There are several answers to this question.
The first is that there are going, from 1 April 2016, to be two new custodial tenancy deposit schemes. One from TDS and one from My Deposits.
Another is, from 1 April 2016, very little.
In the beginning
When the tenancy deposit schemes first launched in 2007 it was fairly easy.
- If you were an agent, you used TDS. TDS is owned by ARLA and RICS and was originally set up (before the compulsory schemes came into force) to provide a voluntarily tenancy deposit scheme for agents.
- If you were a landlord, you used My Deposits. My Deposits is owned jointly by the National Landlords Association and Hamilton Fraser and was set up specifically so there would be an insurance based tenancy deposit scheme developed with landlords in mind.
- If you wanted a free scheme you used the DPS. The DPS ran the only custodial scheme – a custodial scheme being free to the user but the money has to be paid over to the scheme administrators.
It wasn’t absolute but that was the general idea.
Extra schemes
After a while, things started to change. First TDS joined up with the Residential Landlords Association and created a TDS scheme for landlords called Deposit Guard. This had similarities with the My Deposit scheme save that it was a bit cheaper and there was more inbuilt support.
Then DPS were given leave to set up an insurance based scheme (or maybe it was the other way around, I can’t remember the exact dates things happened).
My Deposits also became far more focused on agents, particularly after the company became associated with agent organisation UKALA.
So the main difference between the schemes seemed to be that the DPS had a custodial scheme and the others did not.
Now that too is to change. Announcements have been made that both TDS and My Deposits have been given leave to set up their own custodial schemes from April 2016.
But is this a good or a bad thing?
The benefit of competition
I don’t think it’s a bad thing that there should be a certain amount of competition. For example the big complaint about the DPS has always been how long it takes to refund tenants money at the end of the tenancy.
However new DPS MD Julian Foster has now said that deposits where there is no dispute take an average of two days to be returned.
Is this improvement down to the prospect of imminent competition from the other schemes? I don’t know but it may be at least a contributing factor.
Who will pay?
Custodial schemes are free to use – or at least the DPS scheme is, and I am assuming that the other two new custodial schemes will be.
When the schemes were set up, the general idea was that their running costs would be paid for by the interest on the deposit money held by the scheme. However since then we have had a massive drop in interest rates – how can a custodial scheme still be financially viable?
The interview with Julian Foster in Property Eye revealed that the DPS, faced with financial difficulties, reached a new agreement with the government a few years ago where, in place of the previous government ‘bail out’ guarantee (which could have cost the nation a fortune), it was made a payment of £12.7m.
Are the other two new tenancy deposit schemes getting similar payments (and if so why should the rest of us fund tenancy deposit schemes when there is a self-funding model available) or are they being cross funded by the insurance based schemes?
I’d quite like to know about that.
And if they are being cross funded:
- Is it fair for paying customers to fund the free scheme and
- What is going to happen if more landlords and agents switch to (free) custodial schemes?
But what is the difference?
I read an interesting book recently called Different: Escaping the Competitive Herd
Among the things she considers in the book is the reason why all businesses and products in the same sector tend after a while to look the same. The result being that customer loyalty diminishes and people tend to choose on the basis of who is offering the best deal at the time.
Moon points out that the harder companies compete, the less differentiated they become – because they all compete for excellence at the same things. All you get in the end therefore is a ‘proliferation of sameness’.
Which just confuses the consumer.
I don’t think we are quite there yet with tenancy deposit schemes, but we I think we are getting to the stage where a novice landlord is going to look through the list and wonder what the difference is.
I hope that when we have more information about the new schemes there really is some difference between them, and that there are options which are obviously more suitable for different types of landlord and agent.
Otherwise what is the point of having so many choices?
The issue here is that this is not a competitive market. This is a legal obligation and landlords are a captive market.
There is almost no scope for differentiation and competition. And I think it shows.
Thats a really interesting point about competition promoting sameness. You certainly it with TV scheduling, 300 channels of the same crap AND we have seen it with UK politics (and I’m not being flippant) where there is/was so little to choose from between the big three that voting was all but meaningless.
I joined the Labour party the day Corbyn became leader, not because he is electable, I dont think he is, but he is a distinctly different product.
I think another thing is being missed in debate about deposit protection schemes and that is the service they provide for tenants, after all it is the tenant’s money right the way through.
A tenant’s biggest concern is the speed at which the money is returned. You cant get into a new property without a deposit so even the DPS and their 2 day service is three days too late, meaning tenants have to often borrow from friends and relatives until the money is returned.
Last time I moved it took 10 days for me to get my uncontested deposit back.
I know tenants cant choose the scheme or could they? What if they nominated the scheme instead of the landlord or agent? That would be a radical bit of competition that professor Moon would approve of haha
Romain’s comment is the key to this. The key word missing is the word “regulated” businesses.
These are businesses that are operating in an environment that is a regulated mess – they are NOT competing to provide excellence to consumers but to provide a service that is not wanted by those who are using it, and is not that useful to those it supposedly protects (doing nothing more than protecting crooked tenants, perhaps inhibiting a particular activity of rogue landlords — and in the main just driving up the rate of rent.
If there were competition there would be a whole lot of different things out there – escrow schemes with various rules, options to tenants to accept lower rents in exchange for certain modes of protecting landlords goods etc.
The other bad effect on tenants is that many landlords are simply stopping offering fully furnished properties – so tenants who actually want and need that are left high and dry.
So yes, sameness, but it is sameness in offering the single standard cr_p that governments want us to offer.
And Ben — I would not let too a tenant who had so little free cash that he had to borrow to pay a deposit.
Certainly in an freer market I might but not in an environment that says I cannot get rid of a tenant (for many many months and without huge expense) who effectively steals from me, and is continuing to steal from me. The system determines that marginal tenants are never given a chance, but those who blinkered whiners crying for more and more regulation don’t see that reality.
So what about all those countries in Europe which have no problem housing people with far strictier laws?
I’m sure you’d let to such a person if it was that or a void. We have a supply-side problem and tenants need protection against the market.
@Mat109 The “strictier laws” also often include the tenant having to pay the rent and being expected to behave a lot better then what a UK court will let a UK tenant getaway with.
The tenancy deposit schemes regulations need a complete rethink! E.g. should the tenant be paying the deposit and the first month rent to the scheme, with the scheme checking the landlords ID and that they do own the property before handing the money over to the landlord once the tenant has moved in?
Ian we havent always seen eye to eye on things but I have to say I think that idea is bloody genius.
Tenant only ever deals with the protection scheme, like a bank holding it’s money. Cuts out the middle man altogether and eradicates the landlord’s dislike of protection, also no need for the penalty if you get it wrong.
It would also wipe out the 30 day nonsense and the raft of mad case law that underpins it all.
A bonded tenant in effect. It would have to be a custodial scheme for it to work but so what? Credit Unions could also get involved underwriting the deposit for tenants who dont have it.
I’ve worked on a scheme like that with Lewisham credit union
@Ben,
=> It would have to be a custodial scheme for it to work but so what?
Not true, the deposit could be passed to the landlord once the insurance is in place and the tenant has moved in.
@Ben,
Just think if a check of Gas Safety cert etc was also included before the first months rent was given to the landlord….
Yeah there the new how to rent booklet that has to be given at the start, no reason why there shouldnt be a pack of stuff.
I dont agree on the insurance scheme idea though. If there is any dispute over the deposit the landlord will hand it back to the scheme anyway, so giving it to the landlord would only be a device to earn interest in the landlord’s bank account.
I like the idea of it being held permanently in escrow, so the tenant has a swipe card that tells the landlord the money is held and cant be touched. This way tenants can move freely without the hassle of waiting to get their deposit back, it also relieves landlords of the burden and penallties, its all dealt with by a third party.
What I worked on with our credit union is that the CU would guarantee a bond for the landlord. The tenant would contribute money to it, often by the simple method of signing over child benefit for 1 child, that way they didnt miss it.
If they left with deposit to be deducted then the credit union wouldnt lose as the tenant had built up the pot. If the tenant left with no deposit dispute then they actually had savings they could use for the next property.
It was an idea we cooked up to encourage people to save and to get ahead of universal credit but I could see an additional role in your idea in that the CU guarantees the deposit and opens a savings account with the tenant at the same time
Whoah, hang on a minute.
Ian’s idea is only worth considering because we’re even still using insurance deposit schemes! In the event that we stupidly just continue regardless then yes – let’s just have a national licensing scheme in England and withhold deposit funds from any landlord that it transpires is not licensed. Cos that wd be a whole lot more efficient that having deposit schemes consult each and every licensing scheme in operation at present ! **
Or better still – let’s just abolish insurance schemes and stick with custodial only! Custodial should be the only option (as is the case in Scotland).
Because a) this is a lot of money we are talking about here! And b) until which point any financial settlement is determined by an adjudicator, it remains the tenant’s money.
It should not be sitting in the landlord’s bank account; it quite simply doesn’t belong there. Nor does the interest accrued on it. And we have letting agents going out of business and happily running off with all of it! But still the deposit schemes told Alex Hilton that nothing cd change.
And yes Ben, tenants really must be the ones to choose who holds it. Then I wd pick the deposit scheme that garnered the best votes from its real customers.
But I’m at a loss to think what middle man you think Ian is even cutting out?
** In Scotland it’s actually illegal to advertise a rental property without putting your licence no. Sure, some still do it – but it helps you ignore an advert and move to the next one.
I agree with you Reb.If the deposit money belongs to the tenant at all times then why should a landlord or agent be earning money from the interest?
And despite earlier comments deposits arent chump change. In London it is common practice to charge a deposit equal to 6 weeks rent, which around my way for a two bed flat would be around £2,000. Thats 2 grand of my money sitting in someone else’s bank account earning them interest.
I doubt any sane business man would thank that was good practice.
In England now agents have to display their fees in shops and on their websites and must state clearly whether or not they have client money protection in place, this will allow landlords and tenants to make informed choices.