Opinion: How do we avoid a PPI-type scenario in the new deposit replacement market?

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.

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18 Comments

  1. KevKFH

    I’ve thought this all along. Why would you work with a company offering “financial protection” that is not FCA registered. It would be like accepting a tenancy deposit in bitcoins.

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  2. Towlly

    Totally agree, why would you ever risk offering a non regulated product when you consider all of the safeguards a fully regulated company and product provides. I know I wouldn’t go near one..

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  3. David M

    Jon,

    I’m sure you have been asked these questions many times but just looking for some clarification as I am concerned that there is a big risk of a lot of agents and Landlords getting stung by this.

    When a Tenant takes out a policy with Zero deposit are they buying an insurance product?
    I understand that the Tenant has to pay a fee for this product – but surely these are to be banned under the incoming Tenant Fee ban?  (I understand that under the ban – only rent and deposit can be charged.)
    If the Landlord does make a claim and it is valid – does this just get agreed by Zero Deposit or does this have to be decided by TDS?

    PS: Agents get TDS discount if we resolve deposit disputes without going to arbitration – such a discount will be lost if the majority of deposits are referred to TDS –  thus there is a cost to the Agent.

    Upon a claim being agreed does the Tenant have to refund Zero Deposit – if so could it not be argued that the Tenant has paid a fee and so the agent has breached the Fee ban?
    We understand there is an incoming regulation about referral fees having to be declared to customers when recommending solicitors/surveyors & other partners – how will this be covered by Zero Deposit

    Thanks in advance.
     
    D

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    1. jonnotley35

      Morning David, thanks for each of your questions, which I’ve answered below:

      1. Are tenants buying an insurance product?

      Technically speaking they are buying an insurance backed guarantee that provides a guarantee that if the tenant owes the landlord for any obligations at the tenancy, the Guarantee will pay out of the tenant does not. Yes, it is an insurance product and therefore falls under FCA regulations

      2. Does it fall foul of the tenant fee ban?

      As long as agents and landlords offer Zero Deposit as a choice to the tenant, then it does not fall foul of the regulations, as purchasing it is not a condition of the granting or renewal of the tenancy.

      3. If the landlord makes a valid claim, does it get referred to TDS?

      It depends whether the tenant disputes the claim, as with a cash deposit. The majority of claims that we have handled so far have not been referred to TDS.

      4. Do claim payments from tenants fall foul of the fee ban regulations?

      These payments are not conditional upon the granting or renewal of a tenancy so do not fall under the fee ban. They are simply the tenant discharging their obligations under their tenancy agreement & Zero Deposit Guarantee.

      5. How is the declaration of referral fees covered by Zero Deposit?

      In our communication with tenants and landlords we mention that we may pay agents a commission. However, as with any referral commissions, agents need to ensure that they are sufficiently declaring any payments to their customers.

      On your PS point, any referrals to TDS are made by Zero Deposit, not the Agent so this should not affect your relationship with TDS.

      I hope my answers help and please do get in touch if you’d like to discuss further.

      Best, Jon

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      1. David M

        Thanks for the comprehensive response Jon; and for clarifying a number of points.

        I noticed on your website there is an annual admin fee for any renewals; can I ask what happens if the  Tenant doesn’t pay the admin fee?  Is the Deposit guarantee still in place?

        Cheers

        D

         

         

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        1. jonnotley35

          Thanks David, if the tenant does not pay the admin fee it has no effect on the guarantee which stays in place for the lifetime of the tenancy or 10 years.

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          1. gidam

            So you’re charging an annual fee for the sake of charging an annual fee, where nothing is gained by the tenant?

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  4. Simonr6608

    (2) A letting agent must not require a relevant person to make a prohibited payment to a third party in connection with a tenancy of housing in England. (3) A letting agent must not require a relevant person to enter into a contract with the agent or a third party in connection with a tenancy of housing in England if the contract is— (a) a contract for the provision of a service, or (b) a contract of insurance.
    jonnottley35 How do you propose to overcome the following as highlighted in the first article when the fee ban comes in to affect?  
    You say it is offered as a choice and not a condition of the tenancy but it is, if the tenant doesnt have a cash deposit then the choice is taken away from them and this becomes their only option so choice taken away.
    If they dont want the no deposit option then they will not be given a tenancy.

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    1. jonnotley35

      Thanks Simon,
      We are very clear that this is not an issue and is dealt with in the amendments made to the tenancy agreement when agents come on board. These make clear that the Zero Deposit Guarantee is accepted if the tenant chooses to purchase the product and at no point is a requirement of the tenancy.

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      1. Simonr6608

        Zero Deposit Guarantee is accepted if the tenant chooses to purchase the product and at no point is a requirement of the tenancy.

        No but a deposit is so if a tenant doesn’t have a deposit and the agent uses you as a zero deposit option then they don’t have a choice so it does become a condition of the tenancy and thus will be in breach of the up coming changes in legislation.

         

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  5. seenitall

    can of worms anyway.   Why would a landlord not want a cash deposit in the normal way from a tenant?  If a tenant can not afford to pay the normal deposit then I would suggest the tenant is not going to be financially a good risk in the first place and should be avoided. We work hard to cut the risk to landlords but then we are a small independent letting agency (successfully letting properties for over 40 years) rather than a chain of agents that are number chasing and box ticking.       Its easy to rubbish the zero deposit and agents offering it as it does not help protect the landlord and shows the agent doesn’t really think about the risk that tenant they are putting in.  ie the tenant is running things so tight they can’t afford to pay the deposit  – yep sounds a great tenant to recommend to a landlord.    

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    1. Edenio

      I’ve done some research on the subject (questionnaires / focus groups along with analysing live data), and the demand for a deposit replacement (from the tenant) seems to be present across many wage brackets. Even some of the most wealthy tenants often don’t want to pay an upfront fee for a deposit, when given the choice.

      For me the most important explanatory variable in preference for a deposit replacement was not income, it was temperament (how strategic / myopic is this person, in general?)

      On the other side of the coin – a lot of people who do pay a regular deposit, also can’t ‘afford it’. 76% of renters under 30 had to get some kind of financial assistance when they rent a new place. Less well-off tenants who think strategically will find a deposit through family and friends if they think it will help them in the long-run.

      I agree with your point, on the whole, but it’s not so black and white.

       

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  6. TAHIR68

    Great article Jon. I could not agree more with you on Agents working with FCA regulated firms. Deposit Free will certainly become the norm in the coming years and it is important that Agents are able to offer Renters a range of deposit free alternatives.

    We have similarly invested heavily in being FCA licensed and are continually working with HISCOX as our underwriter as well as with Agents in designing a deposit free alternative which suits the needs of the Landlords, Renters and Agents.

    Tahir Farooqui

    CEO & Founder – Canopy

    tahir@canopy.rent

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    1. Simonr6608

      Sorry Tahir

      But zero deposit schemes will not become the norm, they may be used more but certainly not the norm. A good quality tenant needs to be financially stable and the one way to show this is by paying a deposit plus of course the added security that they may lose some if not all if they don’t look after the property.

       

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  7. DarrelKwong43

    If I was a agent, then I would use Zero Deposit for the following reasons

    (a) no need to worry about deposit compliance and the financial/possession issues which arise

    (b) get commission from each one sold

    (c) the adjudication requirements are similar to the three Gov approved deposit schemes

    If I was a tenant, then I would not use Zero deposit for the following reasons:

    (a) the payment required is akin to a pay day loan, if I only stay for 6 months.  Only really beneficial if I stay for a number of years.

    (b) I am still 100% liable for damages and rent arrears, so only pay in respect of easing any cash flow

    (c) Some of the schemes, not zero deposit from my understanding, levy much higher charges, which IMHO are extortionate

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  8. Lil Bandit

    This comments section just seems like a handful of ZDS staff having a conversation with themselves!

    Cut to the chase, how much commission can I make!

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  9. Reformed Founder

    PPI exhisted in times of regulation, as did the 2008 crisis, as did payday lending, as does fraud. Regulation in itself does not prevent accidental or malicious action – regulation doesn’t prevent poorly designed or harmful products.

     

    John’s opinion piece straddles being an advertisement for deposit replacement schemes and his product specifically. Nothing wrong there, however the FCA does not allow firms to use their logo or name in any maketing. Authorisation/regulation is not an endorsement from the FCA, nor is it a selling point for a product/service or the firm selling that product or service.

     

    Only time will tell. As competition forces an athlete to improve, so should competition encourage products and firms to improve – assuming ‘improvement’ of the product is not to the detriment of stakeholders.

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  10. Woodentop

    Question: Why do you take a deposit and please don’t come back its to cover damage or rent arrears!  
     
    If you know the correct answer, why on earth would you want to use they schemes?  Making it easier for a tenant is not what it is all about. Tenants must always provide their own deposit.

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