Tenant Fees Bill

Baroness Hayter of Kentish Town Excerpts

Monday 5th November 2018 Grand Committee

Debate on whether Clause 21 should stand part of the Bill.

[Baroness Hayter of Kentish Town (Lab)]

My Lords, the Committee will recall that, as a result of pressure in this House and following the recommendations of a working group chaired by the noble Lord, Lord Palmer of Childs Hill, and me, the Government announced on 28 March last year that they would make it mandatory for all letting agents who handle client money to have client money protection in place.

Client money protection involves a separate, ring-fenced bank account, which, should a letting agent become insolvent, is not available to other creditors but belongs to the tenant, if it is rent paid in advance, or to the landlord, if it is rent due. Insurance is also part of client money protection. Making client money protection mandatory was widely welcomed—I remember congratulating the Minister at Question Time on the day he announced it. It safeguards both tenants and landlords, either from a business going bust or from an agent making off with the funds.

This was essential because, without this change in the law, only 60% of agents had such cover. Clients of the remaining 40%, perhaps unknown to them, were vulnerable to their money disappearing through poor business behaviour or fraud. Indeed, as the noble Lord, Lord Palmer, will recall, our working group heard heart-rending stories of tenants left without money and unable to move on to another property and of landlords losing serious money—sometimes their only source of income.

Furthermore, in business terms, there was—and still is—the lack of a level playing field because the good agents, particularly those in the professional organisations such as RICS or ARLA, which require client money protection, are at a competitive disadvantage, given the cost of coverage, in relation to the fly-by-nighters, if I might call them that. These are the letting agents which risk other people’s money by lowering costs because they do not have client money protection. We were therefore delighted with the Government’s announcement that CMP would be made compulsory.

However, the Government are making a mess of it, I am afraid. They have somehow managed to devise a scheme whereby the two major providers of CMP—the world-renowned and respected Royal Institute of Chartered Surveyors, or RICS, and Propertymark, the rebranded Association of Residential Letting Agents, or ARLA—will soon no longer be able to offer CMP to residential letting agents under their schemes, and will therefore have to withdraw from the market because the Government are insisting that their current £5 million coverage is increased to £200 million, with no cap on liability. So instead of bringing the 40% of letting agents that do not have client money protection up to the standard of the 60% that do—as we planned and hoped for and as the House supported—they are driving the schemes of the 60% out of business. You could not make it up.

The Minister knows all about this as he kindly met RICS, ARLA and me last week, but his department has failed to amend the scheme requirements to prevent this catastrophe which is about to happen. I should add that the requirements that are leading to this catastrophe were added by his department only in the last few weeks. They are not the criteria on which the impact assessment was based, they were not discussed in advance with the major players in the field, and they were not included in anything which went through your Lordships’ House.

I will start with RICS—a standard-setter for 150 years, with a proud record of driving up standards and protecting clients, and with a charter which reflects its role in promoting the public interest. Because of the ludicrous demands for recognition of a CMP scheme, it will close to residential agents a scheme which has run problem-free for over three decades and which, together with Propertymark, covers all the big residential letting agents.

RICS’s independent UK and Ireland regulatory board, chaired by Antony Townsend—who used to run the Solicitors Regulation Authority; he knows a thing or two about this—discussed this on Thursday following the meeting with the Minister, and concluded that RICS could not accept a situation in which the public interest functions of the institution, which upholds standards of almost 130,000 professionals and 11,000 regulated firms, were put at risk because it was exposed to unlimited liability. It would be inconsistent with its charter obligations. By opening itself up to potentially unlimited liabilities, no matter how rare, RICS would put its public interest duty at risk—a risk it is, understandably, not willing to take and which, I suggest, the Government should not be asking it to take.

The current RICS CMP scheme limits are £50,000 per claim and £5.3 million annual aggregate. Over the past five years, RICS has paid out residential client money loss claims totalling £49,000—less than £50,000 over a five-year period. That includes some tenant deposits because occasionally these are included. It is £50,000 in total over five years and it is now being asked to insure for £200 million. In fact, the highest single claim was under £13,000.

This is evidence that RICS more than adequately safeguards the public while ensuring that businesses are not adversely burdened by unnecessary CMP insurance costs, which of course are always finally passed on to consumers. Its scheme works for landlords and tenants because all client money held by RICS firms must be held in a separate, ring-fenced client account. Furthermore, deposits are already protected under the Housing Act 2004. Rents are covered under client money protection and deposits are protected quite separately under the 2004 Act.

However, the department is currently demanding that these deposits should be double insured by requiring them, in addition to the Housing Act requirement, to be covered by the CMP scheme. That makes absolutely no sense and I do not know whether it is actually legitimate. Certainly concerns have been raised by insurers as regards whether any such money should be double insured. Insurers have also indicated that there is not the capacity in the market to provide suitable cover for the largest agents that include tenancy deposits.

The figures I have quoted do not come just from RICS. The other professional body for letting agents, ARLA, has its own scheme which has been running since January 2008. Over the past 10 years it has paid out just over £2 million to landlords and tenants, and that includes one year with 10 agents going bust where those claims involved pay-outs of just over £1.3 million. The other nine years saw pay-outs of under £1 million in total. Under that scheme, the average number of claims a year is four. The average loss from claims over the last 10 years was less than £70,000. The last large claim of over £100,000 was in 2013, some five years ago. No major corporate agency has ever claimed on the scheme, yet we were told when we had a meeting with the Minister that the new requirements were being added to protect the really big agents. Because of the big schemes, which have never claimed, all the schemes will have to increase their cover from £5 million to £200 million. That is completely disproportionate, it is not based on evidence, and it is unrealistic. Why should ARLA’s cover, if its anticipated annual scheme loss, based on nearly two decades of experience, is around a quarter of a million pounds, be almost 100 times that? Also, why is this very last-minute change being made in the department’s approach?

Until 16 October, ARLA had been given the impression that CMP schemes would not have to cover tenants’ deposits already protected in insurance-backed tenancy deposit protection schemes, which of course are themselves authorised by the Government under the Housing Act 2004. It quite accepts that unprotected deposits are to be covered by CMP, meaning that no tenant should be left at risk. That is what was agreed with officials on 14 August and it was the basis on which ARLA submitted its application for approval on 12 September, as had been discussed ever since this was agreed last year. On 16 October the department suddenly said that it now expected CMP schemes to cover deposits that are already protected. This represents double insurance of the deposits because they are covered by both TDP and CMP, something that has certainly been questioned by ARLA’s insurer, Gallagher. I am happy to share that letter with the Minister if that would help.

In addition to the 3,000 member firms with less than £1 million in their client accounts, Propertymark has a little over 200 firms with more than that amount—the bigger ones that we were told we had to cover. Most have less than £1 million in their client accounts, so insuring for £200 million sounds a little unnecessary. The 200 firms that have more than £1 million have a combined total of £889 million in client funds, with £500 million of that coming from the top 16 businesses.

--- Later in debate ---

[Lord Bourne of Aberystwyth]

My Lords, I am absolutely clear on that. The cap that we are talking about will not be appropriate in that regard. As I say, I have only just become aware of this. It is a significant issue. I am very happy to engage with the noble Baroness, who probably understands these things better than anyone else in your Lordships’ House, and to carry on the discussion with RICS. I hope on that basis she will withdraw her opposition to Clause 21 standing part.

[Baroness Hayter of Kentish Town]

I thank the Minister. I think he has said more than in our meeting. In our meeting, he said that he would look at the double insurance. Today he has gone a little further and stated that this CMP scheme will not have to cover already protected deposits. That is a large part of it, for which the organisations will be grateful. The other part—the level of coverage—is still important. I know that the Government are well aware of this. I know this is very different from the space industry but a similar discussion happened on the Space Industry Bill, recognising that unlimited issues simply cannot be insured, and the Government agreed to move on that.

For the moment, I will not divide the Committee on whether the clause should stand part of the Bill. However, a tiny word of warning: client money protection is mentioned in the Bill, which means that amendments will be in scope when it comes to Report. On that basis, I shall not oppose Clause 21 standing part of the Bill.

Clause 21 agreed.