Insured Tenancy Deposit Scheme – Insurance Against What Exactly?

Insured Tenancy Deposit Scheme – Insurance Against What Exactly?

10:45 AM, 24th June 2013, About 9 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.




by Mark Alexander

15:00 PM, 25th June 2013, About 9 years ago

Hi Robert

Landlords need to be more diligent about who they entrust their businesses to. Getting caught like this is no different to a shopkeeper forgetting to switch his alarms on and lock his door as he leaves the shop at night. If he does that and comes in the next morning to find no stock in his shop who is to blame? Some will say the thieves of course, others will say the shopkeeper for being daft enought not to secure the premises. Bottom line is that it doesn't matter who's right, the shopkeeper still has to deal with the problem. It's a cruel world and we are all responsible for protecting ourselves. When it comes to appointing letting agents I'm sure you will not make the same mistakes again and that you now know what questions to ask. Sorry if that sounds harsh Robert but it's the truth and sharing best practice is the reason I founded this website. We all live and learn, me included.

by DC

16:31 PM, 25th June 2013, About 9 years ago

Mark – You may have missed my point. I was merely playing devil’s advocate here and thankfully I am not in any way connected with the failed agent from Market Deeping and I fully understand the differences between insured and custodial schemes etc. You make a valid point though regarding choosing an agent that has in place client money protection and professional indemnity insurance. I also agree that there should be Letting Agent regulation in place but to make CPI and PI insurance a lawful requirement isn’t really addressing the problem with the inadequate DPS legislation.

We all know that regulation is needed but I don’t see all the existing regulatory bodies doing much about ridding those unjustified fees some agents are still charging, but that’s a matter for another thread. And phew, your response to poor old Robert Wallace was a bit harsh and a kick in the teeth to all the other affected landlords too! If you could answer any of my questions it may actually help Robert and others to try to sort out the mess they have been left in.

Chris Sheldon – thanks for your response, which has gone some way to answering a few of my questions. You make a very relevant point, “What benefit is there to anyone involved in an insurance based scheme?”.

Of course the buck stops with the landlord and I don’t agree that many landlords are unaware of this. Surely anyone with an ounce of common sense that has done all the research into property investment will be very aware of exactly what he or she is responsible for? If not then we landlords definitely need regulating as well! But why has the government allowed such a scheme (insurance scheme) to exist where any old agent can take a tenants money on behalf of a landlord and then either through reckless management of a client account or by deliberately diverting the money elsewhere, he can just walk away and leave the unsuspecting landlord to face the music? That is a crime and the DPS legislation is leaving itself wide open to it and the law makers are not providing a care of duty to the landlord. Much as Mark’s analogy with the shop keeper leaving his shop unlocked scenario is wrong, if there is blatantly insufficient legislation that leaves itself open to criminal activity it should not be the innocent party that has to pay.

We are all aware that the deposit legislation has its obvious ambiguities but this particular oversight not only has a major impact on landlords and even mortgage lenders but affects the lives of the most important component in the chain, the tenant.

Take this very basic scenario - Imagine the damage caused by the failure of a small agency that services 20 landlords that each owns an average of 5 properties rented out for £600pm. The landlords could potentially be out of pocket to the tune of £60000 just for the first months unpaid rental income and they may also face a demand for a similar amount from the insurance scheme administrator to cover the costs of deposit monies paid out. A few months down the line the mortgage lender will start putting pressure on with the threat of repossession as well.

Also assuming the tenants have invoked the return of the “insured” and “protected” deposit money do the deposit administrators really think they will get their money back from the bankrupted landlords? I doubt it. Oh and what about the 100s of tenants and occupants that have had their money misappropriated and are faced with the threat of homelessness in to the bargain?

So what was the thinking behind this curios alternative within deposit protection legislation? After all, if we breach DPS law it could cost us our deposit and up to 3 times more in fines. But we have been given the choice to utilise one scheme that does not actually guarantee deposit protection and another that does guarantee protection! How did this omission get past those clever people that devised the law?

So as our non-regulated industry has the choice of the safe “custodial” deposit protection scheme I ask, why was the “insurance” scheme even given any thought, or are we still missing the point about what is insured and how deposit money is protected?

It’s no wonder there are some organisations associated with the housing/rental industry that see things from a different perspective and can you blame them?
With the exception of Chris’s response nobody has ventured to answer my other questions regarding whether a letting agent is considered to be part of an authorised deposit taking institution under FSCS rules and if so would either the landlord or the insurance based scheme administrator have any redress for compensation via the FSCS? Perhaps this may be a further course of investigation for those landlords left in the lurch over at Market Deeping?

Okay, I’ve got my flack hat on!

by Mark Alexander

17:18 PM, 25th June 2013, About 9 years ago

It certainly wasn't man intention to kick anybody in the teeth or to be harsh and I apologise if it came across that way. I just say it as I see it. Obviously I am very sympathetic but that's not much help really is it. My intention in my replies to this post have been to ensure that people don't continue to make the same mistakes. First time around it's OK to put it down to experience, making the same mistake more than once is the definition of daft.

I prefer the insured scheme but I've obviously not made a very good case for it despite my best efforts. Therefore, I have invited Mary Latham to comment on this thread as she was very influential in terms of the the regulations and making sure that England and Wales were not saddled with the same problems as landlords in Australia who only had a custodial scheme at the time.


20:30 PM, 25th June 2013, About 9 years ago

Sorry for the confusion.
I am distrustful of any insurance scheme; even RGI.
Until I know what the claim process requirements are I wouldn't take any notice of how good an insurance supposedly was.
I have no knowledge of a successful or unsuccessful CMP or PI claim.
Even if successful though the time it would take for the claim to process would be probably too late for the LL.
Properties will have been repossessed and LL bankrupted.
This is why I don't care what insurance is provided; I would always insist on my holding the deposit and rent monies and then be invoiced by my LA if I have one.
If the LA doesn't wish to do business that way; I wouldn't use them.
80 % of PRS LL are small LL and are more than capable of managing rent payments.
How hard can it be to check on the most fundamental part of your business; the rental payments.
Online banking is very easy now.
Obviously extensive portfolios like yours may necessitate more sophisticated rent management measures.
For most little LL they just have to check their bank accounts to ascertain whether the rent has been paid; probably 5 payments a month!
It is actually good practice to check one's bank account every is a valuable anti-fraud measure!
It does NOT need a LA to collect those rents and then pass them on to the LL minus deductions.
No; far better for the LL to receive rent and then pay a LA invoice; far less risky aswell, cos it doesn't matter where the LA goes!, the rent and deposit monies sit in my bank account!!!
I trust myself far more than any LA to hold those monies!!

by My Deposits

10:56 AM, 27th June 2013, About 9 years ago

There does seem to be some confusion here and we're often required to clarify what exactly the 'insured' aspect of TDP relates to.

TDP was introduced to protect the tenant's money - and it does just that whether you use the custodial or insured option.

Insured TDP schemes don't hold the deposit but if a landlord or letting agent member becomes bankrupt the TDP scheme protecting the deposit is still required to pay out to the tenant (in the same way the custodial scheme would do). In such instances the insured scheme will pay out to the tenant and will then need to claim on it's insurance to cover the loss.

I hope that makes sense. The insurance aspect relates to the scheme's liability for covering the cost of repaying a tenant's deposit they're not actually in receipt of.

The benefits for landlord and letting agents in using insured schemes is that it gives you the flexibility to keep hold of deposits and remain in control of your cash flow.

Mark you are partly right in that some of the protection fee does cover the cost of arbitration but the protection fee covers various business costs, the main being insuring against the ultimate liability of paying out to the tenant. .

Hope that helps.

by Mark Alexander

11:04 AM, 27th June 2013, About 9 years ago

Thanks for that clarification Sam, I've learned something new from that.

Another question if I may then please.

Assuming a letting agent acting for a landlord goes bust having used My Deposit, do you just pay out and claim on your insurance at that point or is my understanding correct in that both the landlord and the agent would need to be bankrupt before that happened? My understanding is that the landlord is always liable to refund first, whether or not they have actually received the money their agents collected on their behalf. Is that right?

by My Deposits

12:00 PM, 27th June 2013, About 9 years ago

Hi Mark,

No that's not the case, it's bankruptcy of the scheme member.

The landlord is ultimately responsible for TDP but in relation to penalties for non-compliance. In terms of the deposit, the scheme is required to pay out if the member - whether agent or landlord - becomes bankrupt.

by Mark Alexander

12:02 PM, 27th June 2013, About 9 years ago

That's very interesting and dispels yet another urban myth I have inadvertently been spreading then. Thanks again for the official confirmation 🙂

by DC

9:44 AM, 29th June 2013, About 9 years ago

Sam, thanks for confirming what we thought the insurance was there for and for My Deposits’ procedure in respect of the tenant but it may be helpful if you would further clarify the landlord’s position where he or she might have an interest in claiming on the deposit.

Can we assume that if we the landlords have a legitimate interest in the tenant and deposit, that we can contact My Deposits and sort out whatever is reasonably required? I’m referring to circumstances where the letting agent has protected the deposit but is no longer in a position to do so and the landlord needs to invoke an insurance claim or to commence a request for a proportion of the deposit money to cover costs in relevant circumstances.

You state that an insurance payment would,
“….pay out to the tenant (in the same way the custodial scheme would do).”

So as in the case with a custodial scheme, if there are issues where the landlord would seek to deduct from the deposit, is this taken into consideration, ensuring that both the Landlord and tenant receive what is due to each other from the insurance pay out?

To qualify this I have previously experienced a letting agent go out of business, however a deposit had been placed into a custodial scheme with the DPS by the letting agent. In order to allow the return of deposit procedure I had to registered with the DPS and forward explanatory correspondence to them, which after a short period of time to allow for any response from the letting agent my interest in my tenants deposit was placed under my account details. I also needed to make a claim for dilapidations, which led to a dispute overseen by the DPS and it resulted in the amount I requested being returned to me with the remaining balance to the tenant.

A landlord is an important part of the equation in respect of deposit money and to cover formalities in a similar scenario as mine I feel that interested parties should to be kept in the loop at relevant times. As you state, the landlord is ultimately responsible for TDP so in order to be so he or she needs to be made aware of what is happening with the deposits that they are responsible for.

All of my tenants’ deposits are currently registered with My Deposits by my letting agent and although my name is on the deposit protection certificates I have not received any correspondence from the scheme administrator. My letting agent forwards me a copy of the certificate, however, despite trusting the agent 100% there would be nothing to stop the agent from notifying the scheme administrator that the deposit is to be removed from the scheme without me being informed by the letting agent or the administrator.

If a letting agent registers a deposit and names the landlord on the certificate is it possible for the landlord to monitor the deposit protection status via your website in these circumstances? If not, I think that the scheme administrator should be obliged to keep the landlord abreast of any relevant information.

In much the same way that the legislation implies that relevant persons should be made aware of the prescribed information I feel that the landlord should similarly be made aware of the status of his or her tenants deposit protection.

by DC

12:14 PM, 11th July 2013, About 9 years ago

Can Sam Haidar or somebody else at My Deposits please clarify my previous post just to clear up whether the insured scheme does cover all eventualities in respect of landlords costs? Thanks DC

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