Fears are emerging that letting agents may already be chasing the high commissions offered by deposit-free schemes despite tenants not wanting or understanding the products.
EYE has heard of situations where agents have snubbed a deposit replacement scheme because a rival has paid higher referral fees, and tenants have already started claiming they were mis-sold the product.
ARLA Propertymark analysis showed that commissions paid by deposit-free schemes range from single figures to up to 30%, and industry commentators and providers have acknowledged this could create issues, especially if firms are not transparent, as tenants and landlords could be pushed into schemes with varying levels of cover and regulation.
David Cox, chief executive of ARLA Propertymark, said: “Agents need to weigh up the commercial benefits between notifying the tenant and landlord of the referral fee or charging for a service. If it is a referral fee, transparency is key, and agents need to remember that they are required to give the consumer a choice.”
However, David Smith, partner at Anthony Gold Solicitors, warned there will be a risk that agents gravitate towards those with the best commission deals.
He said: “In terms of telling landlords, the law is a little complex. Agents definitely need to say that they are earning commission but most agents do this by way of a general statement in their terms of business. What is less clear is how specific they need to be.
“It has been suggested by the courts that landlords need to give informed consent, and in order to do this they need to know exactly how much is being paid in advance, which they will not normally be told unless they ask specifically.
“I think the biggest question with these schemes is whether the business model is sound.”
Jon Notley, founder of Zero Deposit, who has previously warned that unregulated schemes could create a PPI-style mis-selling scandal, told EYE: “Besides the mess that is Brexit, referral fees are clearly on the political agenda.
“For us there are two issues: transparency and proportionality. Do customers understand what is being paid and are commissions set at an appropriate level?
“Offering choice is at the heart of everything we are looking to achieve at Zero Deposit and we feel very comfortable with the level of commission that we pay agents.
“Our commission starts at 8% and we find it is a secondary concern to many of the agents who have joined us because they recognise the quality of our product, the protections that we have in place and the many benefits it delivers to their customers, including increased demand and making the moving process quicker and easier.”
Jude Greer, co-founder of Reposit, which pays 15-20% commission, said there is potential for agents to opt for the highest referral fee, adding: “The ARLA review and comparison made it very clear in terms of the key points an agent should do in due diligence. Those being FCA authorisation and FSCS protection for landlords. The FCA register is very easy to check. ”
Another provider, flatfair, says it pays a “competitive commission” and said many of its agents give the money to charity.
Questions are also being asked about whether the use of commission creates an uneven playing field for the mainstream deposit schemes who do not pay any referral fees.
Cox added: “This creates a different playing field; if you are using a deposit scheme that pays a referral fee you are obliged to disclose to the landlord and the tenant that you will be paid that referral fee.”
A spokesman for Hamilton Fraser, which runs mydeposits, said: “The reason why traditional schemes have never got involved with referral fees or commissions is that we are providing a legally required service and therefore we do not consider it right to pay agents to do something they have to do and which benefits the tenant as well. This holds true for custodial and insurance.
“The above begs the question whether agents should have to disclose to landlords whether they are uplifting the protection fee to the landlord, eg buy it from us for free or at £12 but charge the landlord £25. I assume that this is ok from a legal point of view as landlords are not part of the tenant fee bill – I think morally this is another question.
“There will be a need for greater transparency around deposit alternatives and which fees are being paid. For example, will the tenant be fully informed and able to make a decision on the benefits/risks?”