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Are your deposits safe?

The collapse of client account service provider ARPM has thrown a spotlight on the complex area of client money protection. Are changes needed? Richard Reed investigates.

Richard Reed

Link to Client Money feature

If you outsource your rent collection and landlord payments you would be understandably nervous following the collapse of ARPM. If an outsourcing provider goes to the wall, you are left holding the baby – with landlords banging on your door, demanding their rent. Regardless of Client Money Protection (CMP) insurance, you may feel you have no alternative but to reimburse them immediately – rather than wait weeks for a policy to pay out.

The collapse of ARPM is believed to have affected at least 70 agencies and 8,000 properties, and some agents have done just that to salvage their reputation. There is, of course, no suggestion that other providers are in any way at risk. However, while the industry waits for the dust to settle, agents who have outsourced rent collection to other providers will inevitably be wondering whether they should review that decision.

The law states that if you handle client money such as rent, you must have a CMP policy in place, and if you hold deposits, it must be via an approved deposit scheme.

Don’t abdicate responsibility

Link to Training featureIsobel Thomson, CEO of Safeagent, warns that agents must never just “abdicate responsibility” for their clients’ money. “If they are asking the back-office service provider to collect rent or protect deposits they still have to monitor that is still actually taking place,” she says. “It’s not a case of just saying, ‘I’m ticking that box, someone else is doing the accounting, I don’t need to worry about it’.

“I’m sure they don’t need to worry if they are using a reputable provider but they must monitor the situation so if they get any calls from landlords saying the rent is late, they should be looking into it and getting onto the back-office service provider immediately and seeing what’s happening. It’s that vigilance that needs to be in place.”

If they are asking the back-office service provider to collect rent or protect deposits they still have to monitor that is still actually taking place. Isobel Thomso,n CEO SafeAgent.

She advises any agents using a back-office provider to ensure there is an individual client account in the name of the agent, not just one big client account for all the clients. “Be vigilant, don’t suspend your common sense, always check are you getting monthly reconciliations – and are you checking them, because that is really important,” she adds.

Thomson says Safeagent may send out advice to members once it knows more about the situation. “We would just be saying how important client accounting is, and that it’s the agent’s reputation that is on the line.”

Legal loophole

Link to Client Money featureJenny Markham, Managing Director of The Letting Partnership, says a loophole in the CMP legislation has played its part in the situation that some agents using ARPM now find themselves in. She says it states that “a property agent who holds client money must be a member of a Client Money Protection scheme”. However, the wording suggests that the policy only applies to agents, and additionally, only to those agents who actually handle client money.

“This wording has completely undermined the objective of protecting the funds of landlords and tenants, and the reputation of agents, for two reasons: firstly, it means many companies who handle client money appear not to require CMP. Secondly, it means letting agents who employ the services of these companies do not require CMP either,” she says. “The result is a substantial and completely unregulated grey area.”

This wording has completely undermined the objective of protecting the funds of landlords and tenants, and the reputation of agents. The result is a grey area. Jenny Markham MD, The Letting Partnership.

She believes that to avoid any repeat of the ARPM “disaster”, CMP legislation must either be clarified or amended to apply to all businesses with direct access to and/or control over client money, whether they are classed as property agents, client accounting service providers, accountants, software companies offering rent collection facilities, bookkeepers, or anyone else.

“Unless the businesses operating within this grey area have relevant and adequate insurance cover and operate transparently, giving agent clients open access to accounting records and client accounts held by them on behalf of agents using their services, they will continue to be a risk factor to letting agents until this loophole is closed,” adds Markham.

Due diligence essential

Link to Mentoring featureNathan Emerson, CEO of Propertymark, shares her concerns and says the industry will need to reflect on the situation and see if any changes are needed. “There is nothing wrong with [outsourcing rent collection] providing agents looking to work with a CASP have the correct levels of due diligence in place, and they ensure there are the correct protocols and safeguards in place,” he says. “Very often in a lot of areas of our industry a lot of things are sub-contracted out.

Because of how we monitor and manage our own scheme, the exposure to members has been minimal and I think that’s because we have those safeguards in place. Nathan Emerson CEO, Propertymark.

“But when you sign up with a landlord or a tenant they have the responsibility for their funding. If you want to bring in another party to do that you have to make sure the correct mechanisms and checks and balances are in place, and I think sometimes people don’t always appreciate that.

“Most people assume these companies have the right structures in place – if you are using a third-party provider you need to make sure they have the correct structure and provisions there.” He adds that some agents think that if they have a CMP policy they don’t need to worry if they instruct someone else who is also part of the scheme, but says that just causes confusion. “If I sign up a consumer and I see they’ve got a CMP badge on their brand I would probably reasonably expect that money is in their scheme. I wouldn’t expect that it’s been diverted out to a third party.”

Agents ‘ultimately liable’

The Propertymark scheme does not allow agents to use a CASP without permission, and ARPM was not on the list of approved providers. However a handful of members had not realised this and were using ARPM. “We have got a few agents who have come to us and said, ‘We have signed up with these guys and we didn’t realise we had to let you know’. We are trying to help them,” he states.

It is not yet clear whether the collapse of ARPM had put client money at risk – but Emerson points out agents are ultimately liable for their clients’ cash. “If I am [a landlord] and I sign an agent up to do my work, I would envisage they are doing the whole task, and if they are not they need to let me know, or ensure that the provision sits with them, because I am contracting with the agent to do that job for me and handle my money. So, who am I going to come back to if there is an issue? I am going to come back to the agent.”

Propertymark has a “very proactive compliance department”, according to Emerson, that monitors agents and other providers to make sure they have the right certification in place. “The checks and balances and the safeguards that we offer in this case have proven to be absolutely valid,” he adds.

“Because of how we monitor and manage our own scheme, the exposure to Propertymark members has been minimal and I think that’s because we have those safeguards in place.

“We work very, very hard to ensure that we engage and facilitate members to stay as close to the right path a we can do, and on the back of this there will be further communications going out to members, with an oversight of what they do, reinforcing their responsibilities, and providing more clarity there.”

So is it safe to use other rent collection providers? Emerson feels there is minimal risk using approved providers “so long as agents have those checks and balances and administer their duties properly”.

Is technology the answer?

Link to Covid-19 software featureSoftware provider VTUK, which offers Openview CRM software to agents, had an integration with ARPM at one stage, but removed it some years ago, together with links to two other CASPs, because no-one was using them. However, CEO Peter Grant advises agents not to outsource client money collection to a third party as if there are any issues it can do huge reputational damage.

You only need to go one day not paying that rent to your landlord and your business has gone, because his mortgage is probably coming out the next day. Peter Grant CEO, VTUK-Openview.

“If ARPM were using CMP then you would hope those moneys are protected,” he says.

“Landlords and tenants might be OK – but it hasn’t protected the agents from being suddenly thrown into disarray.

“You only need to go one day not paying that rent to your landlord and your business has gone, because his mortgage is probably coming out the next day, so we would strongly suggest that you don’t let anybody handle your client moneys.

“There is so much technology available to do this for you and automate it as well, so that you still control it.”

Automated rent payments

Openview will be offering a new rent collection system early next year using Open Banking that will make the CRM’s existing payment process almost instantaneous.

“Every single property will have its own client account,” he explains. “The money comes in, it polls the CRM to see what money needs paying out, the automation says, ‘send that to the contractor, send that to the landlord, send that to the agent’ and it’s all done within half a second of the money arriving.

“We’ve got a couple of big clients who are investing in this. All the staff who were dealing with it are being reassigned so they are actually making money for the business.”

He believes agents should see property management as an opportunity to boost revenue rather than a burden, and says there is a huge opportunity to offer maintenance and utility management to sales clients, too. “When they come to sell their house, which agent are they going to go to? Forget about ever outsourcing anything, it’s a massive opportunity.”

Financial compensation

A spokesman for the UK Association of Letting Agents (UKALA) said ARPM was not a member of the UK Association of Letting Agents (UKALA) and was therefore not covered by the UKALA Client Money Protection Scheme. “We would always advise any agent or landlord to do robust due diligence on any organisation handling client money on their behalf,” he said. “All UKALA members have undergone a rigorous audit process.”

ARPM is believed to have had a CMP policy with Client Money Protect and a DPS policy with mydeposits, both part of Hamilton Fraser.

Eddie Hooker - Hamilton Fraser - imageEddie Hooker, CEO of both businesses, said in a statement, “We are working hard with all interested parties to ensure that as many landlords, tenants and other third parties are financially compensated by this awful situation.

“However, there are many legal complexities to this case which will need detailed investigation by various authorities and we are working these through with the government, insurers and other regulatory bodies. We will be contacting the affected parties over the coming days and weeks.”

We are working hard with all interested parties to ensure that as many landlords, tenants and other third parties are financially compensated. Eddie Hooker CEO, Client Money Protect.

January 21, 2022

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