Lettings in the spotlight as current and future regulations hit the headlines

We’re only in February and it’s already clear that this year will set the future direction of the private rented sector (PRS) in England. With the Renters Reform Bill expected this parliament, and MPs already debating its potential impact on the industry, letting agents will have to keep one eye on the future while ensuring they continue to dot the i’s and cross the t’s when it comes to current rules and regulations.

Reform coming in 2023

This month saw the publication of the long-awaited report by the Levelling Up, Housing and Communities Committee, Reforming the Private Rented Sector, to which industry experts including the NRLA, Propertymark and PayProp all contributed.

The job of the committee is to scrutinise government proposals and examine the impact they could have on the industry, so it will come as no surprise to readers that this report spent a great deal of time gathering evidence on the proposed removal of Section 21. It’s clear this move has cross-party support and is welcomed by tenant bodies, but it is a relief to see the committee propose that the removal of Section 21 should only go ahead once certain other things are in place. First, some mandatory grounds for eviction should be expanded, and secondly, courts must be able to process Section 8 claims for rent arrears and antisocial behaviour at a speed that makes the PRS viable for landlords.

It’s also great to see the committee recognise the impact of withdrawing tax relief on mortgage interest under section 24 of the Finance Act 2015 – citing that Act and increased regulation around, for example, HMO licensing, as contributing to the reduction of the number of properties in the PRS.

While we are yet to see the government's Renters Reform Bill, agents need to keep calm and carry on complying with current regulations. One area that caught out some agents in 2022 was client money protection (CMP). While CMP is widely supported throughout the lettings industry and has done much to raise standards and professionalism by ensuring client money is safe, some agencies are still falling foul of the law – and it’s costing them.

What’s the law for CMP?

As of 1 April 2019, letting agencies in England have been required to sign up to a government-approved CMP scheme if they handle any client funds (Housing and Planning Act, 2016). Failure to comply may result in a penalty of up to £30,000.

Initially, enforcement was scant, but after a transition period and several extensions, the tide has now turned and the honeymoon for English agencies to escape CMP sanction is well and truly over. In November 2022, a landmark tribunal hearing handed Carter & Reeves Ltd a hefty £24,000 fine for illegally relying on a former director’s CMP membership. 2022 also saw letting agencies across London face fines of over £3m for CMP offences.

And the consequences get even direr from there on out. In the increasingly strict enforcement climate, Trading Standards may issue repeated fines to repeat offenders, and even issue a ‘cease trading’ instruction.

Another risk is that non-compliance may become a self-fulfilling prophecy, as even contrite agencies will struggle to get insurance – and certainly find it more expensive to qualify if they were denied cover previously.

Staying compliant

In England, there are six CMP providers, and while the application process will be different for each policy, they will all want to see one thing – that your client account bank statement was provided by an FCA-regulated bank or building society.

To get CMP cover, agencies must also be able to show that they follow rigorous client money handling practices. Since many may not have the skills or knowledge within their agency, they tend to hand over their duties in that regard to a technology or service provider.

This may give them an edge of professionalism in the way they manage and report on their client money flows, but ultimately, liability for non-compliance will still rest with the agency owner.

So how can you be sure you don’t get caught out on a technicality, invalidating your CMP policy and potentially costing you thousands?

When your agency trusts a provider to handle its rent, deposit or maintenance fund handling, holding and distribution, it needs to be sure that the provider adheres to the same standards as you yourself will be held to.

Some providers indeed offer dedicated client bank accounts, whether by opening multiple accounts, or in the case of the more advanced PropTech solutions, through software-based client account separation. In either case, they must be backed up by an FCA-regulated bank or building society that can verify the transactions that take place in your client account.

The question you need to ask is whether your client account provider can provide you with a compliant client account bank statement. If not, you may want to speak to your CMP provider to see if your business is covered. Nobody wants to risk fines or reputational damage and potentially losing clients in an ever-stricter compliance environment.

Changing with the times

Private rented sector regulation is not there to catch out agents, but with the workload most agents are under we all know that sometimes things slip through the cracks. In 2023, it’s important that you not only know the law, but also prepare yourself, your team, your landlords and tenants for what is coming. This will let you stay one step ahead of the competition while reassuring your clients that you are the right expert to guide them through this year of change.