I am going to get this in before any of the lefties on here get to you.
I am sorry you have found yourself in this situation, however the system is flooded, there are thousands of people in your situation who have been in it longer then you, who still havent been offered perm accommodation. The council has a duty to rehouse those people first (this will be faciliated through their longer registration date on the choiced based lettings system you are using).
Re housing policy says 6 months, however that policy doesnt reflect the demand for perm rented social housing at the moment. Realistically what will happen is you will remain in temp accommodation until you are successful in bidding for a perm rented property. The council may move you from your current property into another temp one. The reason they have said no to chain is because it is likely they have leased it from a private landlord as a temp measure. That aside if it was me I would just install one, and fight that battle when it comes to it. I doubt any court will side on a HO that seeks to evict you on the grounds you installed a chain for your protection. Please please please ignore suggestions of going to your MP, Councillor or Prime Minister it wont do any good. As previously said the system is flooded and HA/LAs dont have a supply of empty properties on standby to move people into.
I regret that the bedsit isnt to your liking or suitable, however you have placed your housing needs in the arms of the council, whilst you might not like it I regret to say you just have to get on with it and deal with it, as previously said there isnt a host of properties for us to move people into. I would also suggest seeking out properties that will accept HB and try move into one of those if the council will let you.