Client Money Protection is to be mandatory of letting agents in England that handle client money in a move that the Government says will safeguard private sector rents paid by tenants to agents.
‘This will ensure that every agent is offering the same level of protection, giving tenants and landlords the financial protection that they deserve. The Government will now consult on how mandatory client money protection should be implemented and enforced,’ said Lord Bourne of Aberystwyth, the Parliamentary Under-Secretary of State at the Department for Communities and Local Government.
He explained that the protection is needed because currently if an agent become insolvent or is unscrupulous and runs off with the money there is no recompense for a tenant or a landlord.
Letting agents are already required to belong to a redress scheme, but this may not help a client if, when awarded redress, the agent has gone insolvent and there’s no one to pay the compensation.
A working party review into the issues found that as the private rented sector is growing and the sector increasingly houses older people, and families with children, their security is too important to be left to chance.
While many agents already have a Client Money Protection (CMP) Scheme in place, not all do and the review report says that it heard some quite heart rending stories from both tenants and landlords of the losses they incurred.
With tenants, they then don’t have the deposit for their next home. For landlords, they have lost a large part of the income on which they rely. Too often the actions of the agent, whether through negligence or lack of experience going bust, or straight criminality, only come to light after the money has gone and the report points out that CMP offers protection when problems occur.
‘The costs of CMP to a letting agent are not great. However, the cost of not having it, to a landlord or tenant, is too great, and too important for the minority of agents without CMP to be allowed to continue to hold client money,’ the review report says.
‘Making CMP compulsory need not deter start-ups, as they can either use a custodial scheme, or act only as an introducer rather than handling client money until they have a track record. Mandatory CMP would deter the rogue, and indeed the amateur who should not handle other people’s rent without security,’ it adds.
The move has been welcomed by the Association of Residential Letting Agents which has been calling for mandatory CMP for over two years. ‘This is a clear step forward towards a more regulated industry; akin to others such as solicitors or travel agents. CMP safeguards landlords and tenants in the event that agents misappropriate their money,’ said ARLA Propertymark chief executive David Cox.
‘We have long believed that all letting agents should belong to a CMP scheme because the many agents who do not sign up represent a greater risk to landlords and tenants. Furthermore, the reputation of the sector is undermined by the small minority of bad agents who steal from their clients and from tenants,’ he added.
According to Alan Ward, chairman of the Residential Landlords Association (RLA), it is good for tenants and landlords. ‘Landlords should be concerned about agents having control over money due to them and formal schemes offer protection against any criminal activity that would deprive them of this cash,’ he said.
It is estimated that £2.7 billion is held by letting agents at any one time including rents and monies to cover maintenance. Of this, it is thought £700 million is not protected, leaving tenants and landlords vulnerable to agents who go bust or abscond.
Tenants are particularly vulnerable. Since 27 May 2015 agents have had to display whether they belong to a CMP scheme. This means that landlords can choose an agent depending on whether they belong to a scheme, but tenants don’t have such choice.
Under the new rules, the review group recommends that agents found to be handling client money without having a CMO should be fined and in the worst cases could be forced to cease trading. Agents who receive fines for noncompliance should not be permitted to continue to handle client money.
