Letting agents and landlords will no longer be permitted to hold tenants’ deposits in their own bank accounts under further reforms planned by the government as part of its overhaul of the private rented sector.
Housing minister Matthew Pennycook has confirmed plans to abolish insured tenancy deposit schemes, which currently allow landlords and agents to retain deposits provided they pay a fee to protect the funds. Under the proposed changes, all deposits would instead have to be held within custodial schemes managed by approved deposit protection providers.
The government argues the move will provide greater protection for tenants and remove what it describes as an imbalance of power between renters and property owners. For letting agents, the change would require adjustments to tenancy deposit handling processes and could bring an end to a system that has operated since tenancy deposit protection rules were introduced in 2007.
The proposals represent the latest stage of the government’s reforms to the rental sector following the introduction of the Renters’ Rights Act, which abolished Section 21 evictions and introduced a range of new obligations and penalties for landlords and agents.
Further details on the timing and implementation of the deposit protection changes are expected as the government progresses its rental reform programme.
Pennycook told MPs: “The proposed removal of the insured schemes is based on the objective of ensuring that tenant deposits are as safe as possible.
“Under the custodial system, money is held by the Tenancy Deposit Protection provider as a neutral third party. Under the insured scheme, there is an inherent power imbalance against tenants given the landlords and letting agents hold the deposit.”
Pennycook said tenants whose deposits are held in custodial schemes are more likely to challenge deductions made by landlords at the end of a tenancy.
He added: “There is growing evidence that the insured model also carries a higher fraud risk, with incidents of exploiting insured registration being reported.”
Kristine Ng, partner at Morr & Co., who specialises in property litigation and dispute resolution, says while presented as a simplification, the reform primarily shifts when obligations arise rather than fundamentally altering what landlords must do.
Ng said: “The government’s proposal to remove insured tenancy deposit schemes and require all deposits to be held in custodial schemes forms part of the ongoing reform of the private rented sector, aimed at strengthening tenant protections.
“While presented as a simplification, the reform primarily shifts when obligations arise rather than fundamentally altering what landlords must do.
“In practice, landlords are already subject to strict compliance requirements.
“The key distinction lies in choice: deposits can either be placed in a custodial scheme or retained under an insured model, which many landlords use to manage cash flow, particularly across multiple properties.
“However, even under the insured model, landlords must transfer the deposit to the scheme if a dispute arises. The reform therefore largely brings that position forward to the start of the tenancy. Compliance risk will remain focused on procedural failure.
“While the legal position will not materially change, the removal of flexibility may increase the risk of administrative error, particularly during transition.
“Landlords must still meet deposit transfer requirements and provide prescribed information, with breaches exposing them to penalties of up to three times the deposit and restrictions on recovering possession.
“The immediate priority will be transitioning existing insured deposits. Landlords and agents should identify affected tenancies, diarise deadlines and ensure systems are in place for prompt transfer.
“There is also potential for an increase in disputes in the short term. Tenants may be more willing to challenge deductions where funds are held independently, and landlords will no longer have control of the deposit at the outset.
“Over time, however, a single custodial model may deliver greater consistency in decision-making and clearer outcomes, which could help reduce disputes.
“Landlords should also ensure agent instructions and tenancy documentation are updated to reflect the new approach.”
Comments (11)
Why does this Government always assume all landlords are dishonest crooks. Every landlord I have spoken to who has used the insurance scheme has never won a dispute even though in my opinion they had every right to recompense for wilful damage, filthy ovens and piles of rubbish tenants left behind. Not even one penny for the horrendous damage by pets of negligent tenants. Floors, carpets, etc. ruined by pets is not wear and tear.
With just over £3m of tenant deposits held in a designated client account the income pays for one and a half members of staff. So either service will suffer of fees to LLs will rise. Presumably, Penny Cock has seen how much interest is made by the schemes holding deposits and decided he wants some easy money for his little empire?
What “power imbalance”? Agents & Landlords are regulated by the schemes… the same rules that apply to them apply to us.
There is no practical difference.
Whilst I personally prefer custodial, that is besides the point. When will the Government stop meddling in the industry?!
“When will the Government stop meddling in the industry?!” – when only the corporates are left.
As long at the current schemes, DPS and TDS etc are the ones holding the deposit and it is not held by the government, I am not sure I see the issue. All our deposits are currently Custodial, and I have never used Insured though, so I am open to the idea I am missing something…
I did use TDS insured originally. Then, after agreeing deductions with the tenant and paying contractors AND her, she asked TDS for details of one of the charges. Instead of asking me for a copy of the invoice, TDS classed it as a dispute and DEMANDED I pay the whole deposit into their account. I queried this explaining that the tenant and contractors had already been paid. I might as well have been talking to a brick wall or a Labour MP.
I took all my deposits out and put them with DPS. Without realising that several of the deposits were for my own properties, TDS wrote to me explaining that they no longer insured the deposits and, while they were not saying that there was anything wrong, the implication was clear. I spent an entire Sunday transferring deposits and emailing landlords and tenants explaining what had occurred. I would not touch TDS with Starmer’s barge pole.
I’m with DPS, I’ve never used TDS. I did go on a training course run by them once, which was actually helpful in terms of wording on Inventories to try and stop disputes…
We’ve done their training at the TDS, followed the training to a T and still not won… The sad thing about these schemes is there is not standardisation across their own adjudicators and their decisions. Some I have had have been what I would deem fair and others have blatantly been reviewed by someone with an axe to grind!
Following Labour’s defeat at the 2015 general election, Pennycook endorsed Yvette Cooper in the subsequent leadership election and Tom Watson for the deputy leadership . He supported Sadiq Khan in the campaign for selection of the candidate for the 2016 London Mayoral election.
Endorsed Yvette Cooper-Balls; Tom Watson, the nonce finder general who hounded innocent people even as they were dying and Sadsack Khan. With that as his CV, only the left would trust his judgement.
Its the Government yet again making money and taking the interest received on the deposits as well as charging landlords/agents for the privilege. It won’t be long before the government wants to be the estate agent as well as, so they can mess everything up in one go. They are already talking about regulating all agencies. Its just the start of nationlisation and full control in my opinion.
So I presume the single custodial scheme eventually will be the government and obviously no interest payable was mentioned and I imagine the Landlord will pay another fee.