More than £3bn of tenant deposit money could be impacted by government plans to abolish insured tenancy deposit protection schemes, latest analysis from The Letting Partnership reveals.
The research highlights the scale of the operational challenge facing letting agents, deposit providers and landlords if ministers proceed with proposals requiring all tenancy deposits to be held within custodial schemes.
The Letting Partnership estimates that there are currently around 4.7 million tenancy deposits protected across England and Wales. Of these, more than 2.1 million are protected through insured schemes, accounting for 45.6% of all deposits, while just over 2.5 million are held via custodial arrangements.
However, insured schemes account for the larger share of deposit value. The analysis estimates that more than £3bn of tenant funds are currently protected through insured schemes, representing almost 55% of the total value of deposits held across the market.
CUSTODIAL ARRANGEMENTS
If the government’s proposals proceed, those liabilities would ultimately need to transition away from insured protection and into custodial arrangements.
The issue has become a growing topic of debate across the lettings sector, with supporters of reform arguing that custodial schemes provide greater transparency because deposits are held by an independent third party rather than remaining under the control of landlords or letting agents.
The Letting Partnership argues that the discussion should focus on transparency and oversight rather than simply whether landlords and agents can be trusted to hold tenant money.
According to the firm, while tenancy deposit schemes know which deposits have been registered and insurers understand the liabilities they have underwritten, there is currently no single independent view of the total cash held within insured arrangements across the market.
STABLE BALANCE
The company also noted that the tenancy deposit market had reached a relatively stable balance between insured and custodial protection before the government’s intervention.
Chris Mason (main picture, inset), Chief Operating Officer at The Letting Partnership, says: “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.
“If the objective is greater transparency over tenant money, then the government is targeting the right problem.”
TRANSITION PERIOD
Mason reckons any reforms would likely require a lengthy transition period, with existing deposits potentially remaining within insured schemes until tenancies naturally come to an end.
He adds: “This isn’t simply a question of moving deposits from one protection model to another.
“The industry is potentially looking at a significant operational transition that could take years to fully work through, particularly if existing insured deposits are allowed to run off naturally.
“The focus now should be on ensuring that any change is implemented in a way that minimises disruption for agents, landlords and tenants alike.”
Should the proposals become law, many agents may find themselves operating both insured and custodial systems simultaneously during the transition period as the sector adapts to the new framework.
