Deposit alternatives – too good to be true?

Anyone who has rented a property – and that is most of us, at some stage in our lives – will be all too familiar with the issue of ‘double jeopardy’.

You’re moving flat, and you need to stump up a big deposit – but you won’t get your existing one back for some weeks to come. In desperation you may need to borrow from friends or family; in a worst-case scenario, from a short-term-loan provider.

It’s perhaps this issue, more than any other, that has seen the arrival of ‘zero deposit’ schemes in recent years. They have been touted as not just good for tenants, but good for agents, too, increasing the liquidity of the housing market by making it easier for people to move.

And of course, with rents in London now starting at around £1,500 a month for a studio flat, deposit-free schemes also help first-time renters get onto the housing ladder.

Underhand or underrated?

But accusations of sharp practice prompted the announcement of a review by the Competition and Markets Authority, so The Negotiator sought the views of two well-established players in the market, together with a traditional deposit scheme provider.

Sam Reynolds is CEO of Zero Deposit, an insurance-based product that is regulated by the Financial Conduct Authority (FCA).

Zero Deposit offers a monthly pricing option where the premium is split evenly across 12 months, significantly reducing the upfront cost for tenants.

“Given the option, 79% of tenants are choosing zero deposit versus the cash deposit,” says Reynolds. “There is a significant reduction in the amount they have to pay for a guarantee than they would have to pay for a cash deposit.”

Premiums can start from as low as one week’s rent plus £60 set-up fee, with a further payment of £17.50 for each year of the tenancy.

“That’s why we are seeing such a bias towards our product,” emphasises Reynolds. “That’s particularly attractive to our partners because it increases demand per property, so they expect to see a greater volume of tenants and a larger tenant pool to choose from when they are letting a property.

85% of tenants worry about finding a deposit and 74% of tenants have to borrow in some form to fund a cash deposit.”

“When you look at the research, 85% of tenants worry about finding a deposit and 74% of tenants have to borrow in some form to fund a cash deposit.”

Tenants still have to pass referencing in the same way as with cash deposits, and Reynolds says there is no difference in terms of risk for agents and landlords. Landlords receive protection equivalent to a six-week deposit.

As well as being FCA-regulated, the scheme is insured by Munich Re, the second largest provider in the industry.

“It’s a basic principle that for every sale we make, we reserve an amount of money to pay for the cost of a future claim, and we have an additional pot of solvency capital that covers the cost if the claims rate increases beyond a level we have seen in the past,” he adds.

“We have a duty of care to vulnerable tenants and landlords. We invest £100,000 a year in our compliance teams who ensure that we and our partners uphold the standards of regulation that we have all signed up to.

“It’s unsurprising that the CMA are interested in the category because they see from above that instances of vulnerable customers are increasing. I would imagine a regulated approach gives them the assurance that they are treated fairly.”

An acceptable alternative

Flatfair is another well-established provider in the field, though it doesn’t use an insurance-based model. Instead it is effectively self-insured, charging an up-front fee of one week’s rent and, should there be an unsettled claim, buying the debt and pursuing it themselves.

The scheme offers landlords up to 10 weeks’ protection, and there are no recurring annual charges for tenants. Where a dispute occurs that can’t be resolved, independent adjudicators are used to arbitrate.

Although Flatfair is not FCA-regulated, sales and partnership director Emma Parsons says the firm has had positive conversations with the CMA and fully supports its investigation into the sector.

“We are actively encouraging the CMA to publish their initial investigations – we encourage anything that is going to potentially legislate or regulate deposit alternatives,” she says.

“It’s about choice for us. We are not looking for every tenant to take a deposit alternative, we are looking to present it as a choice. At the moment it is not a requirement for a landlord to offer a deposit alternative. That is where we are actively working with the CMA to say look, we want this to be an industry standard; we want tenants to have this choice.”

The firm’s latest product, Flatfair Deposits, gives each tenant using the platform an equal choice between using a traditional deposit and Flatfair, side by side. If the tenant chooses a traditional deposit, Flatfair will transact that for them.

We are not looking for 100% of tenants to choose a deposit alternative but we do want to be able to offer it to 100% of tenants.”

“They are given all the information and they choose; they are not strong-armed into taking either one,” stresses Parsons. “We are not looking for 100% of tenants to choose a deposit alternative but we do want to be able to offer it to 100% of tenants, and that is what we are really focusing on with the CMA.

“This is not a dark industry, this is a really good product for tenants to keep the property market moving. We have so many tenants in the double-deposit conundrum who want to move property – your deposit is tied up, and you’re not going to get it back until you have moved into your next property.

“Not many people have £3,000-£4,000 knocking around – they are starting tenancies in a really bad way, perhaps using short-term borrowing or from friends and family. It’s giving people choice, and that’s all that we’re interested in.”

Cash deposits equal commitment

The Dispute Service (TDS) is one of the three traditional government-authorised deposit schemes. As of 31 March 2024, the schemes were protecting more than 4.6 million deposits in England and Wales, up 2% on the previous year, and 14% over the last four years.

Chief executive Steve Harriott claims that despite the “hype” from alternative deposit schemes, the figures clearly show that the vast majority of landlords continue to prefer the traditional cash deposit scheme.

“We have found that taking a cash deposit mean tenants have more of a stake in ensuring a property is well looked after to ensure they get their deposit back,” he says. “In addition, it demonstrates a tenant’s financial stability and commitment to the rental agreement.

“It is of course in the interests of the deposit replacement insurance schemes to talk up their policy numbers and I would lay down a challenge to the main players in the market to publish the number of deposit policies they hold, and details of claims made. My best guess is that this will be a fraction of what the three traditional deposit schemes have provided.”

Harriott says deposit replacement schemes do have a role to play – and TDS has a stake in Zero Deposit – but believes they should all be FCA-regulated.

Other measures TDS would like to see include:

– That tenants have the information needed to fully understand how schemes operate, and how they compare to traditional cash deposits;

– Where letting agents operate their own alternative deposit schemes there should be full transparency as to how they operate the schemes and what liabilities tenants may have at the end of the tenancy;

– That the schemes should operate according to a Code of Practice such as that proposed by Zero Deposit.

The jury is still out, and no date has been given for the CMA report, but in an ever-expanding market, some form of regulation would seem to be in order to protect not just tenants, but agents and landlords, too.