We’re all on board (now) with the idea that tenancy deposits can’t be stuffed under a mattress or for safekeeping or, indeed, in a rather nice little yacht. That’s why the TDS (Tenancy Deposit Scheme), DPS (Deposit Protection Service) and MyDeposits provide an invaluable service to letting agents.
Probably every letting agent has used one of the Government-endorsed tenancy deposit schemes with success but their strong position hasn’t put off disruptors, who are determined to transform the deposits sector. With agents faced with unprecedented choice, it’s a good time to revue the deposit options available.
Tried and tested
The main benefit of a Government-authorised product is the accountability to operate a moral and secure scheme. “The Government monitors all aspect of our deposit protection scheme and that of the two other official providers,” comments Eddie Hooker, Group CEO at Hamilton Fraser, which owns MyDeposits.
Disputes are dealt with at all levels and the service is free to the tenant and landlord. The ‘big three’ adjudicators are well trained and are experts in dealing with deductions and disputes. Eddie Hooker, MyDeposits.
There are nine specific KPIs in place for the three schemes to operate to and these are reported on every single month. “Disputes are dealt with at all levels – whether £1 or £10,000 – and the dispute service is free to the tenant and landlord. The ‘big three’s’ adjudicators are well trained and are experts in dealing with conflicts and deductions,” adds Eddie.
Many of the deposit-free operators do not have the resources or expertise to provide an efficient and effective dispute service yet they recognise its importance. Steve Harriott, Tenancy Deposit Service.
The service levels of the established tenancy deposits schemes also stick out for TDS Chief Executive, Steve Harriott, “We are advocates of great service. We’re dealing with large sums of money and it’s therefore important that we’re easily accessible and here to guide parties through any difficulties they may have. We’re constantly trying to improve our service, and we see investment in IT and technology to be the key in evolving this market.”
New cap-shifting focus?
The Tenant Fees Act included a cap on deposit amounts and that has created grey areas, which Daren King, Head of Tenancy Deposit Protection at the DPS, clarifies, “As of 1st June, letting agents and landlords can ask for up to five weeks’ rental deposit for tenancies where the total annual rent is less than £50,000, or up to six weeks’ rent where the total annual rent is £50,000 or more.”
Daren adds that the cap refers to new assured shorthold tenancies entered into after 1st June 2019, tenancies of student accommodation and licences to occupy housing in the private rented sector in England.
New tenancies entered into before 1st June 2019 are not affected, irrespective of when the tenant moves in. However, the cap applies if the tenancies are renewed on a fixed-term basis. Daren King, DPS.
“New tenancies entered into before 1st June 2019 are not affected, irrespective of when the tenant moves into the property. The cap, however, will apply if these tenancies are renewed on a fixed-term basis.”
It’s this new cap that’s playing to the strengths of deposit-free operators, who are targeting landlords with the point that they offer more cover than the newly enforced five-week cash deposit. For instance, Zero Deposit gives a contractually-binding guarantee for up to six week’s rent, which is underwritten by a Munich Re insurance company – and some offer even more.
Deposit-free makes a dent
With an estimated £4 billion held in tenancy deposits, it was only a matter of time before the system received a shake up.
Jon Notley, the Co-founder and CEO at Zero Deposit, identified early on that many tenants found it difficult to source large amounts of cash – especially when a deposit may still be withheld on a previous let, “It’s crazy that over £4bn of tenants’ cash is tied up in the deposit system.” While Jon acknowledges the vital role deposit protection schemes play in terms of resolution services, he says it’s a real ‘scandal’ that so much cash is sitting idle.
Agents need to be very cautious about the product they are selecting – they need to dig deep in to the small print as the terms offered by providers can vary massively. Jon Notley, Zero Deposit.
Deposit-free renting is just that – rather than a tenant handing over five weeks of rent, they pay a one off, smaller sum to get their tenancy started. The majority of deposit-free schemes involve an insurance premium that is bought by the tenant at the start of the tenancy – roughly the cost of one week’s rent – but there are variations.
The perks of deposit-free renting are being sold to landlords and lettings agents as much as they are tenants – with the promise of more applicants, a streamlined approach to pre-tenancy administration, reduced void periods and the extra weeks deposit protection, as mentioned earlier.
Tenancy deposits transparency
The financial saving behind deposit-free renting is clear, but Eddie stresses how lettings agents have a pivotal role to play in educating tenants about the various schemes – offering complete transparency and honesty as to what the tenant is buying, whether or not it is an insurance policy and what the tenant may or may not be liable for at the end of the tenancy.
“This key question everyone needs to answer is whether deposit-free schemes lead tenants to falsely believe they won’t have to pay for repairs or replacements at the end of their tenancy,” says Eddie. “Firstly, the tenant needs to fully understand whether they are purchasing an insurance product or something else. If they think they are, or in fact are, buying an insurance policy, the fair conclusion to this is that they won’t have to pay for repairs or replacements at the end of the tenancy. They can choose to pay the ‘claim’ themselves or ‘claim’ off the scheme.”
Eddie stresses that the laws of insurance are very specific: “An insurance policy should provide a clear financial benefit to the policyholder (in this case the tenant) and in return for paying the ‘premium’, they are transferring their financial liability to the insurer.”
“Not every deposit-free tenancy deposits scheme will be selling a tenant a true insurance product and this is a misunderstood area Eddie feels strongly about, “Whilst it is clear to more savvy or insurance-educated individuals that some no-deposit alternatives are not offering insurance policies, they are sold to tenants using insurance terminology that the tenant or landlord can relate to – perhaps with the use of the word ‘claim’, ‘bond’ or ‘excess’. The tenant then thinks they have bought an insurance policy, whether he has or not.
“The surprise comes at the end when the scheme looks for reimbursement of their outlay to the landlord.”
A BRIEF HISTORY OF DEPOSITS
2004 The Housing Act 2004 legislation was introduced to achieve two objectives: firstly to ensure that tenancy deposits were safely protected in a Government-authorised scheme so that the tenant would receive the relevant proportion of the deposit back if they were entitled to it at the end of the tenancy; secondly, to give tenants access to a free dispute resolution service if they did not agree with any deductions made by their landlord or agent, without having to revert to a costly and lengthy court process.
2007 The Tenancy Deposit Protection Act took effect in April 2007 and applied only to deposits taken for new tenancies.
2015 The Deregulation Act was passed to clarify deposit protection rules following the Superstrike Ltd v Rodrigues and Charalambous v Maureen Rosairie Ng court rulings. The Act set out how agents and landlords should manage deposits attached to new and renewing tenancies after 1st October 2015.
2018 The Deregulation Act was revised to apply to all assured shorthold tenancies and those that had become periodic that started before 1st October 2015.
2019 Caps on how much a letting agent or landlord can take as a deposit introduced on 1st June.
Residential landlords cannot require the payment of a tenancy deposit in connection with an assured shorthold tenancy unless it is to be protected by a Government approved tenancy deposit scheme.
Caution is a theme that resonates with Jon as well, “Agents need to be very cautious about the product they are selecting – they need to dig deep in to the small print as the terms offered by providers can vary massively,” adds Jon.
He recommends checking who underwrites any insurance product, verifying whether both the landlord and the tenant is afforded any protection under the Financial Ombudsman Service and the Financial Services Compensation Scheme, as is the case at Zero Deposit. “If one of these schemes were to fail, and leave landlords with no protection, any agent who is seen to have recommended such schemes could find their reputation and relationships with their landlords in tatters,” concludes Jon.
A fourth alternative
Joining the custodial and insurance-based schemes run by ‘the big three’, as well as deposit-free initiatives, is a system run by Flatfair, which has echoes of checking in to a hotel. Franz Doeer, Flatfair’s founder and CEO, says his company’s mission to give tenants choice and a cheaper move led them straight to plastic. “Our deposit-free scheme does not run off an insurance product,’ says Franz. “Instead, a tenant pays a one off membership fee – equivalent to a week’s rent – then puts forward a credit or debit card as a security against the tenancy.”
SpicerHaart has been using Flatfair for 12 months, with our system available on 50 per cent of its lets. Those marketed with Flatfair let 30 per cent faster than cash deposit properties. Franz Dooer, Flatfair .
Some agents are already seeing the benefit of Flatfair’s system: “SpicerHaart has been using Flatfair for more than 12 months, with our system available on 50 per cent of its lets. Those marketed with Flatfair let 30 per cent faster than cash deposit properties,” adds Franz. “It’s a great advantage for agents who have competition and all agents find that Flatfair streamlines their check in process.”
For those wondering what happens when charges are due, the tenants can stipulate how they pay – cash, card or bank transfer – but if there is no payment after 10 days, Flatfair will charge the card that was registered at the start of the tenancy. If that card is declined, Flatfair uses its own insurance to cover the cost. And disputes? They are referred to MyDeposits for resolution.
And now for the overlap
Although deposit-free schemes are headline-grabbing, tenant-pleasing initiatives, it has become evident that new start ups can lack the expertise of the ‘big three’ when it comes to deposit resolution. To that effect, several peace-of-mind partnerships have evolved.
“Many of the deposit-free operators do not have the resources or expertise to provide an efficient and effective dispute service yet they recognise the importance of being able to offer this to the parties,” comments Steve. “We are partnered with Zero Deposit and any dispute that arises at the end of a guaranteed tenancy is passed to the TDS’s expert adjudication service.”
In a reverse direction, Hamilton Fraser is moving into the depositfree sector in a bid to offer tenants as many options as possible. “We have always recognised that choice is crucial in creating a fully functional private rented sector and that’s why we are launching our own deposit alternative product later in 2019,” reveals Eddie.
“As a fully regulated FCA entity with 12 years of tenancy deposit protection experience, I consider Hamilton Fraser best placed to offer a truly transparent choice for tenants. Our aim is not to disrupt and retract the good work that the tenancy deposit protection services have done for the sector over the years but to add more choice.” Eddie also talks of pushing for TDP schemes to accept deposits paid in instalments and furthering discussions with the Government to simplify the prescribed information requirements for landlords and agents.
There are also two very new relationships forged by Flatfair. Its partnership with MyDeposits means letting agents will be able to register traditional cash deposits on Flatfair’s platform via an integrated API, in addition to having the option of offering a deposit-free alternative. Flatfair’s second collaboration is with CBRE’s UK residential lettings business, which has selected the company to provide its first ever foray in to deposit-free renting.