Draft Client Money Protection Schemes for Property Agents (Approval and Designation of Schemes) Regulations 2018
Draft Client Money Protection Schemes for Property Agents (Requirement to Belong to a Scheme etc.) Regulations 2018
(Limited Text - Ministerial Extracts only)
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The Parliamentary Under-Secretary of State for Housing, Communities and Local Government (Mrs Heather Wheeler)
I beg to move,
That the Committee has considered the draft Client Money Protection Schemes for Property Agents (Approval and Designation of Schemes) Regulations 2018.
The Chair
With this it will be convenient to consider the draft Client Money Protection Schemes for Property Agents (Requirement to Belong to a Scheme etc.) Regulations 2018.
Mrs Wheeler
It is a pleasure to serve under your chairmanship, Mr Gray. The regulations were laid before the House on Thursday 3 May 2018. I will refer to them as the approval regulations and the requirements regulations respectively. The private rented sector is an important part of our housing market. It has doubled in size over the last decade, and letting agents now hold approximately £2.7 billion in client funds. The client money held by agents includes rent money and money provided by landlords for the purpose of making property repairs. At the moment, however, there is no legal requirement for agents to obtain client money protection. Tenant and landlord money is therefore at risk if an agent goes bankrupt or if client funds are misappropriated. The main letting agent representatives, ARLA Propertymark and the National Approved Letting Scheme—NALS—support making this protection mandatory. Indeed, it is estimated that around 60% of agents already hold such protection.
Michael Fabricant (Lichfield) (Con)
I am curious to understand the context. Can my hon. Friend give any indication of the approximate rate of failures and money lost? Basically, how big a problem is it?
Mrs Wheeler
I thank my hon. Friend for his interesting question. I will come to it in the rest of my speech.
Making client money protection mandatory will ensure that every tenant and landlord has the financial protection they need. It will bring the property agent sector into line with others where client money is held, such as the legal profession and travel operators.
Before I set out the detail of the regulations, I want to establish the legislative context. The Housing and Planning Act 2016 provided powers for the introduction of client money protection requirements. Following Royal Assent, the Government invited Baroness Hayter and Lord Palmer of Childs Hill to chair a client money protection working group. The working group reported in March 2017, and its recommendation to make client money protection mandatory was accepted by the Government. The Government consulted on implementing mandatory client money protection in November 2017, and there was broad support for our proposals.
I will now introduce the two sets of regulations. The first set—the approval regulations—establishes the procedure for Government to approve privately run client money protection schemes. The second set—the requirements regulations—requires agents in the private rented sector to belong to one of those approved schemes if they handle client money. These two sets of regulations, which together provide the framework for client money protection, are the subject matter for debate before the House today.
I turn first to the approval regulations, which require any client money protection scheme to be approved by the Secretary of State in order to operate. This is to ensure that all schemes meet minimum standards and offer sufficient financial protection. The Government do not intend to create their own scheme at this time. That would be unnecessary, given the number of schemes in the market already. However, the regulations allow the Government to do so in future, so that any protection can be maintained in the unlikely event that the market ceases to offer provision.
In order to obtain approval, client money protection schemes must meet certain conditions, including those that are designed to ensure that landlords and tenants can easily obtain compensation. The scheme administrator must ensure that it has procedures in place so that valid claims are paid as soon as reasonably practicable—I love that word. It cannot make deductions from those claims. The scheme administrator must also hold a level of insurance cover that is appropriate given the amount of client money held by its members. Schemes must put in place arrangements so that in the event of the scheme closing, their members would be notified and transferred to an alternative scheme.
The approval regulations also establish minimum standards that must be set in scheme rules. They include requirements for members to hold money in a separate client account; to have written, transparent procedures for handling client money; and to maintain adequate records.
John Healey (Wentworth and Dearne) (Lab)
I am grateful to the Minister for giving way in her explanation of what she describes as the approval regulations. What would be her success or failure criteria, which would trigger the Government’s re-thinking of the matter and their implementation of the provision in the regulations for setting up their own scheme?
Mrs Wheeler
I thank the right hon. Gentleman for that question. We do not anticipate any failure, particularly because the schemes are backed by insurance. It is, however, a matter of form that the Government always provide in regulations that they can react, should the need arise.
Scheme rules must also require members to hold an appropriate level of professional indemnity insurance cover, to ensure that client money protection schemes are not overwhelmed with claims. The first port of call for a consumer making a claim should be their agent and their agent’s insurers; I hope that that somewhat answers the right hon. Gentleman’s question. Finally, schemes must provide key information to the Department on a quarterly basis to enable us to monitor their performance. If a scheme’s standards are not maintained, its approval can be withdrawn.
John Healey
Before the Minister moves on, if the Department requires, and will receive, quarterly reports on the activity and the performance of each of the schemes, will she undertake to make that quarterly performance information public?
Mrs Wheeler
I will come to that in my closing remarks. I turn to the requirements regulations, which will require all property agents in the private sector to obtain membership of a Government-approved client money protection scheme by 1 April 2019. Those agents will need to meet increased transparency requirements, publish details of scheme membership and inform clients when they lose cover.
The Government recognise that robust and effective enforcement is essential to the implementation of mandatory client money protection. Agents that fail to get client money protection may be subject to a financial penalty of up to £30,000. Those that do not meet transparency requirements will face a penalty of up to £5,000. The regulations level the playing field by ensuring that it is not just reputable agents that offer protection.
For those agents that do not yet have client money protection, we anticipate that obtaining it will not be disproportionately burdensome. Indeed, the average annual fee for cover is only between £300 and £500. It is important to highlight that these requirements apply only where landlord and tenant money is held by a property agent, and so is at risk. Agents can instead choose to eliminate the risk by, for example, allowing tenants to pay their rent to the landlords directly. The new requirements should therefore not deter new entrants to the market.
Hon. Members may be aware that we have committed to introducing a new regulatory framework for letting and managing agents, and to prohibiting letting agents from charging fees directly to tenants. Mandatory client money protection will be an important part of this regulatory framework, which will give landlords and tenants assurance when using an agent. I will close there and answer the questions.
Sir Oliver Heald (North East Hertfordshire) (Con)
I want to follow up on the point that my hon. Friend the Member for Lichfield made about less successful agents. There are references in the notes to agents that are unable to obtain CMP cover and meet due diligence. What is the justification for allowing such agents to trade? If they are so bad that they cannot meet the diligence requirement, why would we want them trading?
Mrs Wheeler
My right hon. and learned Friend asks an extremely good question. We want to make sure that there is enough time for a firm to get its business plan in order, and we expect all letting agents that deal with client protection money to get CMP cover. Similarly, if there is any problem, they can alter their business plan so that matters such as rents go direct, and they are not in charge of those things. I hope that that helps. I will answer other questions in my round-up, after the right hon. Member for Wentworth and Dearne has said a few words.
Mrs Wheeler
What a pleasure it was to hear those three extra questions, further to the three earlier questions. I thank you for chairing the debate, Mr Gray. I also thank the Committee Clerks and the Doorkeepers and everybody who has been involved in organising it, and I thank right hon. and hon. Members for their contributions.
To address some of the points raised, there have actually been only a small number of cases in which claims have been made against existing CMP schemes. The reason why we are going forward with the draft regulations is that this is a growing sector, and so claims may sadly increase in the future. The point of the draft regulations is to protect people involved in this area. We are finishing off the original legislation.
John Healey
Does the Minister accept that the measure of why the regulations are needed is not complaints against members of current schemes? The basis for the regulations is that those not in schemes are stealing money, keeping money and sometimes prosecuted for doing so when it is not their money. That is why it is so important to have mandatory schemes to fill the gap. The problem is not with schemes and members of them making complaints. The biggest case for the regulations is to fill the gap where no schemes exist and members are operating as regulated property agents without regulation.
Mrs Wheeler
Of course, the right hon. Gentleman is completely correct. We want a level playing field across this area of work. To answer his first three questions, the intention is to designate a governmental scheme only if market provision is insufficient. There is no indication at present that that is likely, but it is good and prudent practice to put that measure into legislation, should the need arise.
It would not be appropriate to publish quarterly, as the information would contain some commercially sensitive information. However, the Government will scrutinise and challenge if standards are not met. As regards the housing regulations and what might be repealed, to repeat myself, these statutory instruments finish off the 2016 legislation, so it is not a matter of deleting other areas of legislation.
John Healey
The Minister is right, but my question was whether the Government’s policy of two out, one in on regulations is still extant.
Mrs Wheeler
That is not a matter for today. This is a matter of closing the original 2016 legislation.
John Healey
I am sorry, but it must be a matter for the Committee. It must be relevant to the two regulations that the Minister is asking the Committee to approve. If Government policy requires that four regulations, probably in the housing field, must be repealed as a result of what we might approve, that is clearly a matter for the Committee. I am asking a simple question: does the Government still have a two out, one in policy on regulations? Yes or no is the only answer that is needed.
Mrs Wheeler
I repeat my answer from before: we are closing the legislation that came in in 2016, exactly as we said we would. I will give the right hon. Gentleman no other answer.
Mrs Wheeler
No, I will carry on. Who will enforce the regulations? Trading standards will be responsible. More importantly, the Secretary of State will nominate a lead authority in trading standards for areas that get into difficulty with existing trading standards. That is common practice, and that is what is happening in the Tenant Fees Bill that is going through the House.
Catherine West
The Minister is being generous with interventions. Will she clarify whether local authorities will have extra resources to carry out their trading standards duties?
Mrs Wheeler
As the hon. Lady knows—we have also made a great point of this in the Tenant Fees Bill—the £5,000 fine and the £30,000 fine will remain with councils, and we expect councils to be able to fund services because of such fines coming in.
John Healey
May I encourage the Minister to get her head together with her colleague, the Under-Secretary of State for Housing, Communities and Local Government, the hon. Member for Richmond (Yorks) (Rishi Sunak)? He dealt with that point, which she is right is relevant to the Bill that has been considered in Public Bill Committee today. He made it clear to that Committee this morning that every local authority will have an enforcement role, not that a lead authority would be appointed to do that job for them in some areas. I will not press her for a definitive answer now, but may I suggest that there may be a difference in the view we are getting on the same day from two Ministers from the same Department? Perhaps they could get their heads together and get it clear for both pieces of legislation and write to members of both Committees.
Mrs Wheeler
I would be delighted to answer the right hon. Gentleman now. This is a different piece of legislation under different law—the 2016 Act. This is consumer focused, which is why it is about trading standards. It is not a matter of housing, where we are worried about enforcement and environmental health issues, which is why district councils are getting involved in that Bill. This is completely different.
John Healey
As the Minister said, the discussion this morning was about client money protection. It was not about environmental or housing standards; it was about the very issue that is also relevant to the Tenant Fees Bill.
Mrs Wheeler
The right hon. Gentleman obviously had a very lenient Chair, who allowed Members to stray into that area on the Bill this morning. We are now talking about this Bill and this matter. As regards the figures of £5,000 and £30,000, we believe that those figures are high enough, particularly given that it is per individual case of failure, not over the course of a year, so we agree that that is the correct level. As it happens, it does also mirror the other Bill, which I will not mention again.
Sir Oliver Heald
Of course, the right hon. Member for Wentworth and Dearne suggested that some very large property agents—I think he mentioned Foxtons and Countrywide—have very substantial incomes. However, I thought that they were already in client money protection schemes. Is the Minister aware of any examples of a really large property agent that is not?
Mrs Wheeler
No, I am not. I thank my right hon. and learned Friend for that interesting question; he makes a very good point.
I will close my remarks there. The Government are determined to strike a better deal for tenants, landlords and their agents. All tenants and landlords should be comfortable in the knowledge that their money will be safe in the hands of the agents that they use. Making client money protection mandatory will ensure that that is the case. I therefore commend the regulations to the Committee.
Question put and agreed to.
Resolved.
That the Committee has considered the draft Client Money Protection Schemes for Property Agents (Approval and Designation of Schemes) Regulations 2018.
DRAFT CLIENT MONEY PROTECTION SCHEMES FOR PROPERTY AGENTS (REQUIREMENT TO BELONG TO A SCHEME ETC.) REGULATIONS 2018
Resolved,
That the Committee has considered the draft Client Money Protection Schemes for Property Agents (Requirement to Belong to a Scheme etc.) Regulations 2018.—(Mrs Heather Wheeler.)