Deposit protection schemes have been a legal requirement for guaranteed shorthold tenancies since April 2007, protecting landlords against property damage and repairs and tenants against unfair claims. Although once considered a significant financial barrier to renting, deposits have also been capped at five week’s rent in most cases with zero fees to pay since the Tenant Fee Ban was enacted in 2019.
Yet, confusion remains around landlord and agent obligations when it comes to protecting deposits, which has only been compounded by the emergence of new suppliers and deposit alternative products. According to the UK Landlord Survey, 60 per cent of landlords said they find deposit disputes difficult, so here we provide a short guide on tenancy deposit schemes and what the future could hold.
The two main schemes
The two main types of deposit protection schemes are Custodial and Insured.
As Matt Trevett, Managing Director at The Deposit Protection Service (DPS), and one of the government-approved schemes, explains. “Under our free Custodial service, the landlord or letting agent provides us with a tenant’s deposit, which we hold for duration of the tenancy.
We’re interested in the idea of a deposit transferring from one property to the next under the same tenants’ name and are supporting conversations with government and industry. Matt Trevett Managing Director, DPS.
“When the tenant moves out of the property, the landlord lets us know whether they’re happy for the deposit to go back to the tenant in full, or whether they would instead like to make a deduction to cover costs such as cleaning or damage.
“If the tenant agrees to the deduction, we pay each party accordingly. If they don’t, both tenant and landlord can make use of our independent, free-to-use dispute resolution service.
“Landlords or letting agents who want to hold the deposit themselves can take part in our Insured Scheme. Here, the landlord or letting agent holds the deposit and pays a small fee for us to protect it. To use the Insured option, letting agents must be a member of an approved Client Money Protection (CMP) scheme.
“As with custodial schemes, if the tenant and landlord using an Insured scheme cannot agree on the basis for the return of the deposit at the end of the tenancy, our independent, free-touse dispute resolution service is available.”
Eddie Hooker, Managing Director of insurance specialists HFIS Group, which owns Mydeposits, says, “In terms of tenant/ tenure and landlords, both Insured backed and Custodial offer the same dispute resolution process generally, however, there is more risk with the Insured-backed scheme as the onus is on the landlord to lodge the money at the time of dispute. However, the tenant is fully guaranteed by a default insurance process and will never lose out on a return of an award if one is made by an adjudicator.
A Custodial scheme is free, the deposit money is held by the scheme during the tenancy and 100% secure and the tenant may prefer to know money being held independently. Eddie Hooker Managing Director, Mydeposits.
“The advantage of using a Custodial scheme is that it’s free, the deposit money is held by the scheme during the tenancy and 100% secure and the tenant may prefer to know money being held independently. Generally, the Custodial scheme is a quicker process overall with less administration for the landlord, as the scheme holds the deposit money and doesn’t need to request this to be lodged by the landlord at the time of dispute.”
A clear choice?
The decision on which scheme to use often comes down to the confidence and experience of the landlord or how long the agent has been established, says Steve Harriott, Group CEO of Tenancy Deposit Scheme (TDS).
“New agents may struggle to meet these tests [for CMP] so we would encourage them to use the Custodial scheme,” he comments. “Larger agents tend to prefer the Insured scheme as it gives them greater flexibility in managing the end of tenancy process.”
Steve adds, “Similarly, with a landlord we would always encourage them to use the Custodial scheme as the repayment process is managed by the scheme and does not require the landlord to be responsible for this. However, more experienced landlords may well be comfortable with the Insured schemes.
“Tenants would probably say that they preferred the certainty of knowing that their cash deposit was helped by a scheme and not a landlord or tenant. But the choice is down to their agent or landlord.
“We are definitely seeing a switch towards Custodial schemes and away from Insurance-backed schemes; driven by the fact that custodial is free and the fact it is zero cost is a key driver in times of high costs and inflation in the economy.”
DEPOSIT DISPUTES – HOW BIG IS THE ISSUE?
Regardless of which tenancy deposit protection scheme or provider you get statistics from, the fact remains that the number of disputes remains fairly low.
In addition to Reposit’s report of less than 5%, government data from the Department for Levelling Up, Communities and Housing (DLUCH) shows that disputes have been below 1% of all tenancy deposits protected since 2011, with the last two years being at the lowest since 2009.
The majority of dispute applications were initiated by tenants across all TDS schemes (74%) in the last year.
TDS’s Steve Harriott comments, “This is a continuation of a trend seen over the last five years with tenants raising more disputes than agents/landlords. This is likely to reflect an increased awareness of our free resolution service among tenants who have been renting in the private rented sector for a number of years over several tenancies and now fully understand that they are always able to commence the dispute process.”
In terms of outcomes, there appears to usually be some kind of compromise between landlords and tenants, as Matt Trevett from DPS explains.
“Since April 2018 between 55 and 59% of disputes at the end of a tenancy each quarter have resulted in the disputed amount being split between landlord and tenant,” says Matt. “Between 14 and 20% of disputes each quarter have resulted in the landlord receiving the full amount that they have claimed by producing evidence of sufficient quality to support their position.
“Between 25 and 29% of disputes each quarter have resulted in the rejection of the landlords’ claims and the tenant being awarded the full amount that was disputed.
“The value of deposits amounts disputed has fluctuated between £363.78 and £667.48 during 2018 and 2023.
“Every dispute is different, and, as a result, averages are difficult to interpret.”
Eddie Hooker, on behalf of Mydeposits, comments, “In 2022, Mydeposits dealt with some 13,000 disputes valued at £11M with the tenant receiving some or all of their deposits in around 80% of cases. Disputes are up by around 15% against 2021.
“Generally the dispute ratio is 3% of end of tenancies that come through ADR to get a formal resolution. A lot of negotiation takes place between the tenant and landlord/agent at the end of the tenancy and before coming to a TDP scheme. It is only where an agreement can’t be reached or there is a stalemate that the case will come to a TDP scheme to resolve. This could be for the whole of the deposit or for some of the deposit.”
Across all data sources, cleaning, repairs and redecoration have been the most common dispute reasons and the average adjudication time is around 21 days.
In May, it was announced that Skipton Building Society will be offering 100 per cent mortgages to renters who can demonstrate at least a year of paying rent and have a good credit score. It’s the first time such a product has been available for any borrower since 2008 and it brings rental deposit alternatives back into the spotlight.
As the market heads towards getting more people on the property ladder, new deposit products have sprung up which aim to make renting a property more affordable too – at least from a new tenancy perspective.
30 per cent of tenants can’t raise the average of £1,378 needed for five weeks’ rent…
One such supplier is Reposit. Research by the firm found that 30 per cent of tenants can’t raise the average of £1,378 needed for five week’s rent, based on recent Goodlord monthly rental values. Instead, these tenants borrow money from friends and family or use credit cards, overdrafts and personal loans.
Reposit’s solution is to charge tenants one week’s rent as a non-refundable fee and gives landlords eight weeks’ protection.
CEO, Ben Grech, comments, “We believe Reposit is a more appropriate solution for the reality of tenancies in the UK, working more efficiently and fairly for each stakeholder in the rental process – landlords, agents and tenants alike.
Importantly, the tenant remains liable for any damage at the end of the tenancy, with any disputes resolved through an independent resolution service within 14 days. Ben Grech CEO, Reposit.
“Importantly, the tenant remains liable for any damage at the end of the tenancy, with any disputes resolved through an independent resolution service within 14 days. Reposit’s insurance-backed product structure means that landlords are guaranteed payment in the event of a tenant defaulting on any charges normally covered by a cash deposit. It is currently one of only two deposit alternatives in the UK that have achieved FCA (Financial Conduct Authority) regulated status.
“Deposit alternative products present an effective and entirely new solution to the problem cash deposits aim to solve, that creates a win-win for landlords, agents and tenants, without any of the affordability issues. We therefore see adoption of deposit alternatives continuing to increase.”
An investigative piece in The Observer at the end of last year reported examples of renters being forced or coerced into signing up to a zero or alternative deposit scheme, with agents apparently earning commission of up to 30% for each person they refer.
At the end of the term, some were left with adjudication fees and costs to repay for repairs. Although Reposit says that less than 5% of all their tenancies end in a formal dispute.
Sam Reynolds, CEO of deposit alternative Zero Deposit, says, “There should be genuine concern amongst letting agents who are directly selling deposit alternative products, and not offering tenants a choice of deposit options, that they are in breach of the Tenant Fees Ban – above all in cases where the tenant is pressured to buy a deposit alternative product. I’m amazed if this isn’t on their radar. The size of fines and reputational damage are significant.
Letting agents who are directly selling deposit alternative products and not offering tenants a choice of deposit options, are in breach of the Tenant Fees Ban. Sam Reynolds CEO, Zero Deposit.
“The value of our fully regulated alternative is that the sales process is managed by Zero Deposit. The product can only be introduced to tenants by letting agents, it cannot be sold. This guarantees that it is compliant, fair and offers a genuine choice.
“With our new product, Deposit+, landlords benefit from enhanced six- week cover whether the tenant chooses Zero Deposit or a cash alternative.”
“We continue to innovate and improve standards in our category. We’ve helped close to 120,000 tenants move deposit-free, provided landlords with over £90m in deposit protection, with money hitting their bank account far faster than with a cash deposit. Rental arrears claims are paid within one working day.”
On deposit alternatives, Steve Harriott of TDS says, “We think that these schemes do have a role to play in the deposit protection market, but make no mistake they remain a niche player, in spite of the hype, with the cash deposit still being the overwhelming preferred choice of landlords and agents.”
A trend, seen over the last five years of tenants raising more disputes than agents/landlords, is likely to reflect an increased awareness of our free resolution service among tenants. Steve Harriott Managing Director, TDS.
He warns, “There is an emerging issue that we and Zero Deposit are concerned about, and that is about the lack of regulation of most of these new providers. Just spend a few minutes on the Trust Pilot website of some of the non-deposit providers and read some of the negative reviews from tenants, who claim they have been mis-sold their policies.
“It is an area that concerns us and we have raised this issue with the Government. For some tenants, a no deposit solution will make sense, but they all need to understand that the policy does not operate like a normal insurance policy; they remain liable for any losses that they incur for their landlords.
“We are also concerned about those policies that provide the landlord with sometimes up to 10 weeks cover; twice what tenants would need to pay in a cash deposit scheme. Do tenants really understand the liabilities they are taking on when they buy such a policy? Probably not always, which is why regulation is important.”
These products were also included in the recent update to the Government’s ‘How to Rent’ guide in March.
It stated: “You may be offered a deposit replacement product as an alternative to a cash deposit. A landlord or agent cannot require you to use a deposit replacement product but may allow it as an option without breaking the Tenant Fees Act. There are several different deposit replacement products available. Depending on the product, you may need to pay a non-refundable fee upfront (often equivalent to one week’s rent) and/or a monthly payment for the duration of your tenancy. With most products, you will still be responsible for the costs of any damages incurred, at the end of the tenancy or required to pay an excess on any claim for damages or unpaid rent. It is strongly advised to always check the terms and conditions and to see if it is regulated by the Financial Conduct Authority.”
Reposit’s Ben welcomes the news: “We’re pleased to see the Government’s acknowledgement that deposit alternatives are an increasingly relevant part of the UK’s private rented sector. Equally we support the message that tenants should check if the product they’re offered is FCA regulated.”
Matt Trevett of DPS is also open to the prospect of other solutions. “We’re interested in the idea of a deposit transferring from one property to the next under the same tenants’ name and are supporting conversations with both government and the broader industry about how a ‘lifetime’ proposal might work in practice. With over 17 years’ experience providing deposit protection services across millions of tenancies, we believe we can add significant value to this conversation and help the lettings industry remove friction and reduce void periods.”
Eddie Hooker concludes, “It is estimated that less than one per cent of all deposits are foregone in favour of no deposit alternatives. In this time of property scarcity and high tenant demand, landlords have a greater choice to choose tenants who can afford a traditional deposit.
“Some of the high ‘fees’ charged by no deposit schemes also put off tenants from purchasing these products as they are still responsible for any issues at the end of the tenancy.
“Whether they will continue to be attractive over the next few years is debatable, but they are available and choice for all parties is important and financial circumstances dictate.”
Balancing risk vs reward
A perhaps commonly unknown fact is that deposits themselves are not actually legally required. Landlords can take the risk if they wish to rent a property without asking for one, but if they do – in the traditional sense – it must be registered with a scheme within 30 days of the tenancy start date. Not doing so can result in fines for failure to protect the deposit.
In reality, not taking a deposit at all does not make business sense. There is a lot of protection out there for tenants, but property is an expensive asset and with the Renters Reform Bill proposing the abolishment of Section 21 evictions, landlords need some form of security that they can claim some funds back in the event of rent arrears and damage or disrepair.
However, deposit replacement products are not required to be registered currently and this lack of solid regulation is what’s holding the growth of this area of the market back and potentially putting landlords off using the services.
Stories of cavalier behaviour by tenants, agents and landlords were rife at one point and insisting on a deposit alternative rather than offering it as an option is illegal – plain and simple.
The noises being made do provide some hope, of increased regulation, transparency and security for all customer groups, but all should be prepared to do their research and carry out necessary due diligence.