Sean's Blog: To Protect and Serve

Sometimes the “bleeding obvious” is not as clear as it should be and it is only in hindsight that people say “I can’t believe that this wasn’t done before”. I am convinced that this will be the case when, fingers crossed, mandatory Client Money Protection (CMP) is introduced. The campaign by the industry to get it on the agenda has been long and persistent, however there is still a way to go to ensure that the value to the industry of this protection will greatly enhance the private rental sector in terms of protection, professionalism and reputation.

I was therefore slightly disappointed to hear a comment that CMP only protects the landlord and that tenants get no benefit from it. This as I explain below is not true but it does mean that we need to educate the public about why this move is so important.

Client money does afford protection to the tenant but given that the only client money from most tenants, that an agent holds, is tenancy deposit monies and these should be protected in an authorised scheme, the majority of tenants are protected through this medium and do not need to call on a CMP scheme.

There are however a number of scenarios where CMP affords protection to tenants.  As most landlords and agents know there are two types of tenancy deposit protection (TDP) – namely custodial and insurance backed. Custodial as is implied the money is deposited with the TDP scheme and therefore is secured for the period. In an insurance backed scheme, the agent holds onto the money but in the event of this not being returned when legitimately it should, the TDP scheme insurer pays back the money to the tenant.

Whilst this protection has worked very well for almost ten years now, it is not absolutely watertight.

In the custodial scenario, the monies are initially paid to the agent by the tenant who has then 30 days in which to protect it. Although most agents do transfer the money as soon as possible, there is a period when the money is under control of the Agent. Whilst the deposit is being processed, it should be held in a client account. If these monies go missing, it would be the landlord who is liable for the missing money but if he shirks his responsibility the tenant can claim from a CMP policy to recover their deposit.

The second scenario for the custodial is where an agent fraudulently obtains the tenants release details and releases the deposit to themselves and misappropriates the money.

With the insurance scheme, the first port of call for a tenant would be the TDP scheme the deposit is protected with. In most cases their insurer will pay the scheme to pay the tenant. However all the TDP schemes have limitations to the period they will continue to pay tenants, following an agent going to the wall. Most will not pay deposits until the tenant has left the property and once the period of insurance has expired, their liability expires unless a tenant has registered their claim. The same scenario applies if an agent is expelled from a TDP scheme, there is only a limited period of liability before claims are not dealt with. In theory if you are banned from an insurance scheme you must use a custodial one but often the money has disappeared by then.

Again the liability for the deposit falls on the landlord but if they also renege then if CMP is in place the tenant can claim.

As you can see therefore, whilst the tenant does not have as direct a protection as a landlord, if the tenant uses a client money protected scheme they have more surety and certainty of making a recovery of their deposit.

They should also be aware that the agent would have been through some form of criteria to obtain CMP and therefore present a lower risk of financial failure or impropriety.

Another area is that some agent hold monies from landlords in order to undertake repairs and maintenance. Again this money is held in client accounts, if the money disappears, this could mean landlords are unable to meet their obligations and the tenant suffers by not getting things put right in the property. Whilst they have other ways of getting redress, CMP indirectly benefits them if the landlord recovers their money and undertakes the work.

Finally remember most landlords are accidental and are not big time investors, they are not usually professionals and therefore many use agents. Anything that therefore encourages a safe and competent agent sector will benefit tenants as poor agent reputation leads to more DIY landlords who do not know what they are doing and are exposing tenant to risk.

We should therefore educate both our landlords and tenants of the value of CMP. It benefits all as part of the 'Golden Triangle' of Good Landlord, Good Tenant and Good Agent. One cannot thrive without the others.