The government is stopping landlords holding tenants’ deposits in their own bank accounts.
Housing minister Matthew Pennycook has revealed proposals to abolish insured tenancy deposit schemes, which currently allow landlords and agents to retain deposits provided they pay a fee to protect the funds.
Instead, all deposits would have to be held in custodial schemes managed by approved deposit protection providers.
Pennycook says this offers greater protection for tenants and shifts more power to tenants.
He has told MPs: “The proposed removal of the insured schemes is based on the objective of ensuring that tenant deposits are as safe as possible.
“Under the custodial system, money is held by the Tenancy Deposit Protection provider as a neutral third party. Under the insured scheme, there is an inherent power imbalance against tenants given the landlords and letting agents hold the deposit.
“There is growing evidence that the insured model also carries a higher fraud risk, with incidents of exploiting insured registration being reported.”
No timetable has been set out for the change but Kristine Ng, partner at property litigation firm Morr & Co, says this move may have less than anticipated impact on landlords.
Ng comments: “While presented as a simplification, the reform primarily shifts when obligations arise rather than fundamentally altering what landlords must do. In practice, landlords are already subject to strict compliance requirements.
“The key distinction lies in choice: deposits can either be placed in a custodial scheme or retained under an insured model, which many landlords use to manage cash flow, particularly across multiple properties.
“However, even under the insured model, landlords must transfer the deposit to the scheme if a dispute arises.
“The reform therefore largely brings that position forward to the start of the tenancy. Compliance risk will remain focused on procedural failure.
“While the legal position will not materially change, the removal of flexibility may increase the risk of administrative error, particularly during transition.
“Landlords must still meet deposit transfer requirements and provide prescribed information, with breaches exposing them to penalties of up to three times the deposit and restrictions on recovering possession.
“The immediate priority will be transitioning existing insured deposits. Landlords and agents should identify affected tenancies, diarise deadlines and ensure systems are in place for prompt transfer.
“There is also potential for an increase in disputes in the short term. Tenants may be more willing to challenge deductions where funds are held independently, and landlords will no longer have control of the deposit at the outset.
“Over time, however, a single custodial model may deliver greater consistency in decision-making and clearer outcomes, which could help reduce disputes.
“Landlords should also ensure agent instructions and tenancy documentation are updated to reflect the new approach.”
This article is taken from Landlord Today