Landlords and letting agents will no longer be permitted to hold tenants’ deposits in their own bank accounts under reforms planned by the government as part of its overhaul of the private rented sector.
Housing minister Matthew Pennycook has confirmed plans to abolish insured tenancy deposit schemes, which currently allow landlords and agents to retain deposits provided they pay a fee to protect the funds. Under the proposed changes, all deposits would instead have to be held within custodial schemes managed by approved deposit protection providers.
The move represents the latest stage of the government’s reforms to the rental sector following the introduction of the Renters’ Rights Act, which abolished Section 21 evictions and introduced a range of new obligations and penalties for landlords and agents. The changes come as recent data shows 42% of landlords are considering reducing their portfolios amid increasing regulatory pressures.
Shift in deposit protection model
For letting agents, the change would require adjustments to tenancy deposit handling processes and could bring an end to a system that has operated since tenancy deposit protection rules were introduced in 2007. The government argues the move will provide greater protection for tenants and remove what it describes as an imbalance of power between renters and property owners.
Pennycook told MPs: “The proposed removal of the insured schemes is based on the objective of ensuring that tenant deposits are as safe as possible. Under the custodial system, money is held by the Tenancy Deposit Protection provider as a neutral third party. Under the insured scheme, there is an inherent power imbalance against tenants given the landlords and letting agents hold the deposit.”
Pennycook said tenants whose deposits are held in custodial schemes are more likely to challenge deductions made by landlords at the end of a tenancy. He added: “There is growing evidence that the insured model also carries a higher fraud risk, with incidents of exploiting insured registration being reported.”
Industry implications
Kristine Ng, partner at Morr & Co., who specialises in property litigation and dispute resolution, said while presented as a simplification, the reform primarily shifts when obligations arise rather than fundamentally altering what landlords must do.
“In practice, landlords are already subject to strict compliance requirements,” Ng said. “The key distinction lies in choice: deposits can either be placed in a custodial scheme or retained under an insured model, which many landlords use to manage cash flow, particularly across multiple properties.”
Ng noted that even under the insured model, landlords must transfer the deposit to the scheme if a dispute arises. “The reform therefore largely brings that position forward to the start of the tenancy. Compliance risk will remain focused on procedural failure.”
She warned that while the legal position will not materially change, the removal of flexibility may increase the risk of administrative error, particularly during transition. Landlords must still meet deposit transfer requirements and provide prescribed information, with breaches exposing them to penalties of up to three times the deposit and restrictions on recovering possession.
The immediate priority will be transitioning existing insured deposits, according to Ng. “Landlords and agents should identify affected tenancies, diarise deadlines and ensure systems are in place for prompt transfer,” she said.
Ng also predicted a potential increase in disputes in the short term. “Tenants may be more willing to challenge deductions where funds are held independently, and landlords will no longer have control of the deposit at the outset.”
Further details on the timing and implementation of the deposit protection changes are expected as the government progresses its rental reform programme.
