It is thrilling to be at the centre of a new market as it develops.
Deposit replacement has taken off. There are easily over 1,000 letting agent offices offering this new choice to tenants today – nearly 1,000 are live with Zero Deposit alone.
This number is likely to increase rapidly over the next year or two.
Agents who see the benefits are getting on with rolling the product out, tenants are hugely appreciating a lower cost deposit option when moving, and landlords are starting to understand that reducing the upfront costs of moving can speed up the rental process, reduce voids, and lead to happier tenants at move-in.
Removing the admin and compliance hassle of registering deposits is an added bonus.
Understandably, though, there are concerns that if these new products are not fit for purpose, or are mis-sold, they could leave landlords less protected and damage agents’ reputations if they have been seen to recommend a product that does not deliver.
The worst case scenario, as has been mentioned previously in the press, is that we could have a new PPI-type scandal in the making – the last thing the lettings industry needs.
We completely understand and agree with many of the concerns that have been raised. It is essential that this new industry develops responsibly.
To ensure that it does, it is worth thinking about how the PPI fiasco began and make sure that we have learned the lessons from it.
I was ripped off by PPI
On a sunny day in the early ‘90s I remember walking into a local high street bank branch to get a loan to fund my relocation from Maidstone to Islington. As a 20-year-old with very little credit history, I was not exactly a hot prospect, so I knew I’d have some persuading to do.
Thinking that my application was 50/50, when the loan manager asked me whether I would be taking the Payment Protection Insurance, my answer of course was ‘yes’.
There was a clear implication that if I bought the PPI, things would go better for me.
The money hit my account the following day.
One week after my move, having paid three months’ rent in advance, the deposit, etc, I got some bad news.
The wine and beer wholesaler that I worked for (what an amazing job that was!), and had relocated to London for, went bust.
We were called into the warehouse and unceremoniously laid off with no notice or severance – not a happy situation!
But at least I wouldn’t have to worry about the monthly loan payments, though. Right? Wrong!
The PPI policy that I had purchased did not pay out until I had been unemployed for 60 days!
There was no possibility that I could afford to be unemployed for that long, and I ended up in a new job within a couple of weeks.
However, due to the gap in pay, I fell behind on my loan payments and ended up facing additional interest and other charges. What a rip-off!
I was just one of millions of consumers who were sold this type of product, which went on to be the scandal that we are all aware of, and spawned an industry of PPI claim firms.
So why did PPI end up as such a big problem?
First, the products were not generally fit for purpose.
As I had experienced, in most cases they simply didn’t pay out or offer the kind of protection people needed. Did I read the small print? No, of course not, I was too eager to get the loan.
Many people were given a very brief, overly positive overview, if they were even told that they’d bought PPI at all.
Second, because they only paid out in limited circumstances, as in my own case, the margins were huge.
At the height of the market, providers were paying upwards of 90% commission to their distribution partners and still making huge profits.
This meant those selling PPI were making a lot of cash, and that led to huge incentives to push the product and industrial-scale mis-selling.
Lastly, the market was unchecked, and the problems were allowed to snowball.
It wasn’t until 2006 that companies selling general insurance products became regulated by what was then the Financial Services Authority, now the Financial Conduct Authority (FCA).
The rest is history, with large payments, including refunds, and compensation and huge fines; not to mention the reputation damage suffered by the those involved.
So how do we avoid these problems in our new deposit replacement market?
My own view is that regulation is essential.
Regulated businesses must follow the rules set out by the FCA, all of which are designed to ensure that customers are treated fairly, and are also designed to avoid the mis-selling of financial products.
Regulation is not easy and requires, for example, firms to prove that they have adequate processes and capital in place. It took us a year and significant investment to achieve it.
Additionally, those individuals running regulated firms must make personal commitments to operate responsibly, with severe consequences for those who do not.
Customers of regulated businesses also benefit from protections that are simply not available elsewhere. These include recourse for customers to the Financial Ombudsman Service, and protection under the Financial Services Compensation Scheme in the event that a provider fails.
The other roots of the PPI scandal are also dealt with in the FCA handbook, which all of us regulated firms must adhere to.
Firms selling a regulated product have to make sure they are clear, fair and not misleading.
In short, if you are dealing with an FCA regulated business, backed by a known underwriter, you can have a high level of confidence that the kind of issues that led to PPI won’t happen.
Looking to plug hole in income after fees ban?
For agents who are looking to plug the hole in their revenues that will be left by the fees ban, it might be tempting to select a provider that is not regulated, because they may offer a higher level of commission or even gives you complete freedom over pricing and selling.
You may also find that they offer all kinds of additional incentives, but don’t always highlight the risks involved. Your own agency may sell the product in an entirely responsible way, but you do not have control over the behaviour of others.
If any of these non-regulated providers go bust, and there is no ‘cash in the corner’ left for landlords, agents could do irreparable damage to their reputation and businesses when their landlord customers are left with no deposit cover at all.
Deposit replacement can be a great way to offer choice to your tenants, speed up the rental process and generate additional revenue.
Deposits offer your landlord customers protection, so it is important to ensure that any product you recommend to them is as secure as possible.
* Jon Notley is CEO and co-founder of Zero Deposit.