Decision

Regulatory Notice: Highstone Housing Association Limited (3 November 2022)

Updated 3 November 2022

Applies to England

RSH Regulatory Notice

• Provider: Highstone Housing Association Limited

• Regulatory code: 4776

• Publication date: 3 November 2022

• Reason for publication: Economic Standards

• Regulatory route: Reactive Engagement

Other providers included in the judgement

None

Regulatory Finding

The regulator has concluded that:

• Highstone Housing Association Limited (Highstone) is non-compliant with the Governance and Financial Viability Standard and the Rent Standard.

• Highstone has failed to ensure that its governance arrangements comply with its governing documents and all regulatory requirements, safeguard taxpayers’ interests and the reputation of the sector and have an effective risk management and internal controls assurance framework.

• Highstone has failed to demonstrate that it complies with an appropriate code of governance and that it has managed its affairs with an appropriate degree of skill, independence, diligence, effectiveness, prudence and foresight. It has also failed to ensure that it has an appropriate, robust and prudent business planning, risk and control framework.

• Highstone failed to ensure that any arrangements it enters into do not inappropriately advance the interests of third parties, or are arrangements that the regulator could reasonably assume were for such purposes.

• Highstone has failed to assess, manage and address risks to ensure the long-term viability of the registered provider, including ensuring social assets are protected by carrying out detailed and robust stress testing and before taking on new liabilities, ensuring it understands and manages the likely impact on current and future business and regulatory compliance.

• Highstone has failed to provide assurance that its stock is correctly classified and that the rent levels have been set in compliance with the Rent Standard.

The Case

Highstone provides supported accommodation to vulnerable adults who receive housing benefit and social care funding. Highstone’s properties were acquired and developed by unregistered related third parties under common control: Highstone Homes Limited (HH) and Highstone Building Services Limited (HBS). Highstone entered into long leases with HH, which subsequently sold the majority of the properties in November 2021 to a Real Estate Investment Trust along with renegotiated terms of the long-term lease with Highstone. According to its accounts up to 2021, Highstone has received £12.7m in grants under the Homes England Affordable Homes Programme.

The Regulator’s Findings

Highstone has failed to ensure its governance arrangements are appropriate for the size of the organisation and its activities. The regulator lacks assurance that it is compliant with its adopted code of governance. There is a lack of clarity on roles and responsibilities between Highstone, HH and HBS and obvious conflicts of interest with the majority of Highstone’s board holding a financial interest in HH and HBS. Highstone’s board reporting on risks, financial performance and accounting is inadequate and decision-making is poor due to a lack of appropriate skills and independence.

Highstone failed to manage conflicts when acquiring and developing properties when its executive directors stood to personally benefit through HH and HBS. As a result, Highstone has failed to ensure that the arrangements it has entered into do not inappropriately advance the interests of third parties. The intercompany connections and weaknesses in governance also lead the regulator to conclude that Highstone has failed to manage its affairs with an appropriate degree of skill, independence, diligence, effectiveness, prudence and foresight.

Highstone has been unable to provide evidence that the board gave appropriate consideration to risks arising from a long lease-based model. The long leases run up to 60 years with no break clause until 25 and 50 years, resulting in significant risks to meet liabilities where there are voids or delays in agreeing rent and housing benefit levels with local authorities. Further, Highstone has a concentration risk that comes from having long-term, low-margin, inflation-linked leases as a single source of finance. We lack assurance that Highstone has taken a suitably long-term view of managing risks associated with this strategy, nor does it have a financial plan in place underpinned by appropriate assumptions. We lack evidence that Highstone undertakes adequate stress testing against a range of scenarios, with appropriate mitigation strategies in place, to ensure its long-term viability.

Highstone has been unable to provide evidence of any assurance given to the board that rent levels are compliant with the Rent Standard and has made inconsistent statements to the regulator about the classification of its stock.Given the lack of assurance over Highstone’s ability to charge rents at the current level any subsequent reduction could impact its ability to meet its financial commitments.

The governance failings and lack of assurance on compliance with the Rent Standard have created a significant risk that public funds may have been misused thereby failing to safeguard taxpayers’ interests and the reputation of the sector. The regulator considers that Highstone’s directors have failed to demonstrate meeting their fiduciary responsibilities and have not acted in the best interests of the registered provider.

Since the regulator placed Highstone on the gradings under review list it has recruited independent board members with experience in the social housing sector who have had no involvement in matters set out above, to replace individuals who remain directors of HH and HBS. Highstone is committed to work with the regulator to address the issues outlined in this Regulatory Notice and has commissioned a review of its governance arrangements and compliance with the Rent Standard. While the regulator has no evidence that tenants have been put at risk, given the extent of weaknesses in Highstone’s governance, the regulator welcomes Highstone’s indication that a review of reporting on health and safety matters will be a priority.

Section 220 of the Housing and Regeneration Act 2008 states that the regulator’s regulatory and enforcement powers may be used if a registered provider has failed to meet a standard under section 194 of the Act. The regulator will keep any further action, including whether to exercise any of its powers, under review.

Based on the most recent Statistical Data Return (SDR), Highstone had fewer than 1,000 units and is classed as a small provider. The regulator does not publish regulatory judgements for providers that fall into this category. Instead, in the interests of transparency, the regulator publishes a Regulatory Notice where it has evidence that a small registered provider is not meeting the regulatory standards. This notice is published under those arrangements.

About the provider

Highstone was registered in September 2013 and designated as a not-for-profit provider. Highstone is a registered community benefit society and exempt charity. According to the 2022 SDR Highstone owns and manages 195 units of social housing located in Yorkshire.

About our Regulatory Notices

Regulatory notices are issued in response to an event of regulatory importance (for example, a finding of a breach of the Rent Standard or of a consumer standard that has or may cause serious harm) that, in accordance with its obligation to be transparent, the regulator wishes to make public. More detail about Regulatory notices is set out in Regulating the Standards.