- Government plans to abolish insured tenancy deposit schemes.
- Landlords and letting agents would no longer be allowed to hold tenant deposits themselves.
- Ministers say the move will improve tenant protection and reduce fraud risks.
The UK rental market could be heading for another major change, with the government proposing to stop landlords and letting agents from holding tenant deposits in their own accounts.
Under the planned tenancy deposit reforms, all deposits would have to be placed in custodial schemes managed by approved deposit protection providers. The proposal would bring an end to insured tenancy deposit schemes, which currently allow landlords and agents to retain deposits as long as they pay a fee to protect the funds.
The move forms part of the government's wider private rented sector reforms following the introduction of the Renters' Rights Act, which brought significant changes to the relationship between landlords and tenants, including the abolition of Section 21 "no-fault" evictions.
A shift in power over deposits
Housing Minister Matthew Pennycook said the reforms are intended to ensure tenant deposits are held as securely as possible. Under a custodial scheme, the money is held by an independent third party rather than by the landlord or letting agent.
Pennycook reportedly told MPs that the insured model creates an "inherent power imbalance" because landlords and agents retain control of the deposit during the tenancy. He also reportedly pointed to growing concerns about fraud risks associated with the insured system.
According to the minister, tenants whose money is held independently are more likely to challenge deductions at the end of a tenancy, potentially leading to greater scrutiny of disputes over deposit returns.
The proposal arrives at a sensitive time for the rental sector. Recent industry data suggests that 42 per cent of landlords are considering reducing the size of their property portfolios as regulatory and financial pressures continue to mount.
More administration, not necessarily more rules
Property litigation specialist Kristine Ng of Morr & Co reportedly said the reform may not dramatically alter landlords' legal responsibilities, but it will change how and when they manage deposits.
Under the current system, landlords using insured schemes must transfer the deposit into a custodial arrangement if a dispute arises. The proposed reforms would effectively move that requirement to the beginning of the tenancy rather than the end.
Ng reportedly said many landlords value insured schemes because they provide greater flexibility, particularly for those managing multiple properties. While the legal obligations surrounding deposit protection would remain largely unchanged, she suggested the transition could increase the risk of administrative mistakes.
Landlords would still be required to comply with deposit protection rules and provide prescribed information to tenants. Failure to do so can result in penalties of up to three times the deposit value and may affect a landlord's ability to regain possession of a property.
Industry experts expect the immediate challenge to be the transfer of existing insured deposits into custodial schemes. Ng reportedly advised landlords and letting agents to review affected tenancies, track compliance deadlines and ensure systems are ready for any new requirements.
The government has not yet confirmed when the changes will take effect, but further details are expected as its wider programme of rental sector reforms moves forward.
