Is this the end of insured deposits?

The government is planning to change the rules around protecting tenancy deposits, taking responsibility – and money – out of agents’ hands.

At the moment, landlords and agents have two options for protecting deposits:

• Custodial deposit: Deposit the money for free with a recognised tenancy deposit protection (TDP) scheme.

• Insured deposit: Hold the deposit themselves and pay a TDP scheme to insure it. Last year, a report from the Tenancy Deposit Scheme said about 46% of all deposits are insured.

Landlords and agents face the same compliance requirements either way. The rules around deposit deductions and disputes are the same – and if the tenant disputes a deduction, the landlord or agent has to hand the deposit over to the TDP scheme until it is settled.

But in a blow against agencies or landlords holding deposits themselves, housing minister Matthew Pennycook has told Parliament that the government plans to get rid of the insured deposit option.  

In response to written questions from MPs, he said the insured option creates an “inherent power imbalance” against the tenant.  

He also says insured schemes carry an inherent fraud risk, and that deposits can be put at risk if agents don’t maintain Client Money Protection cover or insurance.

The government is now looking to abolish insured deposit schemes and move all deposits to custodial schemes.  

What does that mean for landlords and agents?

First, it depends on where they are based. Insured deposits are currently allowed in England and Wales, but not in Scotland, where all deposits already have to be custodial.

Passing responsibility for all deposits to TDP schemes could mean less admin and risk for landlords and agents in the long term. In the short term, though, they may have to transfer large numbers of insured deposits over to custodial schemes, depending on whether any new law allows existing insured deposits to continue.

It could also mean less income for landlords and agents. With an insured deposit, the landlord or agent gets to keep the interest, which helps to cover the cost of the insured scheme. When TDP schemes hold deposits, they keep the interest to cover their costs. Depending on the scheme, they may also give some to the tenant.

When and how?

The government hasn’t published any legislation to scrap insured deposits yet. They also haven’t shared a target date. Any announcement is unlikely before the end of the year: Parliament goes on recess on 16 July, and much of the rest of the year is taken up by the summer, conference and Christmas recesses. It could also be affected by Labour’s change of leadership. If Matthew Pennycook is replaced, his successor may have other priorities.