Insured Tenancy Deposit Scheme – Insurance Against What Exactly?

Insured Tenancy Deposit Scheme – Insurance Against What Exactly?

10:45 AM, 24th June 2013, About 11 years ago 26

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With letting agents going under and causing untold financial mayhem in their wake and in light of the failed Market Deeping agent mentioned in another thread this type of case raises issues with what an “insured” deposit scheme is actually covering.

In the hard times that we live in there are likely to be many more agents that could go the same way so this may be a useful place to get clarity on the matter.

In respect of the aforementioned letting agent, it was said that deposits were dealt with via My Deposits, which I assume is the insurance based scheme so my question is what exactly does the scheme insure against?

I imagine after finding that the letting agent no longer exists the tenant would go to the scheme administrator, in this case My Deposits and request the return of deposit. The administrator would then direct the tenant to the landlord, which in certain circumstances may not be that simple for various reasons, so isn’t the insurance scheme meant to cover the non-payment of a deposit by a landlord in these circumstances by invoking the insurance scheme to reimburse the tenant? I have read Schedule 10 of Sec 212 to the Housing Act 2004 a number of times and sub-section (e) covers this procedure, doesn’t it?

If this is not the case then what is the insurance actually protecting?

I understand the likelihood of a civil claim by the scheme administrator against the landlord to recover any monies they pay out to a tenant, however, is a letting agent considered to be part of an authorised deposit taking institution under FSCS rules? After all tenant deposit procedure is covered by its own law and probably accounts for millions of pounds so it isn’t just a small group of people collecting holiday money for a one-off trip.

If so I assume that either the landlord or My Deposits would have some redress for compensation in the above circumstances?

On the other hand, if the letting agent has not complied with the scheme by failing to keep any deposit monies in a separate client account, or has used the client money for other purposes then wouldn’t that amount to a criminal offence by the agent for which the landlord cannot be held responsible unless proved to be complicit in the act as well?

If this is the case with Bonnie and Clyde of Market Deeping are we to assume that either the landlord(s) or My Deposits will be making the necessary complaints to Lincolnshire Police in order that they can pursue all individuals involved in respect of any criminal wrong-doings? And before anyone mentions Limited Company blah blah, whether they are/were a limited company or not that does not preclude individuals from embezzlement of client money for unconnected purposes!

Constructive views on this subject would be appreciated as it is certainly of relevance to me and no doubt to many others also.



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Mark Alexander - Founder of Property118

11:25 AM, 24th June 2013, About 11 years ago


I will attempt to answer your questions as fully as possible and I hope that others will too as we all have a different way of explaining things and this is both an important and a complex issue

There is a BIG difference between Deposit Protection Insurance and Client Money Protection but they often get mixed up so I will attempt to explain both.

As a landlord YOU are legally responsible for money paid as a deposit by a tenant. Legally, the money belongs to the tenant until you prove otherwise.

You have two choices. The first is to pay the money into the DPS custodial scheme. To release the money you and the tenant must both agree how much of the money is paid back to whom. If you disagree the case goes to arbitration. Theoretically, the money earned from interest on all those deposits pays for any required arbitration.

If you don't like that idea you can protect the deposit with an insured deposit protection provider. That does not mean that the provider will pay the money back if you don't. What it means is that you will be allowed to hold the money and the premium you pay will fund the cost of the arbitration required in any dispute. If a dispute occurs you are required to pay the money to your deposit protection provider.

Now here's the bit which too few landlords realise.

If you choose to appoint a letting agent, YOU remain responsible and accountable for the tenants deposit whether you actually received the money or not. The letting agent is acting for YOU.

I suggest you read the above sentence again before moving on.

What this means is that if your letting agents fails in any of his duties YOU remain accountable in law.

This accountability goes way beyond tenancy deposits. YOU still remain liable for making sure the property remains safe and compliant will the law including Gas Safety Certificates, EPC's, fire regulations and more. Similarly, any money which the agent takes on your behalf is at YOUR risk.

You can of course sue your letting agent for breach of contract or failing to provide you with a duty of care if they fail your requirements but the buck stops with you in the first instance. If your letting agent is made bankrupt the chances of being able to recover any money, whether you win any claims in court, are obviously minimal.

For this reason you need to ensure that any agent you appoint carries Client Money Protection and Professional Indemnity Insurance. These insurance policies pay out claims against the agent which are court ordered regardless of whether the agent still exists. It will still be up to you to take the case to Court before a claim can be paid out though and you may well want to instruct a solicitor as the Client Money Protection Insurers and Professional Indemnity Insurers often have get out clauses in the event they are not involved in the claim process from the outset.

There are no laws to state that letting agents must have Client Money Protection or Professional Indemnity insurance. Many in the industry, including myself and the professional bodies including ARLA, RICS, NALS, Law Society and the landlords associations, believe this should be law.

I don't know the details of the agent you are referring to in Market Deeping but the first thing you need to check is which professional bodies they belonged to and find out whether this company had Client Money Protection and Professional Indemnity Insurance. If they had a valid SAFEagent sticker in their window you are probably safe, same goes for if they were members of any of the professional bodies I've listed above. That said, even if your letting agent was insured you should still expect a battle in Court before you manage to recover any losses.

If you chose to use an agent which did not belong to one of those professional bodies then I afraid you stand to lose money.

When it comes to choosing the right agent it's a case of caveat emptor (buyer beware).

Chris Sheldon

11:30 AM, 24th June 2013, About 11 years ago

I have never understood the logic behind insured schemes, surely the introduction of tenancy deposit legislation was to protect a tenants deposit from rogue landlords and agents such as Market Deeping, it is of no benefit to an agent as interest on client accounts is nominal.

However, in answer to your question, the insurance covers the misappropriation of funds. The agents (in the above case) are considered to be a third party introduced by the landlord and therefore if an agent was to steal client funds then Mydeposits will seek redress through the courts from the landlord and the landlord would then have to sue the agents, which will be a very difficult task without an address for them.

We use the custodial scheme for the DPS which in my eyes is the best scheme for protection against rogue agents and landlords as they do not hold tenants deposits, which limits the amount they can acquire. If i was a tenant i would feel my deposit was much safer placed in the hands of the DPS rather than sitting in an agents or landlords bank account.

Which leads me back to my original point, what benefit is there to anyone involved in an insurance based scheme?

Mark Alexander - Founder of Property118

12:06 PM, 24th June 2013, About 11 years ago

Hi Chris

As a landlord who manages my own deposit protection I am a fan of the insured scheme because it gives me more control. For example, if the tenant does a runner I'm in control. If I can't trace a tenant and I am owed rent then I have a problem with the custodial scheme.

I do follow your logic for letting agents using the custodial scheme, however, part of my reasoning above is also relevant to using the insured option in that instance too.

I know your Firm Limited is an ARLA member and has PI insurance so either way the landlord is covered by your PI and CMP insurance. However, if you were not an ARLA member and were not covered by those insurance what's to stop you 'saying' the money was protected in the custodial scheme when in fact it isn't? There lies another problem in that; how many landlords ask their agents to provide evidence that their deposits have been protected?

In your case they don't need to ask but they should ask for a copy of your PI and CMP but how many do that?

Chris Sheldon

12:47 PM, 24th June 2013, About 11 years ago

@ Mark - I can see your point that it gives flexibility.

I know that for the TDS you have to (or certainly had to be) a member of a registered body with CMP & PI in place in order to hold a tenants deposit in your account and subsequently you were governed by the rules and regulations of that body which makes sense, im not sure of the process for mydeposits so i cant really comment, but i would of thought that if this is not the case it certainly should be, particularily in the light of the Market Deeping scenario.

If a landlord is registering the deposit themselves i can see the advantage as it is insured directly,and the only person who mydeposits can seek redress from is the landlord.

I am of the firm belief that a landlord should receive information regarding the deposit protection when protecting through an agent, however under the current circumstances i agree that there is nothing to stop a rogue agent from telling the landlord that a deposit has been protected.

Which seems to lead to the necessity for regulation of agents within the letting industry, something that i support strongly.

20:50 PM, 24th June 2013, About 11 years ago

Taking into account the obvious problems that have been highlighted here with these deposits etc; would it not be advisable for a LA to advise the LL that the LL should hold the deposit monies under mydeposits as it is the LL who is ultimately liable irrespective of what happens to the LL.
The LA would point out the problems of claiming against CMP and PL and that it is a lot better having the monies in the LL's bank account.
Indeed a good LA would suggest that rent is paid to the LL
Far better from the LL perspective that all monies should be paid to the LL and then the LA invoices the LL.
This solves the problems of LA getting their grubby mitts on funds belonging to the LL.
The claiming procedure against criminal LA may be so protracted that a LL is bankrupted long before any case against a LA was concluded in the LL favour.
One reason why I would NEVER allow ANY LA to receive rent or deposit monies.
It is perfectly possible for a LL to monitor his bank account for rent payments due.
He can easily pay a LA invoice.
I wasn't aware there may be get out clauses for CMP etc.
I doubt many LL query what the exact CMP claim process is.
Do they find out after the fact that they have missed certain deadlines etc.
The same problem occurs with RGI.
One needs to know what the exact claim process requirements are BEFORE one trusts that organisation.
Many LL have been caught out because they were not able to comply with a RGI claim process.
Being covered by any insurance does not solve the immediate cashflow crisis which can financially destroy a LL; especially a small LL.
Investing one's financial future in probity of a LA is extremely risky.
I wouldn't do it.
Until compulsory regulation of LA is introduced I would not allow any LA to receive the rent or the deposit monies.
This latest LA scandal should be a wake up call to other LL who could not suffer the losses if their LA did a runner with their rent and deposit monies.
As a LL YOU are responsible for everything; the fact that you appoint an agent to carry out your responsibilities is the LL choice.
ALL a LA is; is an extension of the LL.
Legal liability for everything is still with the LL.
Something it seems that very few LL seem to appreciate!
If the LA fails to behave as the LL should then the LL has only recourse to suing the LA for breach of contract in civil courts and possibly criminal prosecution; though this is highly unlikely; the police don't wish to be bothered.
LL if they wish to sleep easy need to ensure they receive the deposits and rent monies and just pay the LA on receipt of invoices.
Most good LA would be perfectly happy to do that; understanding a LL genuine concerns about LA doing runners!!

21:05 PM, 24th June 2013, About 11 years ago

Taking into account that a GOOD LA would have PL and CMP insurance; is any of them prepared to explain as a matter of course what the claim criteria is are these insurances BEFORE they take on business from a LL.
I know I would take a lot of convincing as cashflow is the immediate issue facing any small LL.
It is all very well legal cases being eventually being won; pretty pointless if in the meantime the LL has been bankrupted!!
Mortgage lenders aren't interested in a LL excuses; they want paying or they will repossess, usually within 6 months.
I very much doubt whether any PL or CMP case would be concluded within 6 months!?
Good LA would therefore recommend that the LL checks for rental receipts and retains deposit monies themselves.
LL don't have to but at least the LA would have advised that they should.
If it all goes wrong then the LL has only himself to blame.
With online banking it is not too hard to diarise when rents should be received for the various properties one has.
If it hasn't come in then contact the LA for them to commence recovery of such.
This Deeping case IS a massive reminder to LL as to how vulnerable their business model is is if they use LA of any sort.

Mark Alexander - Founder of Property118

23:31 PM, 24th June 2013, About 11 years ago

@paul - the benefit of dealing with an agent with PI (not PL as that's something completely different) and also client money protection is that losses are insured. Therefore, if a landlord did end up bankrupt due to delays the insurer would incur the costs of putting that right and that could cost millions. Therefore, the incentive to settle before matters get that out of hand is very strong.

0:02 AM, 25th June 2013, About 11 years ago

I admire your faith in insurers.
Based on my experiences over the years I have little faith that full recompense would ever occur.
There are so many intangible for consequential losses.
Sorry if I quote the wrong types of insurances.
I am not that up on them.
So for me I would insist on rent being paid directly to me aswell as the deposit monies.
You know what they say about possession being 9/10ths of the law!!!?
I prefer to possess the rent and deposits before anyone else gets a look in!!

Mark Alexander - Founder of Property118

10:54 AM, 25th June 2013, About 11 years ago

I don't follow you Paul. You are the biggest advocate I ever come across for RGO outside of people who actually sell this type of insurance and now you are saying you don't trust insurance. Makes no sense to me!

You only ever hear about landlords losing money when their letting agents don't have Client Money Protection and Professional Indemnity insurance. Can you give me an example of a landlord losing out where their letting agent did have these insurances in place? I suspect not but feel free to prove me wrong.

14:22 PM, 25th June 2013, About 11 years ago

As a landlord to whom S&J in Market Deeping were my letting agent, I appear to be well and truly shafted by this situation.

I have contacted directly for clarification. All they can tell me is that they have no deposit held for my tenant's address whatsoever, and that ultimately I am responsible for my tenant's deposit. They will not even confirm that S&J were their clients (Data Protection ! - :(( )

The implication is that no money was ever deposited by the agent (my property was let by them two months ago fortunately only for a finder's fee !) and therefore unlikely to ever be reclaimed.- even though it may be a criminal offence !

Even had it been deposited, according to the other thread here - admittedly by another agent whom I curiously had cause to dismiss for not being able to find a tenant in six months - bankruptcy of the agent just blows the whole scheme to pieces as far as the landlord is concerned.

The only person protected is the tenant. As usual, the landlord has to pick up the pieces.

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