Mandatory Client Money Protection for Letting Agents

The draft bill on for banning letting agent fees has taken most of the attention (you can read David Smith’s comments on the Government’s proposals here) but last week also saw progress towards banning orders and mandatory client money protection schemes for property agents in England.

The Housing and Planning Act 2016 introduced a power for the Government to make regulations which would make client money protection (“CMP”) mandatory for letting agents. On 1 November a consultation was announced on how membership of mandatory client money protection schemes in England should be designed, implemented and enforced. This consultation builds on the work done by done by a working group lead by Baroness Hayter and Lord Palmer of Childs Hill which published its report in March 2017.

It is clear from the consultation that the Government is going to proceed with making CMP for letting agents compulsory. That itself will not be of great significance for large parts of the sector since, as the consultation notes, around 60% of agents (including the vast majority of larger agents) are already offering CMP since this is required by professional bodies as a condition of membership.

However, there are a number of interesting proposals about how the duty to participate in a client money protection scheme will operate. The main areas on which the Government are seeking views is on the extent to which client money protection schemes should be controlled or administered by central government, whether scheme providers should have to comply with legal conditions, what regulations on the type of CMP should be made and how enforcement should operate.

The consultation does recognise that it will be small agents and particularly new entrants to the market who are likely to be most significantly affected by the proposals. Small agents will need to satisfy the insurers who underwrite the CMP schemes that they do not represent a high risk, or they will be hit with high fees to join a scheme. The consultation notes:

‘The Government agrees with the Working Group that agents should not be required to have a minimum number of years’ experience in order to be eligible for membership of a client money protection scheme. Scheme providers will need to satisfy themselves that new firms have sufficient knowledge to operate effectively. This could be demonstrated through relevant work experience or formal qualifications, or agents could use a custodial scheme for rents initially.’

If, as appears likely, the Government leave CMP schemes to the market, the due diligence requirements of those scheme are likely to require agents to arrange their activities so that the risks to the schemes are minimised. This may include operating segregated client accounts so that client funds are kept separate from the business’ own cash reserves, and holding professional indemnity insurance.

The alternatives to meeting the demands of CMP scheme providers will be not holding any client money (i.e. not collecting rent) or using a custodial scheme, where the money would be held centrally, similar to a custodial deposit scheme.

Using a custodial scheme for client money is not likely to be an attractive option unless it runs very smoothly and efficiently, and agents will not want to give up control of rent collection. The reality appears to be that small and new letting agents will be hit with significant costs if they want to process rent receipts themselves.

Some of these concerns may be irrelevant if the government pushes ahead with its other proposals to regulate all letting agents. As all the current professional bodies supply CMP as a part of their membership it is almost inconceivable that CMP would not be linked in with any regulatory regime. Equally, regulation of agents will mean that CMP providers will have a degree of certainty about the quality of those they are insuring and this would presumably keep premiums down. However, CMP is already dealt with on the statue books while agent regulation is not and so the demands of CMP schemes are very likely to become the de facto regulation of the sector even if the Government ultimately delays or rows back from full regulation of lettings agents.

The consultation runs until 13 December 2017.

We are holding a seminar on 6 December to discuss recent developments in the regulation of the private rented sector, including CMP and the tenant fees ban. For further details please click here.

* Disclaimer: The information on the Anthony Gold website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. It is provided without any representations or warranties, express or implied.*