Government hints insured deposit schemes may be axed over fraud concerns

The government has announced potential changes to the tenancy deposit protection system, including plans to remove insured deposit schemes.

Under the Renters’ Rights Act, landlords must place a tenant’s deposit in a government-approved tenancy deposit scheme such as the Deposit Protection Service (DPS), MyDeposits or the Tenancy Deposit Scheme (TDS).

Housing minister Matthew Pennycook said the proposed removal of insured schemes was aimed at making “tenant deposits as safe as possible”.

Low awareness

Custodial schemes hold the tenant’s deposit with an independent protection provider for the duration of the tenancy. Insured schemes allow landlords or letting agents to keep the deposit themselves, backed by insurance through an approved protection provider.

In a written Parliamentary question, Liberal Democrat MP Lee Dillon asked the government about differences in the speed of deposit returns and alternative dispute resolution (ADR) outcomes between insured and custodial tenancy deposit schemes.

Mr Pennycook said tenant representative groups “consistently report low awareness” of the difference between the two types of scheme.

He added: “Under the insured model, tenants who dispute a landlord’s deduction can feel pressured to accept a deduction, rather than pursue Alternative Dispute Resolution (ADR).

“Where ADR is used, feedback from tenant representative groups report that it operates effectively and the impartial service provided by TDP providers is valued.”

Tenant deposits as safe as possible

Mr Dillon also asked what evidence underpins the government’s proposal to remove insured tenancy deposit schemes from the reformed tenancy deposit protection system.

Mr Pennycook said the move was aimed at making “tenant deposits as safe as possible”.

He said: “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.

“The custodial scheme provides tenants with more confidence to challenge deposit deductions and use the Alternative Dispute Resolution service provided.

“There is growing evidence that the insured model also carries a higher fraud risk, with incidents of exploiting insured registration being reported. When agents fail to maintain insurance or Client Money Protection cover, reimbursement for losses can also be delayed, leaving tenants exposed.”

Tenant’s deposit must be protected

As previously reported by Property118, the government says that to use most possession grounds landlords must show that the tenant’s deposit was protected in a government-approved scheme and that they complied with the scheme’s requirements when the deposit was received.

A Ministry of Housing, Communities and Local Government spokesperson told Property118: “The Renters’ Rights Act will allow a court to award possession if the landlord has stored a tenancy deposit in a government-approved scheme (and complied with related legal requirements), or returned the deposit to the tenant, either in full or with deductions as agreed between the tenant and landlord.

“The court can also award possession if a separate, specific court process has been undertaken to determine whether the deposit was stored appropriately.

“The Renters’ Rights Act does not change what will count as a valid deduction from a deposit, which includes unpaid rent and bills.”