£3bn tenant deposit shake-up on the cards
Tenant deposit money could be affected by plans to abolish insured deposit schemes
The latest research from The Letting Partnership has revealed that more than £3bn worth of tenant deposits are currently protected via insured tenancy deposit schemes across England and Wales, highlighting the scale of the transition facing the lettings sector should the government’s proposed reforms proceed.
In light of the government’s recent proposal to abolish insured tenancy deposit schemes and require all deposits to be protected via custodial arrangements, The Lettings Partnership analysed the latest tenancy deposit data for England and Wales to understand how many deposits this change would impact, and the total funds that would need to be relocated.
The findings show that there are currently an estimated 4.7m tenancy deposits protected across England and Wales. Of these, just over 2.1m, equivalent to 45.6% of the market, are held within insured schemes, while just over 2.5m (54.4%) are protected through custodial schemes.
However, insured schemes account for the larger share of deposit value. The Letting Partnership estimates that north of £3bn of tenant deposit funds are currently protected via insured arrangements, representing 54.7% of the total deposit value held across the nation. In comparison, custodial schemes account for £2.5bn, or 45.3%.
As a result, more than £3bn of deposit liabilities could ultimately be impacted should the government’s plans to phase out insured protection move forward.
The proposal has prompted considerable debate across the lettings industry, around whether landlords and agents should continue to be permitted to hold tenant deposit funds directly. However, The Letting Partnership believes the discussion extends beyond questions of trust and into the issue of transparency.
Unlike custodial schemes, where deposits are held by an independent third party, insured schemes allow landlords and agents to retain tenant funds within their own accounts while paying a fee to protect the deposit through an approved scheme. While schemes know which deposits have been registered and underwriters know which liabilities they have agreed to insure, there is no single independent view of the cash held across the market at any given time.
The timing of the government’s intervention is also notable. Data from the tenancy deposit sector suggests that the long-term shift towards custodial protection had largely stabilised, with custodial schemes accounting for around 54% of the market and insured schemes continuing to represent a substantial proportion of deposit protection activity. Rather than accelerating an ongoing migration, the proposed reforms would introduce a structural change to a market that had reached a relatively stable balance between the two models.
Should the proposals become law, a gradual transition is widely expected. New tenancies could enter custodial protection while existing insured deposits remain protected until tenancies naturally conclude, creating a period where many agents may need to manage both systems simultaneously.
Chris Mason, COO of The Letting Partnership, commented:
“The debate around insured deposits has often centred on whether landlords and agents should be permitted to hold tenant funds, but this framing misses the fundamental issue.
Nobody, not the schemes, the underwriters, or the government, has a complete picture of the cash position sitting behind those liabilities at any given moment. From a client accounting perspective, that has always been the real weakness of the insured model.
If the objective is greater transparency over tenant money, then the government is targeting the right problem.
This isn’t simply a question of moving deposits from one protection model to another. The industry is potentially looking at a significant operational transition that could take years to fully work through, particularly if existing insured deposits are allowed to run off naturally. The focus now should be on ensuring that any change is implemented in a way that minimises disruption for agents, landlords and tenants alike.”
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