More than £3bn of tenant deposit funds could be affected by government proposals to abolish insured tenancy deposit schemes, according to new analysis from The Letting Partnership.

The research examines the potential impact of plans that would require all tenancy deposits in England and Wales to be protected through custodial schemes, ending the current system that allows landlords and letting agents to retain deposits under insured arrangements.

The Letting Partnership estimates that around 4.7 million tenancy deposits are currently protected across England and Wales. Of these, just over 2.1 million are held in insured schemes, accounting for 45.6% of all protected deposits, while the remaining 54.4% are held in custodial schemes.

However, insured schemes represent the larger share of the money being protected. The analysis suggests more than £3bn of tenant deposits are currently covered through insured arrangements, compared with around £2.5bn held in custodial schemes.

The proposals have sparked debate across the lettings sector over the future role of insured schemes and whether landlords and agents should continue to hold tenant deposits directly. Industry participants have also raised questions about how any transition would be managed, particularly given that the market has settled into a relatively stable balance between insured and custodial protection models.

Should the changes be implemented, a phased transition is considered likely, with new tenancies entering custodial schemes while existing insured deposits remain in place until tenancies come to an end. This could leave many agents operating both systems for an extended period.

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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