Here is a talking point on which it would be interesting to get your feedback.
As we all know, the cost of Client Money Protection has gone up. But is there a simple solution staring us in the face?
The cost of CMP especially affects the smaller firms. For example, a one-office business in ARLA or NAEA membership pays the same premium as businesses with many offices.
There is also a lot of confusion about CMP. For example, some agents who display the ARLA logo on their business cards have CMP and others don’t.
Then there are the unregulated agents who give the impression that they offer protection by being members of the Property Ombudsman scheme, often showing the OFT badge on their headed paper, or such bodies as the Guild of Professional Agents, Guild of Lettings Agents or UKALA.
For example, agents can make much of belonging to the Ombudsman scheme, even though it offers no redress. We’re told of one agent that flags up Ombudsman membership on its website and how it is bound by its strict code of conduct.
The reality, according to a competitor, is that this particular agent has made heavy losses and currently has a black hole in its client account running into hundreds of thousands of pounds.
Of course, all insurances have increased. For example, car insurance has gone up because of accidents caused by insured drivers. In exactly the same way, agents’ CMP has gone up because of the actions of regulated agents – not the so-called rogue ones.
So, isn’t there, as we have hinted, a simple solution?
The risks associated with client money could surely be heavily reduced for agents who place all tenants’ deposits in a custodial scheme, rather than hang on to the money themselves but pay an insurance premium.
If all an agent’s deposit money were to be held in a custodial scheme (at the moment, just the Deposit Protection Service), then it would remove much of the risk. CMP would of course still be required to cover rent monies held by the agent.
But surely such an arrangement would reduce an agent’s costs in terms of premiums, spiralling TDS fees and the cost and extent of audits. Landlords would be spared the risks associated with agents who, unknown to them, leave a scheme and the deposit becomes unprotected, with the onus for repayment plus any possible sanctions passing to them.
If all deposits were kept in custodial schemes, would agents really lose out? With interest rates so low, agents who keep client money in a ring-fenced account would barely notice the difference.
In Scotland, ONLY the custodial scheme will be allowed for tenancy deposit protection – a decision made in the interests of the consumer. Arguably, the decision in England and Wales to allow insurance-backed schemes was not in the consumer’s interest so much as the agent’s. Was this right?
The bodies which offer CMP might not want to make all their members use the custodial scheme. But surely they, via their provider, could offer a two-tier insurance by which agents using the custodial schemes paid much lower premiums than those in the insurance schemes?
Your feedback would be welcome.
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Comments
As a private landlord the reason I left the custodial scheme is that it offers vurtually no protection for the Landlord (and you all seem to forget that is half the point of the scheme & deposits). I still have a deposit tied up with DPS from 4 years ago because the Tenant (who left early because she got a better offer) walked away not paying their last months rent and out of spite disputed the retention of the deposit by simply lieing through her teeth. DPS adjudication is so behind and so incredibly baised towards Tenants I would be better off going to the Small Claims Court.... and that's saying something!! They are far from level on the scales of justice when it comes to Tenants.
Blimey David, write a tenant a cheque from your own funds and rely on them to fill out the DPS form to get your money back if you wish, but I certainly wouldn't do that.
Even if you're prepared to do this its still more hassle than simply writing a cheque from your client account as you would with TDS.
As I've said earlier though, I think relatively minor downsides like that are far outweighed by the opportunity to flush out those with black holes in their client accounts.
The Martin & Co franchisee David mentioned was flushed out because a franchisee gets audited by their Head Office. Independents have no such body looking over their shoulder and anecdotal evidence suggests that there's more than a few out there who have things to hide.
Interesting to see so much support for this.
Firstly, regarding those who say "you can write a cheque out here and now" you can do exactly the same with the custodial scheme. Simply go to the move out with a deposit release form you have obtained from The DPS (they are unique for each tenancy). If you can reach agreement on the deductions, simply agree that with the tenant and write a cheque for that amount to the tenant. The tenant then completes The DPS form agreeing the agent can have all the deposit from the scheme. And for those of you after the interest, if there was any interest, it goes with the refund so the agent can have that as well.
Secondly regarding "regulated agents", agents can fail to renew their membership to any of these bodies and fail to renew their CMP insurance (see Martin and Co in Chester case). Unless the landlord is on the ball and insists that they see every renewal, you can get caught out (with hassle even if not a monetary loss.) If the money is lodge securely, one less risk of losing the money.
Bob you are quite right. All three schemes have some daft ideas and requirements entirely of their own creation and not required or imposed by the actual Statute. This is where the 14 days fiasco came from with TDS for certain and possibly Mydeposits.
Another one to watch out for is the agent registering the deposit and then relying on the Landlord having or opening a DPS account so the deposit can be transferred into their account before the end of the tenancy.
Or even agreeing to hold the deposit in the agent's DPS account on a tenant find. And there are other dangerous practices..
Why dangerous?
Because if the deposit is still in the agent's DPS account at the point a dispute is raised by the tenant (or Landlord) then DPS will only deal with whoever's account the money is held in. So an agent can get dragged into a dispute months, even years after the initial letting when theu have no knowledge of the tenat and Landlord relationship, the property or the disputed issues.
Having said that I firmly believe and always have done that only DPS is needed. The UK scheme was modelled on the Oz one pity they didn't stick closer to the original model (only one scheme in Oz)
Slightly Off Topic, but after reading DPS process documentation for deposit repayments, their flow chart recommends the Landlord and Tenant meet a month before the end of a tenancy to agree who gets what from teh deposit.
That's terrible advice. How on earth can you make such an agreement at that stage if a) you haven't had a check-out yet, and b) the tenant still has a month to potentially cause damage?
The reason I am baffled and bemused is we have all been there before and a few times. Initially when the proposals for how TDP was to be run were announced (3 schemes), then not that long after it started and then especially when TDS started their £500 a go on your fee for a dispute - even if it was raised by the tenant and a vexacious one.
There has never, ever been any doubt that only one scheme was needed as in Oz and soon as in Scotland which will for the poster who queried it, be run also by DPS.
There is actually no need for a deposit at all, or if there is and you can do it then do an AT not an AST. They are different debates.
But the big and blindingly obvious position is there is no need for any scheme other than DPS. The other two only serve to satisfy vested interests - TDS for agents and amazingly Mydeposits for private Landlords!!! How CLG allowed that for the poachers to attempt to turn gamekeepers I will never know.
The interest earned on client account as pointed out by someone in the myriad of posts below is peanuts and even at attractive interest rates on a net after tax basis current account basis always has been unless you were holding a very large client account indeed.
The point about current accounts and immediate availability is a very good one too - just ask any agent daft enough to have put theirs into Iceland a couple of years ago!!!
I am just amazed how many posters below all of a sudden seem to have had a light switched on and realise that client account earnings are actually probably small even when BoE rate is 5% - and now are non existent.
There was never and there is still not now any need for any other scheme.
I am willing to role play with anyone who wants to act as the agent and you try and convince me as Landlord why you want to put the deposit into an insured scheme, other than to your own benefit. And in DPS in higher interest rate times I might even earn money on it!!!
All the points on Duty of Care and what is best for the Landlord (and tenant) below are very well made.
As are the comments about no brainers - this is and always has been. So too the point about transferring schemes. It matters not whether you hold 10 or 1000 deposits what matters is whether you do actually hoold the money!!! The mechanics of transferring to DPS are very simple and, given the previous TDS fiasco, well practised.
Bob
Going forward - how is it any harder to transfer deposits to a scheme - its just a few account numbers.
I disagree with IO - this seems a good thread as most agree. But hey - reserving judgment until I read your next submission.
Bob
"One of our landlords has 2000+ properties. All deposits are transferred to the landlord and properly insured. This is all enshrined in a long term agreement"
Can you explain how if the deposits are transferred to the landlord and "properly insured" you are able to pay money immediately when you don't control it?
I am totally and utterly bemused and baffled by this article and this entire thread as I will explain shortly
For the reasons I have already stated, it would be a nightmare for us to switch to a Custodial Scheme. There is no reason why it should be compulsory. If an agent wants to promote the fact they use a Custodial Scheme that's all well and good, but it doen't mean I should be forced into joining one when all our deposits are properly insured and protected.
We also like being able to pay the money immediately without having to apply to the scheme for it to be realeased.
Morality and money do not make good bedfellows.
All I can say is that all those in ARLA moaning about lack of regulation should seriously consider this as it removes a whole layer of red tape and regulation and would be a huge step in protecting the public.
Well said EAT
The simple answer is YES.
But the powers that be are all influenced by those who make money from interest - the bigger they are, the more influence they have and the more money they make.
Otherwise, its a no brainer
Its an unarguable idea only suppressed by the establishment in favour stacking their larger members coffers.
Agreed - with interest rates so low, there has never been a better time to make this transition.
The hassle of changing over is a fair point - we had to shift about 700 live deposits when we moved from TDS to DPS and it was a major exercise.
I still like the idea of making everyone do it though for the reasons I articulated earlier.
An incredibly interesting debate and one that has raised a discussion point within HQ. Boss has asked for a costing and approx income to assess whether we should revisit our having a clients account at all.
We always felt having a large sum on deposit would give banks reassurance - but as they don't lend anyway and the money is ring-fenced - is there a point?
I wonder what the time savings and bank charges would be in addition to the other associated costs.
This has been a pretty obvious move for many Agents ever since the TDS hiked their prices.
However, for larger companies with possibly more complex arrangements with their landlords, it's too much hassle to switch.
One of our landlords has 2000+ properties. All deposits are transferred to the landlord and properly insured. This is all enshrined in a long term agreement.
It would be a nightmare for us to change and is one reason why we would never want it to become compulsory to use a Custodial Scheme. One size doesn't allways fit all.
"In Scotland, ONLY the custodial scheme will be allowed for tenancy deposit protection – a decision made in the interests of the consumer." Yes, but only when they actually find someone willing to operate the scheme!
JamieK - agree fully with what you say, but its even more straightforward than that.
Bearing in mind that if the rules are followed to the letter any tenants' deposits should be held in an instant access account I find it very hard to believe that anyone is making enough money from the interest to cover their TDS subscription costs, so money really shouldn't be an issue.
I do know there are some practical benefits from TDS - the ability to say to a warring landlord and tenant "If you reach an agreement I can write you a cheque NOW" can often focus people's minds - but I still think the greater benefit for all reputable agents would be the opportunity to flush out those with black holes in their client accounts.
A good article spoilt by the line about one competitor laying the boot into another.
Hearsay should not feature in a sensible discussion.
Me thinks Ros has been reading the ARLA forum page on Linked In !!
Not that its a bad idea - far from it - just some bits look oddly familiar!
When the TDS changed their rules, we were forced to switch to a custodial scheme as we couldnt justify the costs of ARLA as we are a small business.
Every penny has always been accounted for and at the time I resented the position in which we found ourselves.
That said - now we use the fact we don't hold deposits to our advantage and landlords find this more reassuring than membership of any so called professional body boasting insurance. Just a thought.
I have to admit, I sometimes get fed up with the recycled articles on here - but this one is very good and really thought inducing. Credit to LAT for this.
It does indeed seem a good idea. The only argument one could see from opponents would be loss of interest on someone elses money.
Not much of a defence really. Perhaps LAT should launch a campaign - I cant think of ONE person outside industry who would fail to support it.
@ SteveFromLeicester - Excellent comment - in a nutshell mate. Frankly, think of the % reduction in risk by adopting something so very simple and which costs nothing.
Good thread LAT - a really good idea!
We made nothing in interest when we accounted for all the costs enabling us to hold clients money.
As such we switched to a custodial scheme. It wasn't so much a moral consumer issue, rather a commercial one and has saved a bunch of admin grief in the process.
Legal liability for protection of deposits falls to the landlord - so let them register their own deposits,
Simples
Its a simple solution to safeguared the biggest risk to clients money - but ARLA will fight it tooth and nail. Sad, but true. Not a negative comment, but they are there to represent members interests and as such their biggest members are those who will earn the most interest and pay the lowest CMP premium per branch.
The real winners would be the single office agent who often, are those with the smallest voice.
What is galling is that NAEA members pay the same for CMP yet ARLA licensing leaflets appear to try an dissuade the public from using them!
@Xpressman - TPOS doesnt offer protection and any clients money requires insurance. NALS offers a cheaper alternative so I suggest you look into that.
I agree - custodial schemes are the way forward. The only resistance would be from large firms who rake in lots of free money in interest.
Our Company is having to pay CMP Insurance, and we do not hold any deposits.
Simply because we have a Clients Account, we were told we have to pay.
We are only one office, and do not have a big turnover, yet we are paying the same insurance as a large organisation.
The only money in our Clients Account is the months rent in advance, and six weeks deposit when someone rents a property, and then is immediately given to the Landlord when the tenants move in.
It is the Landlords obligation to get the deposit protected, as we do not do management, and purely just introduce the tenants.
Whty do we need CMP IUnsurance in the first place.
Ther NAEA told us that they were not able to negotiate a better deal for smaller offices at the time, but they would try to the next time round. What a load of ruibbish. They never made any effort, and did not care what we pay.
It seems I have insurance that we do not need, and we should only be paying a nominal fee if anything.
When the renewal comes, unless it is more realistic, we will leave the organisatiuoin altogether, and become one of the Ombudsman bunch.
As an agent but also as someone who lost out when an agent went bust - I think it a great idea.
My agent was in the TDS, but wasn't a member of a regulatory body when the TDS changed its membership criteria. As such, the deposit ceased to be protected and despite assurances to contrary - I did NOT recieve a letter advising me. The tenants did - but they assumed it would be re-registered elsewhere. It was not.
That cost me £2000 and had the tenants been nasty, could have cost a whole lot more.
As such, I wish such a rule had been in place 2 years ago.
I just cant believe no-one else suggested it
A simple amendment to the 2004 Housing Act would save many the losses currently reported and even where CMP is in place it would reduce the effect of short term financial suffering and the stress and delays associate with making a claim.
Bloody obvious when you think about it. Nice one Ros.
Great debate Ros. Really thought provoking and so obvious.
Ok, we still make about £9k on interest, but factor in the TDS fee's, spiralling CMP, audit fees etc and I doubt we break even plus have a lot of unnecessary admin.
It is something we will certainly investigate.
For us it was a simple business decision - a couple of years ago TDS membership cost about £2000 and we received about £12,000 interest on the tenants' deposits, so we used TDS.
Today TDS membership is about £12,000 for a business of our size, and we'd get about £2.50 interest on the client money so we use DPS.
I'd like to see everyone forced to use a custodial scheme for a while simply because it would be an opportunity to flush out those agents who have black holes in their client accounts.
Now would be a good time to do it - few agents could claim that it would cause them economic hardship with interest rates as they are (unless they'd nicked the client money and had to put it back of course . . )
Sledgehammer cracking a nut? Surely ARLA, RICs etc is sufficient if the consumer message could be properly conveyed? As it is, non regulated agents already have to submit to a custodial scheme and regulated agents have CMP.
It would certain create a shift in consumer confidence - but still doesn't protect against those agents who simply dont register - as such there would need to be a huge PR campaign to ensure tenants and landlords know to expect confirmation of registration in the appropriate time-scale.
Likewise, rents being misappropriated are still and issue.
There is an agent over in my area whose property manager we recently employed who told us that her old company has half a million not where it should be!
Other than that.... seems logical. But what would this mean for the regulators and safe agent?
A couple of points; when we left my deposits in favour of the Deposit Protection Service, they wrote to all of our Landlords and Tenants to say that we were not renewing. Why can't Tenants pay their deposit directly into The Deposit Protection Service? The agent would then simply log in to establish that the deposit had been paid. This would save us a whole load of time and effort.
I have to agree, we should never have had the Insured schemes. After all the complexity of prescribed information, telling tenants which scheme has the deposit and the scheme rules, would not be needed if there was one scheme.
I wrote to the Scotland consultation and recommended one custodial scheme, delighted they have gone that way.
Look at MyDeposits, if the agent does run off with the Deposit, the poor landlord is left liable. Other than taking the view of "it serves the landlord right", how can that ever be right? I always recommend landlords to never allow agents to use MyDeposits and hold the deposit. Agent holds the money, landlord holds the risk, is this good agency? And do not believe the hype that "you have control over the deposit". IF you have to get the tenant's agreement to deduction, the tenant controls and you do not.
If agents are doing this just so that they can earn interest, are they really acting in their clients interests or in their own? Arguably the bodies claiming to police their members should be addressing this as a breach of the agent's responsibilities.
If agents charge landlords for deposit protection, because they use a paid for scheme, is this a breach of the agent's duty to do the best for the client? There is a very good scheme that is free (no to say any agent cannot charge for the work involved in using any scheme, registering deposits and giving prescribed information) though perhaps even this should be discussed so landlords have the choice explained and can consider if they would rather look at options other than taking a deposit at all.
Having taken over properties where the letting agent left one of the insurance schemes, did a runner with the rent and left the landlord not only with losses on his rent, but also having to make up the deposits. AS THE INSURANCE SCHEMES CAN JUST WALK AWAY LEAVING THE LANDLORD RESPONSIBLE! If people want letting agents to be trusted more, it is the custodial scheme that offers transparency and protection for all parties.
Actually, its a good plan.
@DocklandsDude - perhaps it could be phased in where just new deposits have to be held in a custodial scheme. Problem solved?
It would be a positive pre-cursor to regulation
It wont happen as too many agents have holes in clients accounts and if they suddenly had to pay monies over, they would be very exposed. Rumours abound locally over a couple of such agents who are always slow in paying back tenants.
Please could you enlighten us who has written the article or is asking the question.
I have an opinion on this but would like to know who I am conversing with.
An extremely interesting and thought provoking debate.
It seems an obvious solution, however perhaps some will argue that interest rates will one day rise and adopting such a plan will reduce potential future 'money for nothing'.
If the agent is a member of NALS they are offered a reduced CMP insurance if they use a custodial scheme. It's far more transparent for an agent to use one too and of course the recently launched SafeAgent kitemark is raising consumer awareness of CMP.
All positive steps, next one hopefully will be full mandatory regulation of Letting & Property Management companies.