It’s ten years since compulsory protection for tenants’ deposits was introduced in England and Wales and protection has also now become compulsory in Scotland and Northern Ireland. It’s a good time to consider how successful the scheme has become and what developments we might see over the next decade.
There are now three scheme providers, DPS, TDS, and Mydeposits. However, while originally each business provided only one type of deposit protection (DPS with a custodial scheme and the other two with insurance backed schemes) now all three providers offer their customers a choice of custodial or insurance, though DPS still claims it does 99 per cent of custodial business. As far as market share is concerned, the market is fairly evenly split. DPS claims two out of every five deposits, and MD Julian Foster says “that’s been roughly the same since our schemes were launched.”
Being part of Computershare, a global technology leader, makes a huge difference to the quality and security of our systems. Julian Foster, Managing Director, DPS.
The big change isn’t in market share nor in the growth of providers; only one new entrant, Capita, has tested the waters, and, says Steve Harriott of TDS, “They soon got out, because they couldn’t serve the market very well.”
Instead, the huge change has been the growth of deposits protected, from a third of landlords in 2008 to 71 per cent in 2011 and well over 85 per cent last year. That’s meant huge growth in business and in staffing for the schemes, which started with just a handful of staff but are now major employers.
CUSTODIAL OR INSURANCE SCHEMES?
There has also been a shift in emphasis from the insurance backed schemes to custodial protection. Steve Harriott explains; “Initially the insurance backed scheme was more popular, when interest rates were much higher and lettings agents were making money on their client accounts. Over the years the custodial scheme, which is free to use, has become the more popular, due to the collapse in interest rates.”
However, even after a decade of compulsory protection, there’s a significant minority of tenancy deposits that are not held in a scheme. A report from the Centre for Economics and Business Research in January 2016 estimated that 300,000 landlords and £514m deposits still weren’t covered.
Four or five years ago we were getting sackloads of post delivered to our office. Now most cases just need two or three clicks of a button online. Steve Harriott, Chief Executive, TDS.
Steve Harriott believes that may overstate the level of non-compliance, “The statistics on this are quite hard to unravel”, because compulsory deposit protection only applies to Assured Shorthold Tenancies, not agricultural or social tenancies, and some landlords don’t take deposits. “I’d be very surprised if there are any lettings agents left who don’t understand the law,” he says; probably the biggest problem is the accidental landlord who isn’t aware of the requirement to protect deposits.
But it is true that there’s no real enforcement of the legislation. Steve Harriott says, “It’s up to the tenant to take the landlord to court and very few tenants are prepared to do that.” (If they do, they may be awarded up to three times and at least once the cost of their deposit.)
That’s one reason why DPS engages with the market, Julian Foster says, “as an industry we need to do everything we can to make sure landlords and tenants understand their responsibilities and rights.”
Landlords shouldn’t be complacent, though. According to Tessa Shepperson of Landlord Law, failure to protect a deposit can present a major problem for landlords when they want to evict a tenant. Section 21 actions can’t be used if the deposit hasn’t been protected, and a counterclaim by the tenant makes it very difficult for a landlord to bring an action for arrears, “If the tenant gets the maximum award, you’ve lost your mandatory ground,” she says.
Landlords may not appreciate how an unprotected deposit can be a slow burning fuse. According to Shepperson, tenants can bring an action at any time from the 31st day of the tenancy to six years later, and can even apply after they have vacated the property; this is a liability that “can come out of the blue at any time, when the landlord’s forgotten all about it.” Tenants who make a successful claim may also apply for costs – which can put a landlord heavily out of pocket. Even when landlords or agents have protected the deposit, if they haven’t served the tenant with the right information, they may still have a problem. It’s such a common problem that she has created a ‘deposit error repair kit’ on legalkits.co.uk.
She also points out that the clock starts running quicker than many agents think – the deposit has to be protected within 31 days of getting the money, not 31 days from starting the tenancy. Those who take deposits several weeks in advance of the moving-in date might need to get their skates on.
Fortunately the deposit protection schemes are making life easier for landlords and agents. Since custodial schemes, by law, have to be free of charge, the only way the schemes can compete is by offering better service, and that has led to increased spending on technology. Steve Harriott says, “In terms of our part of the jigsaw, we have moved to make things significantly easier. Just four or five years ago we were getting sackloads of post delivered to our office in Hemel Hempstead. Now most cases just need two or three clicks of a button online.” Disputes have been almost completely automated; 98 per cent of cases come through TDS’s online evidence portal, which allows inventories and photos to be uploaded.
However, the law may need to be changed to make things easier at the start of a tenancy, he says. “The big sticking point is the fact that landlords still have to supply documentation physically signed by both landlord and tenant; the legislation was designed for the paper age.” But for that, TDS would be happy to take on board the task of serving the required information, too.
TDS also offers significant resources to landlords and agents; for instance it hosts regular training sessions, including an adjudication workshop which shows how disputes are handled, and offers a library of cases on its website. Mydeposits hosts dedicated workshops led by Head of Dispute Resolution Suzy Hershman, and is represented at National Landlords Association meetings throughout the UK (it’s an NLA partner), as well as providing a range of guidance including real life case studies and videos on topics such as wear and tear and negotiation techniques.
Such training goes much further than just talking about deposits – it would be great training for a first time buy-to-let landlord or agency apprentice. Agents can also benefit from a range of material intended for agents to pass on to their landlords and tenants.
DPS has made a huge investment in technology, Julian Foster says, which it’s able to do as part of a larger group; “The support that comes from being part of a global technology leader like Computershare makes a huge difference to both the quality and security of our systems,” he explains. DPS focused on creating partnerships with rental management programs Fixflo and Imfuna “that rely on very thorough technological integration.” He’s also proud that DPS’ contact centre gets consistent 9.5 out of 10 ratings for its helpfulness and ability to resolve issues and answer questions.
Multi branch agents in particular, need software that integrates with their property management systems to streamline the process. Eddie Hooker, CEO mydeposits.
Eddie Hooker, CEO of Hamilton Fraser, parent company to mydeposits, says multi-branch agents in particular need software that will integrate with their existing property management systems, to streamline the process. He stresses that his software team are happy to work on integration at no cost to the customer, as that brings benefits to mydeposits as well, for instance in establishing its niche in student accommodation (100,000 student beds already supported). David French of Tara & Co quotes the easier administration system as one of the major reasons for switching to mydeposits – it’s obviously a key differentiator.
ADJUDICATION VS THE COURTROOM
Although we tend to think landlords and tenants are always at each other’s throats, in fact only 2-3 per cent of tenancies end in dispute, and that’s being conservative – TDS reckons it’s only 1 per cent. All the deposit protection schemes are required by law to offer free alternative dispute resolution, and increased professionalism of the process may be one of the big success stories of the schemes’ histories; there has been a vast increase in the use of professional inventories, check-in and check-out procedures, and the schemes’ handling of disputes ensure that very few of them ever end up going to court.
Tessa Shepperton says the adjudication process has huge advantages over the courts. “It’s a quick and simple process,” she says; “you can usually get a decision within ten days or so.” But she notes that the schemes can only award the landlord the amount of the deposit, which may not cover serious damage – in those cases, and if the tenant has significant assets (for instance in the case of corporate lets), it may be worth going to court.
She also says agents and landlords often understimate the evidence that will be required. “It is a judicial process,” she says, “and the judge is not a mindreader; you need to have evidence for damage, showing that the tenant is responsible (for instance, check-in and check-out) and some evidence on the appropriate costs.”
Looking ahead, what do the next ten years have in store for the deposit protection schemes? One change that’s already on the cards is the introduction of client money protection (CMP) requirements for lettings agents. That may change their priorities; some clients currently using insurance backed schemes may want to minimise the impact of CMP by putting money into a custodial scheme. But Steve Harriott says some agents will struggle to obtain CMP insurance, he believes some will simply close down as a result.
Interest rates also appear likely to rise from their multi-year trough over the next few years. Currently, interest rates are so low that managers of custodial schemes can’t make money; charging for custodial schemes would require a change in the law. But a rise in interest rates, while it would help the scheme suppliers, might also see a swing back towards insurance-based schemes.
The most far-reaching change, though, may be the fading away of the deposit itself. Average deposits at over £1,000, and close to £1,800 in London, are now becoming a major barrier to tenants. Steve Harriott points out that some large landlords have already stopped taking deposits, in favour of alternatives such as deposit replacement insurance, where the tenant takes out a policy to cover any damage or arrears.
Another change is for the deposit protection scheme to become the administrator of the process, so that tenants could submit their own deposits, bypassing both the landlord and agent – that’s something Eddie Hooker thinks could happen, as well as all-electronic processes, as the market evolves.
But as long as there are deposits, there will be deposit protection schemes, and one thing is absolutely certain; from smartphone inventory-taking apps to integration with lettings management systems, there will be more technology changing the way we do things.