding against not for profit Kinsman Housing Limited as a response to a number of referrals from London boroughs raising concerns over Kinsman’s governance and compliance with consumer standards.

The RSH report confirms Kinsman as opting for open market disposal of affordable housing assets acquired – with proceeds going to a third party.

Kinsman is also confirmed as entering into transactions to acquire properties it has no control over and where it is reliant on a third party in order to ensure it can comply with its own objectives and meet legal and regulatory requirements.

The resulting RSH investigation identified that the way in which Kinsman operates does not align with its stated purpose as a not for profit registered provider – revealing, as it did, Kinsman acquiring the legal interest in a social housing property but holding the beneficial interest on behalf of a third party, the investor, who funds the purchase.

To RSH, a deed of trust between the investor and Kinsman enables this to happen with the investor legally entitled to all capital and income arising from the property.

It is the investor that, through a property management agreement, appoints a registered provider to manage the properties on its behalf and for a management fee.

The resulting report shows Kinsman’s properties were transferred from a registered provider operating the same arrangements with the same investor – others directly through section 106 planning agreements and two properties, including one tenanted unit, acquired from large registered providers.

In line with regulatory standards, RSH says it would expect Kinsman’s board to have sought to assure itself on the detail, appropriateness and risks to Kinsman of the arrangements before entering into them – including any impact on the role of a not for profit registered provider and its ability to deliver its objectives.

But Kinsman, says RSH, has not been able to provide evidence that the board commissioned “appropriate advice” or that relevant information was made available to the board in its decision making.

The homes acquired from large registered providers were, the report says, done so on the basis of continued social housing use.

However, apart from the tenanted unit, these were sold on the open market shortly after acquisition, with all proceeds from the sale, including any capital uplift, going directly to the investor.

As such, Kinsman’s failure to consider the implications, potential outcomes and risks of the acquisitions it has entered into demonstrated to RSH a lack of “skill, diligence and effectiveness”.

Kinsman is a not-for-profit registered provider with a specific objective to house ex-military personnel.

Registered in 2013, Kinsman was previously known as Sustain Housing and manages 35 units of in London, including 11 shared ownership properties.

These were acquired either directly through section 106 planning agreements or transferred from another registered provider.

To RSH, the arrangements Kinsman has chosen to use means that there is reliance on the relationship with the investor to ensure the registered provider can comply with its own objectives and meet regulatory requirements.

The report references documents underpinning the arrangements as making clear that that Kinsman must act on the instructions of and in the interests of the investor (a third party).

The report outlined that, in the situation where issues arise that need to be addressed in order for Kinsman to comply with legal and regulatory expectations, consent for, and funding of, the necessary remedial action rests with the beneficial owner.

There is, the report says, no evidence that the beneficial owner recognises and will take into account the organisation’s objectives and regulatory responsibilities in issuing instructions under the deed of trust and the management agreement.

The investigation also found Kinsman issuing two-year assured shorthold tenancies to tenants with no rationale given and with the stated aim that their accommodation is not permanent, not available for those on housing benefit, and that tenants should demonstrate that they can move on to home ownership or another rented property.

Where the Governance and Financial Viability standard requires that providers ensure any arrangements they enter into do not inappropriately advance the interests of third parties, or are arrangements which the regulator could reasonably assume were for such purposes, Kinsman had, the report said, been unable to provide “compelling evidence” that it has met these requirements for the arrangements it entered into.

Nor, according to the investigation, could Kinsman demonstrate that it had adequately managed conflicts of interest as a result of connections between the registered provider’s chair and the third party entities providing the monies for the purchase of social housing assets and held for them on trust.

Kinsman’s chair is acknowledged as declaring a conflict of interest due to his relationship with Kinsman’s investor. Kinsman’s board agreed he would not vote on projects where the investor was directly or indirectly connected.

However, to RSH, it was clear from the information provided by Kinsman that, in practice, the chair has influenced and been actively involved in all aspects of the acquisitions.

The Governance and Financial Viability standard also requires registered providers to have an effective risk management framework in place.

But RSH found that, when entering into the arrangements, Kinsman had not been able to provide evidence that it had identified the associated risks or has in place mitigation strategies to manage these risks.

Based on the most recent statistical data return, Kinsman had fewer than 1,000 units and is classed as a small provider.

Though RSH does not publish regulatory judgements for providers who fall into this category, in the interests of transparency, it publishes a Regulatory Notice where it has evidence that a small registered provider is not meeting the regulatory standards.

The notice issued today is is published under those arrangements.

RSH is now considering what further action should be taken – including whether to exercise any of its powers.

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