MPs have called for the security deposit cap proposed in the Draft Tenant Fees Bill to be reduced from six to five weeks as part of a range of changes to the legislation.

A report based on the Housing, Communities and Local Government Committee’s pre-legislative scrutiny of the fees ban legislation, recognises that it “would deprive letting agents of an income source” but said it introduced more fairness and transparency to the market for tenants.

The select committee has held meetings with several tenant, landlord and letting agent groups as well as local councils and has suggested several changes to the proposed legislation.

Security deposits should be capped at the equivalent of five weeks’ rent in recognition that finding six weeks’ worth of rent can cause financial difficulties for tenants, the report said.

On holding deposits, the report proposes that landlords should only be permitted to retain the full holding deposit if the tenant knowingly provides false or misleading information.

If the tenant  provides information in good faith and subsequently fails a reference check, the landlord should only be permitted to retain the cost of a reference check. The cost of the reference check in this situation should be limited to an amount set by the Secretary of State, the report said.

It also calls for the Government to make clear that landlords can’t charge a higher rent in the first month and then reduce it for the rest of the tenancy to cover the fee.

The report also calls for clarity on permitted and prohibited fees, calling for more guidance on the type and level of default fees where a tenancy agreement is breached.

It is also suggested that tenants should be allowed to recover any prohibited fees through the property chamber of the First-tier Tribunal – rather than the county court as currently proposed – and landlords should be prevented from recovering possession of their property until they have repaid any prohibited fees.

The MPs also suggest the tribunal be given enforcement powers.

The Government is also urged by the committee to provide additional funding for local authorities to enforce the legislation.

It warns that the legislation can’t be solely self-funded through the retention of civil penalties, adding: “The Government must provide sufficient additional funding directly to all local authorities to enforce the legislation if it wants the Bill to achieve the Government’s aims. Failing that, the Bill should increase the maximum amount of civil penalty.”

The Government also comes in for criticism for failing to provide an impact assessments with the proposed legislation.

The report suggests the Government should encourage innovation in the deposit replacement schemes and report on the merits of alternatives to traditional security deposits. If alternative solutions are found to be affordable for all tenants, the report says, the Secretary of State should use the power provided for in the proposed legislation to amend the permitted payment list to make clear that they can be used.

Clive Betts, chair of the Housing, Communities and Local Government Committee, said: “With more and more people living in the private rented sector, this legislation has the potential to make a difference to millions of people by cracking down on unfair fees and saving tenants hundreds of pounds.

“We believe however that there are clear improvements that could be made to the Bill that would ensure it has a much better chance of delivering on its aim of making renting fairer and easier.

“Moving home is already an expensive time and many people struggle to find large sums of money at the start of their tenancies to put down as a deposit. Lowering the cap from six weeks’ worth of rent to five will help make the private rented sector much more affordable, while also keeping protection for landlords from rogue tenants.

“We also had concerns about how the law will be enforced. Funding enforcement through the retention of fines gives local authorities a perverse disincentive to proactively engage with lettings agents and landlords. If councils are to be given this extra enforcement responsibility, they must either be given extra resources or the maximum amount of civil penalty needs to be increased.”

The report also clarifies that old Green Deal loan repayments by tenants would be permitted and that letting agents and landlords could continue to charge for a change of sharer if proposed by the tenant in a joint tenancy.

David Cox, chief executive of ARLA Propertymark, was pleased by the clarification related to a change of sharer and Green Deal payments, but still had some concerns.

He said: “While it is positive that the Bill will be clarified to reflect that holding deposits can be paid to letting agents as well as landlords, not allowing agents to retain the holding deposit when a tenant fails the referencing check is both extremely unwise and very misguided. This will result in agents only selecting the very best tenants to avoid the possibility of incurring costs through tenants failing referencing.

“Ultimately, this will reduce the availability of property for vulnerable tenants and families.

“The very people that the Government are trying to help most with this Bill are those who stand to lose the most.”

It comes after the Residential Landlords Association (RLA) warned last week that the six-week cap on security deposits wasn’t enough to cover cases where tenants fail to pay the last month’s rent.

Commenting on the prospect of the cap being reduced to five weeks, RLA chairman Alan Ward said: “Policymakers need to address the problem of tenants who fail to pay their rent with as much energy as tackling rogue landlords.

“Proposals to lower the cap on deposits paid by tenants will play into the hands of the minority of tenants who cheat those providing housing for them out of the rent they are legitimately owed.”

Isobel Thomson, NALS chief executive, said: “We recognise the time and level of scrutiny the HCLG Committee have taken with this report. NALS wants a fairer PRS for all, and we echo the committee’s conclusion that the proposed legislation could be improved to make the market both fairer and more transparent.

“While we don’t agree with all the recommendations, the report makes some important points.

“NALS has repeatedly raised concerns over how local authorities will enforce the new legislation, so we were pleased to see the committee acknowledge that if councils are to be given this extra enforcement responsibility, they must have the maximum amount of civil penalty increased or be given additional resource.

“It is difficult to concur with the conclusion that fee ban increase will competition in the sector, we know many smaller agents will be forced to close or reduce staff. How will this aid competition?

“We also cannot concur with the conclusion that any rent increases will be easily absorbed by tenants in England. This is based purely on the experience in Scotland and we believe is the committee adopting a wing and a prayer mentality.”