Tenants Deposits – Evolution or revolution

The landscape of tenants’ deposits has shifted considerably over the last few months and looks to change again in 2013 so I thought I’d give landlords a quick "heads up" on the legislation and how the changes impact on landlords dealing with their tenants deposit.

Firstly, the arrival of the Localism Bill earlier this year has strengthened the hand of the regulators. The requirement of landlords to protect their tenants’ deposits by either placing it with the custodial scheme (the Deposit Protection Scheme) or one of the approved insurance based schemes is no longer without meaningful sanctions. The new legislation means that landlords now have only 30 days to protect their tenants’ deposit and provide them with the prescribed information about how and where the monies are held. Failure to do this will result in a fine of between 1 – 3 times the deposit and loss of the ability to use a section 21 notice for accelerated possession.

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Which tenancy deposit scheme to use?

I’ve looked in the past at the advantages and disadvantages of the tenancy deposit insurance vs the custodial scheme. In the days when the bank base rate was not on the floor it was a complicated equation as to which scheme was financially the most beneficial for a landlord. It was a trade off as to whether to retain a tenants deposit and receive the difference between the base rate and the charges from the DPS (2.32% before this was suspended by the government) and the financial benefits of retaining a tenants deposit themselves and potentially earning a return on this money.

There are two recent developments that may turn this on its’ head.

Firstly, the DPS custodial scheme does not currently require landlords to reprotect their tenants deposit if a landlord decides to renew a tenancy.

This is in stark contrast to the insurance based schemes. With these each time a landlord who holds the tenants’ deposit renews a fixed term tenancy then they have to take out a new insurance policy for that tenancy. If a landlord opts to renew the fixed term every 6 months then this equates to 2 insurance payments each year (all so they can hold the tenants deposit and earn little or no interest in a deposit account). In my mind I can’t see how there is any advantage now in being able to hold a tenants deposit and then have to pay to insure it (this is unless these landlords have found a fantastic way of earning a phenomenal rate of interest on their cash balances that I’m not aware of). The other explanation is that are landlords using these deposits as a way of raising equity to then buy additional property. Certainly, if you had a large enough portfolio, say 30 rental deposits at £1000 per time; that’s £30000 (probably enough for most landlords to put down a 25% deposit down on a property and by something decent). The downside of all this is that if you have several tenants moving out and wanting their cash back then you will need enough cash to pay them back pretty quickly. However, for many landlords making record rental profits because of low interest rates this shouldn’t be a problem.

TDS insurance based scheme

The other major change that is on the horizon is that the custodial based deposit scheme the Deposit Protection Service has been granted a government licence to operate an insurance based scheme alongside it’s custodial business. The new insurance scheme is due to launch in April 2013, with landlords and letting agents being able to register in advance from the 1st of October.

The DPS argument for this change is that it will be beneficial to landlords by offering a ‘one stop shop’ for them when it comes to tenants deposits seems completely plausible in my view. However, if I were the likes of My Deposits and The Dispute Service which very confusingly operates a scheme called the Tenancy Deposit Scheme (who allowed this ridiculous anomaly). I’d be very worried. This is because the DPS will not be charging a registration fee. This stands in stark contrast with the current two insurance schemes. In the case of My Deposits it costs £60 whilst the more industry (letting agents) targeted The Dispute Service charges a whopping £500. It seems to me a no-brainer as to which insurance scheme a landlord will eventually choose. However, changes are a foot with the government just granting the TDS an extension to their contract until 2018.

Change is good?

The revised details have not as yet been revealed but the TDS has promised they will be made plain over the coming months. It should be an interesting time for those involved in the industry of tenancy deposits. The evolution in the tenancy deposit system has no doubt being planned carefully by the Mandarins of Whitehall. All I hope is that us simple landlords are the beneficiaries not the victims. Let’s face it we have enough to cope with! We’ll keep you posted!

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