Custodial and alternative rental deposit schemes on the rise pushing transparency in the sector

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The latest research by rental deposit
replacement scheme Ome, has looked at how the growing preference for custodial
deposit protection schemes is creating a more professional, safer and
transparent rental sector, with the emergence of deposit alternatives also
helping to drive this change.

Data from Ome shows that the number of deposits
protected via insurance-based deposit protection schemes has fallen -8.3% on
the previous year, while the number of deposits protected via custodial schemes
is up 24.4% on the previous year. A trend that has been seen consistently since
Ome’s sister company, mydeposits, launched a custodial protection scheme
alongside their insurance-based option in 2015.  

Ome believes this trend is an overall positive
one for the lettings sector as not only are custodial schemes preferable for
many tenants, who may otherwise feel uneasy about a landlord holding onto their
money personally, but it also limits the amount of client money held by agents
to further reduce risk in the industry.  

With the upcoming launch of Ome and continued
success of mydeposits, parent company Hamilton Fraser will be the first
provider to offer the choice of three deposit options when tenants secure a
rental property. This will drive further progress for choice and transparency
as the sector continues to progress.  

What’s the difference?  

Insurance-backed Deposit Protection

With an insurance-backed deposit protection
scheme, the landlord or agent takes the security deposit from the tenant and
registers it with a government-approved scheme but the money remains in their
bank account. This allows them to control the money for the duration of the
tenancy but requires a small fee to be paid to the scheme provider.  

At the end of the tenancy, the landlord or
agent is free to negotiate any return with the tenant, agreeing on deductions
before returning the money without needing to involve the deposit protection
scheme. This is often the quicker of the two traditional deposit protection
schemes when ending a tenancy.

The scheme reimburses the tenant at the end of
the tenancy should the landlord or agent be unable or unwilling to return the
right proportion of the deposit to the tenant when it is legally due following
a dispute resolution process. The landlord is expected to send the scheme the
disputed amount whilst the scheme decides who gets what. It is the scheme that
is insured rather than the tenant to cover the scheme’s liability to pay the
tenant when the landlord or agent won’t. 

Custodial Deposit Protection

With a custodial scheme, the money is collected
by a landlord or agent and then lodged within a government-approved protection
scheme.

This scheme provider then takes custody of your
money and holds it for the duration of the tenancy, only releasing it once both
parties agree on a returned sum or a tenancy dispute has been resolved.  

Both landlord and tenant can initiate the
request to return funds but both must agree on the sum being returned. Today,
all of this can be done easily online via portal that all parties will have
access to.  

The benefit to a tenant is that an independent
third party has control of the money and again, the money remains safe if the
landlord or tenant goes out of business. The money will only be returned once a
tenancy has finished or if the landlord or agents wish to move it to another
protection scheme.  

Ome’s Deposit Replacement Membership

Ome’s Deposit Replacement Membership removes
the requirement of a cash deposit altogether, with a landlord or agent
registering the tenancy online and inviting the tenant to create their
membership.

Tenants pay a small monthly membership until
the end of the tenancy, at which point the tenant and landlord are free to
negotiate any end of tenancy settlements. Where an agreement cannot be met the
negotiation can be escalated to the same adjudication team as mydeposits use.

The core benefit to tenants is cash flow.
Unlike cash deposits, or even some of the more traditional deposit
alternatives, the tenant can manage their finances over a longer period of
time.

A landlord can feel comfortable that they
receive the same financial security as a cash deposit, however as no money
exchanges hands are not threatened with a fine of up to three times the deposit
should they forget or fail to protect a deposit properly. Even where a tenant
leaves the property early (or fails to maintain their membership fee) Ome will
ensure landlords are reimbursed for their losses as a result of a tenant’s
breach of contract.

Co-founder of Ome, Matthew Hooker,
commented:

“There isn’t a huge difference between an
insurance or custodial deposit protection scheme from a tenant perspective and
both will deliver a certain degree of protection. However, it’s clear that the
industry is slowly moving away from the insurance-backed protection scheme and
this is largely due to a focus on raising standards and increasing transparency
across the sector, with landlords opting for custodial schemes in order to
provide and maintain this level playing field throughout. 

Poor communication during the repayment of
deposits is currently the biggest cause of
tenancy disputes so it’s clear that the industry is
heading in the right direction by opting for custodial schemes that enforce the
need to itemise deductions before the money can be released. The next logical
step is to provide a trusted, cashless option that not only requires an
itemised list of end of tenancy settlements but also requires the evidence
upfront. 

That said, while custodial schemes continue to
become ‘the norm’ and the increase in the number of deposit replacements such
as Ome are also providing tenants and landlords with an additional route that
further removes many of the friction points of deposit disputes entirely, we
believe that the ultimate goal is tenant choice.  

Looking into the future, and in the context of
a Lifetime Deposit, it wouldn’t be unimaginable that tenants have the choice as
to where they put their money for protection during a tenancy. Whether this is
with a custodial scheme or a deposit replacement, all options should provide
the same fundamental protection and operate to the same minimum standards in
order to better the sector as a whole.” 

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