New no-deposit schemes for tenants could turn market into ‘Wild West’, warning

Question marks have been raised over the growth in tenancy deposit replacement products, with one provider admitting that the unregulated market could turn into the ‘Wild West’.

Jon Notley, who has yet to launch the Zoopla-backed Zero Deposit, was speaking after a highly critical ‘white paper’ report of the new marketplace by Eddie Hooker, of MyDeposits.

However, at least one other provider was scathing, saying that MyDeposits simply wanted to protect its market.

With the no-deposit products, a tenant typically pays the equivalent of a week’s rent upfront.

This is far less than the deposits currently required, usually six or eight weeks’ rent in advance.

But Hooker says there may be no appetite for the new no-deposit products given the Government’s intention – announced in the Queen’s Speech – to cap deposits at a month’s rent.

Hooker’s intervention comes despite one of the Hamilton Fraser firms, HF Resolution, being said to have contracted to provide independent dispute resolution to one provider, flatfair.

Hooker, CEO of Hamilton Fraser, which runs MyDeposits, expressed a number of other concerns.

He said: “There are now several no-deposit insurance products that offer a solution whereby a tenant can rent a property without having to put down a deposit.

“Despite the initial attraction, I have been unable to find clear answers to some pertinent questions. Landlords and tenants entering into such contracts should do so with their eyes wide open.”

Tenancy deposit protection was introduced as a legal requirement in 2007 following government statistics which suggested that 20% of deposits were being unfairly withheld from tenants.

Some ten years later, over 4m individual deposits are protected by the authorised schemes and dispute levels have fallen to less than 2% of all ending tenancies.

Hooker said: “The no-deposit products use the 2% dispute levels as proof that they can keep their claims and premiums low, but they are misusing the statistics.

“In fact, more than 40% of deposits are returned to the tenant with an agreed deduction. That means at least 40% of landlords will have to make a claim.”

Hooker went on: “I question whether the no-deposit products will be as interesting to tenants as they may have been. These products command a premium the equivalent to one week’s rent.

“This will now equate to 20-25% of a deposit and is non-refundable, whilst also leaving a tenant liable for reimbursing the insurer for any claims they pay out.

“I struggle to see how this is a viable option for the hardest pressed tenants and is not just another fee they will have to pay.”

Yesterday, Notley said: “I understand and agree with the concerns that Eddie has raised.

“Currently there is a deposit protection regime which is government approved and covered by very clear legislation. Players are entering the deposit replacement market with apparently very little regulation, if any.”

He said that his own scheme, Zero Deposit, is currently undergoing a stringent process of due diligence and will enter the market as a fully regulated product with reinsurer Munich RE standing behind every policy written.

He said: “Agents need to think carefully about any provider in this space who is not regulated and protected by underwriting that clearly reflects their tenancy agreement, and consider the potential impact to their business if something goes wrong.

“Regulation in the financial services and insurance markets exists to make sure that businesses are clearly thought out, well capitalised and with clear penalties should there be any failings. Everything that Zero Deposit is doing is to make sure we have provided agents, landlords and tenants as much protection and reassurance as possible.”

Of concerns also expressed by Hooker that asking a tenant to pay the equivalent of a week’s rent in advance of moving in will be seen as just another fee, Notley said: “Zero Deposit has been actively involved in the recent consultation on tenant fees, liaising with the officials who are overseeing the process.

“We are entirely aligned with the Government in wanting to create a more affordable and better renting environment for tenants.

“Our product will always be offered as a choice for tenants and as such our product will never be a pre-condition of any tenancy.

“The Government has been very clear that they are looking at ways to reduce the costs of moving for tenants, and Zero Deposit delivers exactly that.”

Franz Doerr, of flatfair which has already launched its ‘flatbond’ scheme which it emphasises is not an insurance product, said: “We appreciate that this white paper addresses the growing no-deposit insurance market.

“Some points raised by Eddie might hold true for insurance-based products. However, flatfair does not fall into this category.

“For the avoidance of any doubt, our product was developed with the support of the FCA innovation hub and stands as the simple, affordable and secure alternative to tenancy deposits.”

Doerr also said he had taken legal advice on whether a ‘flatbond’ could count as a fee – a crucial point, since tenant fees will be banned.

He said: “Since we give tenants the choice to either use our service or a deposit, the payment of the fee is optional and therefore the regulation on fees does not apply.”

Tahir Farooqui of another provider, InsureStreet, last night said of the ‘white paper’: “It screams of protectionism and fear coming from the CEO of a company who earns a healthy return from the status quo.”

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20 Comments

  1. TAHIR68

    Whilst I will not provide a point by point rebuttal for the inaccurate portrayal of InsureStreet that is put together in this whitepaper. Highlights include:

    1) InsureStreet is fully regulated

    2) We are backed by HISCOX – household Insurance name and one of the most trusted brands in the U.K market

    3) Insurance premium on our platform is: 5% – 15%; Not 20%-25% as the whitepaper claims

    4) We insure both the tenant and the landlord and are not reliant on the tenant paying up on claims to cover the landlord. We do have an Excess for the tenant to pay but again the landlord is covered to the full value of the deposit for all of the things a deposit would cover today. This document clearly implies business practices on InsureStreet which are untrue.

    5) Deposit Insurance is ONE choice on our platform.

    6) We offer Landlords, Agents and Tenants comprehensive Tenant referencing – FREE.

    There is a lot more to InsureStreet than Deposit Replacement Insurance. We launched our BETA Dec 2016 and are taking a measured approach to launch.

    We are selectively piloting with leading property brands to make sure we are compliant with relevant regulatory standards and most importantly, make sure the end product fits Landlord and Renter needs. Deposit protection just happens to be one of the services we offer.

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  2. Will

    Could cost tenant dearly.  If there is an insurance payout the claim is then made against the tenant to recover insurer’s loss. So from the tenant perspective they could pay a significant premium, insurer’s payout and then claim back loss from the tenant. This means the tenant potentially pays the costs plus an insurance premium. It could encourage less savvy tenants to take less care of the property thinking insurers will just pay for their damages. From a landlord perspective we have all seen how some Loss Adjusters act, I have dealt with a subsidence case where the property has had the same claim through AVIVA where it has gone wrong 3 or 4 times (they  keep doing “polyfiller” fill it and forget it repairs) and the claim re-opened on each occasion 2 or 3 years down the line. They have used the 2 largest firm loss adjusters and still come up with substandard repairs. Unfortunately neither freeholder or leaseholders can afford to sue the adjuster concerned. These days it seems loss adjusters like politicians do cheap short term solutions rather than work towards a professional solution. Insurer’s will fight to avoid paying claims so landlords will also suffer. Up side more work for the courts and lawyers!

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    1. TAHIR68

      Will you are absolutely right – that is why the product has to be carefully thought out to ensure Landlords and Tenants are fully protected. 
      I think we have to have an open mind to innovation. No doubt there is a lot to learn along the journey, but I am confident given where we are with technological advancements, we can address the concerns raised in the whitepaper. Time will tell. 

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      1. Will

        One thing is right “Time will Tell”   I would like to think positively but experience teaches me to be cynical where money is concerned.  Insurance used to be a profession – it is now an industry.

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        1. AgencyInsider

          ‘Insurance used to be a profession – it is now an industry.’

          Now you know how some of us older agents feel about the demise of our own ‘profession’ Will.

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          1. Will

            Agency insider – I could not agree more!  It all started to go wrong in the 1980’s when people started using the term property industry and I guess you will agree!!

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  3. FutureAgent85

    Reposit seem pretty silent on all of this?

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    1. ajayjagota75

      Perhaps it’s because they are not an insurance product? 
       

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  4. ajayjagota75

    An economist view of Mr.Hooker’s Cash Deposit schemes www.conservativewoman.co.uk/brian-sturgess-ajay-jagota-scrapping-tenancy-deposits-ease-housing-crisis/

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  5. Jopo71

    Nil Deposit Schemes are lunacy. Any landlord in their right mind would stear well clear. These are schemes concocted by letting agents to charge more fees to landords – as agents desperately look to replace the fees they will no longer be able to charge tenants.

    Selling a landlord a deposit insurance policy and earning commission, rather than take a deposit from a tenant is pure bad practice and another example of why agents need to be regulated.

    Take a full deposit from your tenant, protect it with a government approved scheme, and sleep at night.

     

     

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    1. ajayjagota75

      What happens when a cap of one month means you can not recoup the amount of damage?
      Or loss of rent is over and above one month? 
      Or you have to take legal action to evict? 
      Far from sleep at night, this is the reality with the current system and the nightmares faced by landlords and agents?
      Discuss with the landlords and tenants who have lost their deposits and ask how they are sleeping as £1 million raised in Tenancy deposits under these government schemes?
      http://www.bbc.co.uk/news/uk-england-cornwall-38958848

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      1. Romain

        “What happens when…”
        Exactly the same as with these new insurance/not insurance schemes, I would think.
        A tenancy deposit remains the best security for a landlord. This proposal to limit the amount is plainly bonkers.
        These new schemes will also likely be hit by the ban on fees.
        Lastly, let’s not forget that there are already plenty of insurance products to cover unpaid rent and damage.
         

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    2. Robert May

      ….but only have enough to deposit to cover 4 hours of a solicitor’s time or  half a week of a single tradesman on dilapidations with no materials covered!
      It is because the existing system is badly broken and Yvette Cooper’s 2007 fix was only a sticky plaster on nasty gash that new systems are being investigated. There is a bit of work to do on most products but it is a change that will happen.

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  6. Jopo71

    So we are all agreed that it is sensible for a landlord to take a Deposit. And we also agree that tenants need recourse against a landlord unfairly withholding the deposit at the end of the tenancy.

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  7. StatementOfFact

    This is an absolutely terrible idea and I can’t even believe it is being suggested. What with tenants have more rights than landlords once in, we now want to give them the opportunity to create damage which the cost of is unrecoverable? No thanks.

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  8. JenniBax14

    A lot of schemes coming into play now but I can’t imagine many of them will be around in a years time.  Sounds like Mr. Hooker has got it wrong though judging by Franz’s comments? If it isn’t insurance then this report is meaningless?

    Probably applies to Delighted or Insurestreet but the biggest of these schemes is Reposit and can’t find any response from them so it must be written about their product?

    I think one of these is going to work though, tenants would always go somewhere they dont have to pay a deposit

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    1. ajayjagota75

      “biggest of these schemes is Reposit” how?  They are also not an insurance scheme!
      Dlighted has been successfully in use for the last 5 years.
      The Dlighted deposit replacement insurance policy is issued directly to the Landlord or Agent unlike other schemes.

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  9. KByfield04

    These schemes could, potentially, work but there are a few key questions:

    1. Whilst Dlighted & InsureStreet are insurance products and are FCA regulated- in what way are Reposit & FlatFair NOT insurance? Surely they are structured the same as one and, as such, should be regulated accordingly.

    2. Will Tenants fully understand that they incurr an upfront cost and still retain most, if not all, liability (depending on which product- as I understand it FlatFair give 12 weeks cover but T is still liable for first 6 weeks)?

    3. If the tenants receive cover over and above their outlay, will their attitudes shift causing more damage. Not, per se,  in large damage issue but cumulative small ones. Will they drag that sofa across the floor rather than lift? Or put that hot pan on the worktop rather than take care not to?

    4. When one of these companies fails, and make no mistake at least 1 will, what protections will still be in place for the products under its brand? Will tenants, and more importantly Landlords, be left with no cover at all?

    In an ever varying marketplace, new options are always interesting but there are a lot of questions that still need answering. Personally I still believe, as both an agent of 15 years and a London tenant of 20 years, that a cash deposit backed up by a good rent & legal expenses warranty is the fairest & most comprehensive strategy for landlord & tenant alike.

    In total transparency, I would say that, having spent the last 18 months developing The Depositary in partnership with TDS. We are about to go in to Beta and launch later this year. We will support the current system we are simply completely overhauling its implementation digitising & automating most of the leg work for agents whilst bringing transparency & 24/7 access to Tenants. I think that’s the way forward- but only time will tell.

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  10. Votta583

    I worked with a scheme like this in the past for a few years AND IT DID NOT WORK. In fact the company went into administration. The amount of claims was astronomical. I’ll say what I’ve always said ENFORCE THE LEGISLATION THATS IN PLACE and the industry will become a far better place instead of making poor decisions and changes that will ultimately turn it into the wild Wild West.

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  11. TAHIR68

    Perhaps MOST ALARMING is Eddie’s comment and I quote: “Perhaps one day we will launch a deposit alternative” 
    Strategy 101: Damage reputation of new companies. Then launch the same service yourself. Great strategy Eddie. 
     

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