The seven year hitch – why the deposit protection schemes don’t necessarily protect.

The seven year hitch – why the deposit protection schemes don’t necessarily protect.

After years of tenants feeling disadvantaged at the end of their tenancy by losing some or all of their security deposits without any means of redress, April 2007 saw a revolution when the deposit protection schemes were first introduced in England. Well seven years on and with over £3bn protected for over 9m tenants, it seems the schemes have been a huge success. And, mostly, this is true but there is one fatal loophole in the insurance based schemes that enables rogue agents (and for that matter rogue landlords) to abscond with their tenants’ money.

When the whole thing was trundling through the law making process, the then Government of the day allowed themselves to be lobbied into agreeing to two insurance based schemes to compete with the custodial scheme operated by the Deposit Protection Service (The “DPS”). This was against the backdrop of letting agents squealing about the potential loss of interest income on deposits they held on behalf of clients had the Government insisted on a custodial scheme only. This became somewhat moot a short while later when the world went bust and interest rates dropped to record lows. Notwithstanding that, the way the insurance based schemes work – Mydeposits and the Tenancy Deposit Scheme (“TDS”) – is that the agent/landlord is permitted to retain the deposit (and any interest earned) in their bank account but it is insured by the scheme operators. On the other hand, using the DPS scheme means the agent/landlord has to pay the money into the DPS’s bank account where it sits until the end of the tenancy. It cannot then be distributed to either the landlord or the tenant without both parties’ agreement (or a dispute being formally adjudicated by a DPS appointed adjudicator). Any interest earned is then paid to whomever the deposit money is finally distributed to.

So, what’s the loophole? Under the rules set down by the Government, these schemes must "expel" members who don't stick to the rules. Inevitably, it is bad or rogue agents/landlords who get expelled – the very people tenants need protection from. In practice, that means deposits, which had been protected at the beginning of a tenancy, can become unprotected later on. Without the power to turn away or expel members, insurance-backed deposit schemes wouldn't be able to buy the necessary insurance. For both tenants and landlords this should be a concern; both thinking the money is properly protected could easily find, in fact it isn’t, leaving them having to sort out the mess themselves with no recourse to the underlying scheme. The current Housing Minister, Kris Hopkins recently commented "where a deposit has not been properly protected, tenants are well within their rights to take court action where a judge could require the landlord to pay up to three times the deposit". This is absolutely true but if an agent has done a bunk with your money, that’s not much consolation when firstly, as a tenant, you’re probably not going to know about it until the end of the tenancy when you need the money for your next deposit, or, secondly, as a landlord you would be responsible for paying back the deposit plus the 3 times penalty, all because some scummy agent regarded both of you as an easy target.

Ahead of the next election next year, inevitably with nearly 20% of the adult population now living in rented accommodation the whole issue of the Private Rental Sector is rightly receiving political attention. Hence the various tenant’s rights groups such as Generation Rent and Shelter are now going into overdrive to highlight the manifold deficiencies in our current system. For example, Generation Rent recently proposed to the insurance based schemes that tenants’ money should be protected for the duration of the tenancy – not the duration of the agents/landlord’s membership of the scheme. This way, if the agent failed to comply with the scheme they would not put their tenant’s money at risk nor expose their landlord client to severe financial loss. A sensible solution, on the face of it? Yes it probably is but the current legislation doesn’t permit that. In our view, at Martin & Co, the real answer is to scrap the insurance based schemes and have only custodial ones – much safer and fairer to all parties.

In the meantime, what can you do to protect yourself from the rogues? Don’t be complacent, remember at least 4 rogue agents in Norwich have absconded in the last 5 years. Both landlords and tenants should actively prefer agents who only use the DPS custodial scheme. If you’re in one of the others, check, and crucially, keep checking that the deposit is protected. If you would like more information on how to go about doing this, give us a call at Martin & Co on 01603 766860.