The government has provided its clearest indication yet that it is considering a future tenancy deposit protection system based entirely on custodial schemes.

In answer to a Parliamentary question from Lib Dem MP Lee Dillon, Housing Minister Matthew Pennycook said the “proposed removal” of the insured schemes was based on the objective of ensuring that tenant deposits were as safe as possible.

The sector has operated under a dual-model system since 2007, allowing landlords and agents to choose between custodial protection, where the deposit is held by the scheme provider, and insured protection, where the landlord or agent retains the funds subject to statutory safeguards.

Pennycook (pictured above) suggested that the insured model creates an “inherent power imbalance” because landlords and agents retain possession of the deposit during the tenancy.

Evidence

He said there was growing evidence that the insured model also carries a higher fraud risk, with incidents of exploiting insured registration being reported. “When agents fail to maintain insurance or Client Money Protection cover, reimbursement for losses can also be delayed, leaving tenants exposed.”

Pennycook said that based on recent Key Performance Indicator (KPI) figures for the custodial schemes, more than 95% of disputed or undisputed deposits are returned to tenants within two days of notification of the conclusion of a dispute or agreement of any deductions.

“However, a recent report from Citizens Advice states that 55% of tenants surveyed reported waiting longer than two weeks to have all or some of their deposit returned. Given the most recent KPI data shows custodial deposit returns are shorter than this, we have concluded that the insured scheme can create unnecessary delays to the detriment of tenants.”

Significance

While the minister’s comments provide an insight into the government’s apparent thinking, they stop short of announcing a formal policy change, according to Eddie Hooker, CEO of MyDeposits (pictured left). Hooker adds that no impact assessment, consultation paper or research has been published demonstrating that insured schemes present a materially greater fraud risk than custodial schemes.

Supporters of custodial protection argue that holding deposits independently throughout the tenancy offers greater security and confidence for tenants. Those who favour retaining the current system point out that insured schemes have successfully protected billions of pounds of tenant deposits over the last two decades while providing access to independent dispute resolution and statutory consumer safeguards.

Question

“The wider question is whether the government believes the benefits of a single custodial approach outweigh the loss of choice currently available to landlords and agents,” Hooker tells LandlordZONE. “For now, the minister’s answer should be seen as a signal rather than a decision.

“Nevertheless, for anyone involved in the private rented sector, it may represent the clearest indication yet of the direction of travel being considered within government as ministers examine the future of tenancy deposit protection.”

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