Letting agents and landlords will no longer be permitted to hold tenants’ deposits in their own bank accounts under further 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 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. 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 proposals represent 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 government plans to abolish insured tenancy deposit schemes, meaning landlords and letting agents will no longer be allowed to hold tenants’ deposits in their own accounts.
- All tenancy deposits would instead be held in custodial schemes managed by approved tenancy deposit protection providers.
- The reform is part of wider private rented sector changes following the Renters’ Rights Act, which also abolished Section 21 evictions and introduced new landlord and agent obligations.
- Housing Minister Matthew Pennycook said the change is intended to:
- Improve protection of tenants’ money.
- Reduce the power imbalance between tenants and landlords/agents.
- Encourage tenants to challenge unfair deposit deductions.
- Reduce fraud risks associated with insured schemes.
- Under the current system:
- Deposits can be held in either a custodial scheme or an insured scheme.
- Many landlords use insured schemes to help manage cash flow across multiple properties.
- If a dispute arises, landlords must already transfer the deposit to the protection scheme.
- According to property litigation specialist Kristine Ng, the reform:
- Does not significantly change landlords’ legal obligations.
- Mainly changes when deposits must be transferred (at the start of the tenancy rather than when a dispute occurs).
- Removes flexibility for landlords and agents.
- Landlords will still need to:
- Comply with deposit protection rules.
- Transfer deposits correctly.
- Provide prescribed information to tenants.
- Penalties for non-compliance remain significant:
- Fines of up to three times the deposit value.
- Restrictions on a landlord’s ability to regain possession of the property.
- Key challenges during implementation:
- Transitioning existing insured deposits into custodial schemes.
- Updating systems, processes, tenancy documents, and agent instructions.
- Monitoring deadlines and ensuring deposits are transferred promptly.
- Short-term impacts may include:
- Increased administrative burden and risk of procedural errors.
- More tenant challenges to deposit deductions because funds are held independently.
- Potential long-term benefits:
- Greater consistency in dispute decisions.
- Clearer outcomes for both tenants and landlords.
- Possible reduction in deposit disputes over time.
- The government has not yet confirmed the exact timetable for implementing the changes, with further details expected as rental sector reforms progress.
Further details on the timing and implementation of the deposit protection changes are expected as the government progresses its rental reform programme.
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.
There is growing evidence that the insured model also carries a higher fraud risk, with incidents of exploiting insured registration being reported.
Kristine Ng, partner at Morr & Co., who specialises in property litigation and dispute resolution, says while presented as a simplification, the reform primarily shifts when obligations arise rather than fundamentally altering what landlords must do.
The government’s proposal to remove insured tenancy deposit schemes and require all deposits to be held in custodial schemes forms part of the ongoing reform of the private rented sector, aimed at strengthening tenant protections.
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.
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.
However, 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.
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. Landlords and agents should identify affected tenancies, diarise deadlines and ensure systems are in place for prompt transfer.
There is also potential for an 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.
Over time, however, a single custodial model may deliver greater consistency in decision-making and clearer outcomes, which could help reduce disputes.
Landlords should also ensure agent instructions and tenancy documentation are updated to reflect the new approach.
