More than £3bn of tenant deposit money currently held by landlords and letting agents could be hit by Government plans to abolish insured tenancy deposit schemes.
New analysis by The Letting Partnership, which provides client accounting and compliance services to letting agents, estimates that more than 2.1 million tenancy deposits in England and Wales are currently protected through insured schemes. That is almost half of all protected deposits.
While the proposal remains at the consultation stage, it would require all tenancy deposits to be protected through custodial schemes, where the money is held by an independent third party rather than by landlords or agents.
The numbers involved
Many landlords may not know which protection model is being used if their properties are fully managed by an agent. However, those who use insured protection directly, or whose agents rely on it, could be affected if the reforms go ahead.
According to The Letting Partnership’s analysis of tenancy deposit sector data, there are currently around 4.7 million protected deposits across England and Wales.
However, insured deposits tend to have a higher average value, meaning they account for a larger share of the money held within the system. The research estimates that more than £3bn of tenant deposit funds are currently protected through insured arrangements, equivalent to 54.7% of the total value of deposits held nationwide.
In comparison, custodial schemes account for approximately £2.5bn, or 45.3% of total deposit value.
The figures illustrate the scale of the challenge facing the sector if the Government proceeds with its proposals.
What is changing?
Under an insured deposit scheme, landlords or agents retain possession of the tenant’s deposit while paying a fee to an approved deposit protection provider.
Under a custodial scheme, the deposit is transferred to a third-party provider for the duration of the tenancy.
The Government is proposing to remove insured schemes altogether as part of its wider review of tenancy deposit protection.
It argues that custodial protection provides greater oversight because all tenant money is held independently rather than being dispersed across thousands of landlord and agency client accounts.
It would, though, fundamentally change how tenancy deposits are administered throughout the sector.
What it means for investors
For many landlords, particularly those using full management services, any transition would largely take place behind the scenes.
However, those with larger portfolios or self-managed properties may wish to understand how their deposits are currently protected and whether any operational changes could be required in future.
The proposal is not expected to trigger an immediate transfer of every insured deposit into custodial protection. Instead, the industry expects a phased transition under which new tenancies would enter custodial schemes while existing insured deposits remain protected until the tenancy ends.
That would create a lengthy adjustment period where both systems operate alongside one another.
Adjustment period
Chris Mason, COO of The Letting Partnership, says the debate has focused too heavily on whether landlords and agents should be allowed to hold deposit funds rather than on transparency.
“The debate around insured deposits has often centred on whether landlords and agents should be permitted to hold tenant funds, but this framing misses the fundamental issue.
“Nobody, not the schemes, the underwriters, or the government, has a complete picture of the cash position sitting behind those liabilities at any given moment. From a client accounting perspective, that has always been the real weakness of the insured model.
Transparency is key
“If the objective is greater transparency over tenant money, then the government is targeting the right problem.”
For landlords, there is no immediate need for action. However, those with self-managed properties or multiple agents may want to establish which deposit protection model is currently being used across their portfolios.
With more than £3bn currently sitting within insured protection arrangements, the proposal represents a significant reform that landlords will want to monitor as the Government’s tenancy deposit review progresses.
