Citizens Advice has warned that deposit replacement products could be being mis-sold to tenants.
It is also warning agents that sell the products that they could be giving advice which, legally, should be regulated by the financial authorities.
The consumer and debt-counselling charity is the latest to express its concerns.
They follow a BBC investigation and accusations last week from Generation Rent that some agents are focusing on selling the products to make up for revenue lost because of the tenancy fees ban.
The BBC claimed that tenants may not be told that payments for a deposit replacement are non-refundable.
The CAB is now saying that it has concerns that replacement schemes could: “. . . sidestep restrictions imposed by tenancy deposit protection requirements introduced by the Housing Act 2004 and caps on deposits introduced by the Tenant Fees Act 2019, and in the long run prove a very expensive option for tenanats.
“A significant function of such schemes is also their potential to generate income for letting agents who operate them, to replace income lost in the wake of restrictions on tenant fees.
“While such schemes appear to operate as ‘insurance policies’ which can be relied on in the event that any money (usually unpaid rent or repairs for damage to the property) becomes due from the tenant, they in fact benefit only the landlord (typically allowing the landlord to claim 6–12 weeks worth of rent from the scheme) in such circumstances.
“They offer no protection against liabilities or losses to the tenant — and so cannot for example be offset against any damage to the property which the landlord claims the tenant has caused.
“A landlord can make a claim from the deposit replacement scheme for any unpaid rent or damage, but the agent operating the scheme will then pursue the tenant for reimbursement of that sum with no account taken of the payments made by the tenant under the scheme, which are retained in full by the agent.
“If no money becomes due from the tenant, then the fees are simply retained by the agent as profit, with no refund available to the tenant as in the case of a traditional deposit.
“Over the course of a tenancy lasting several years, a tenant may pay hundreds or even thousands in fees under a deposit replacement scheme, with no option to offset these payments against any liabilities which may arise to their landlord, or to recover the money if there are no liabilities when the tenancy comes to an end.
“ . . . We have seen enquiries which suggest that tenants entering into deposit replacement schemes have not always fully understood that payments made offer them no protection against future liabilities.”
CAB also warns of some circumstances where selling a deposit replacement product may be unlawful.
For example, tenants must be clearly told that such products are optional, while any tenant who opts for a deposit replacement scheme “fully understands that while providing ‘insurance’ for a landlord, it does not provide any insurance for the tenant who pays for it”.
The CAB also considers that providers of deposit replacement schemes who are not regulated by the Financial Conduct Authority “may be acting unlawfully”.
The CAB also has this warning for agents: “It is also worth considering that as well as the question of whether deposit replacement schemes represent regulated financial products, there is a further question about whether information given by those selling them falls within the remit of FCA regulated financial advice.”
The CAB concludes that tenants should be wary of deposit replacement schemes.
The full CAB article, by Amy Hughes, is here:
At a time of abolition of s21 and making it ever difficult to remove bad, difficult tenants or those struggling financially it seems to me It would be unwise to accept any tenant who can’t stump up the reduced statutory 5 week deposit. For me it is a no deposit no rental scheme. Encouraging those who can’t afford to rent and giving then enhanced security of tenure makes no business sense what so ever. If an investment doesn’t make a decent return why hold it? The government have made it clear it doesn’t want a PRS as has Shelter and Generation Rant. Go find an alternative.
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Totally agree with you Will2. If they cannot afford a deposit then we do not even consider them. Our business has taken the decision not to offer these types of schemes, regardless of the money that could be on offer to us as ‘profit’ We knew what was coming years ago with the TFB and acted accordingly, reducing our reliance on fees, yet there are companies local to us that are forcing these ‘Zero deposit’ schemes down the throats of tenants to make up the shortfall in their income… and they are the same companies that used to charge obscene amounts for referencing, bonding deposits, doing the job they were being paid to do!
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Totally agree with the guys above we do not use the 0 deposit options and is not currently affecting our business we have been asked by prospective tenants if we do but when the whole situation is explained to them re the pros and cons most have decided to provide the required deposit. If a tenant does not have the required 5 week deposit then we will not take the risk and rent to them all i can see is a PPI type mis selling scandle in the future .
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I think the only safe way to let to a tenant these days is to ensure that you’re backed up with Rent Guarantee and Legal Protection. That’s the only surefire that you know you’re compliant, and that you’ll get an eviction sorted if ever you need it.
And no, I don’t work for one of those firms – it just seems like common sense, to me.
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interesting to see that most of these companies have a policy of not chasing tenants if the deposit claim is below a certain amount….I wonder if that could bankcrupt some of these replacement schemes, if they have multiple claims fall into that bracket.
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