The government has announced that participation in a Client Money Protection Scheme (CMPS) will be obligatory from April next year. Until now, agents have been recommended to join such a scheme, but it has not been a legal requirement. This has been a major concern for groups like ARLA, as well as for reputable agents like PDF Estates Ltd, and we warmly welcome the latest move to further protect tenants, as well as landlords.
The original government consultation document estimates that 44% of existing agents are already a member of a CMPS, but this figures means that more than half are not necessarily signed up. All tenants that hand money to these agents are at risk, and the new legislation being introduced by the government, aims to redress this.
At PDF Estates Ltd, we are already members of the ARLA CMPS, and we firmly believe that every reputable agent should already be a member of their own scheme. The cost to the agent is minimal and it not only offers peace of mind to the tenant but also means that they will be able to get back their deposit and any rent payments that are held by the landlord. This can amount to hundreds and often thousands of pounds, and most families and individuals cannot afford to lose this kind of money.
What Is CMP?
The Consumer Rights Act 2015 saw the government try to address the problem by requiring that agents to publicise whether or not they are a member of a CMPS. Agents are required to publicise scheme membership on their website and in their offices. However, the original consultation determined that this had had little or no effect on the number of agents that had voluntarily joined such a scheme. The same Call for Evidence also highlighted the fact that there was very low awareness of whether a tenant’s agent was a member of one of these schemes.
A Client Money Protection Scheme is effectively an insurance product. It means that, should an agent go bus or abscond with the money, it is protected by the scheme. The money can be recovered by the landlord, and the tenant’s rent account remains in good standing. Neither the tenant nor the landlord will lose out financially, offering protection for both parties.
There are requirements that must be met to join a CMP scheme. The checks conducted by the CMPS will ensure that the agent is deemed capable of handling client money, too; adding yet another layer of protection.
A number of CMP schemes are in operation, including those from respected bodies like ARLA and the National Approved Letting Scheme (NALS). Membership of either of these bodies means that an agent is automatically enrolled in their protection scheme, and PDF Estates Ltd enjoys membership of ARLA and its CMPS; a benefit that we are proud to offer our clients.
Why Does Tenant Money Need Protecting?
In most cases, agents hold rent for a period of up to a week before it is transferred to the landlord. This poses some risk that if the agent were to abscond or go bankrupt in this time, the landlord would not receive their rent, leaving both the landlord and tenant in a difficult position.
There is evidence that, in some cases, rent money is held for much longer. Foreign students may be asked for a year’s rent upfront, although these are extreme circumstances. As long as the money is held by the agent, and not given to the landlord or held in a recognised protection scheme, the greater the risk to both the landlord and the tenant.
ARLA estimates that nearly £3bn of tenant money is held by agents at any time, of which at least £700mn is not protected and at risk of being forfeit.
Currently, letting agents are not regulated, which means that anybody can set up as an agent and handle client money. While CMPS requirements does not mean full regulation, it effectively enables the government and trade bodies like ARLA to ensure that agents are reputable and that their clients are fully protected.
Who Is Affected?
During the government consultation, several options were put forward. A blanket requirement for all agents to register with and use a CMPS was put forward, but the paper highlighted the fact that this would deter some agents from entering the market, even if they would never handle client money. As such, the preferred option was that agents would have to sign up for a scheme if they ever intend to handle client money – this is the option that the government intends to put into law.
As such, any agent that handles rent or other client money must register with a Client Money Protection Scheme before April 1st 2018. They must also be open regarding any fees that they pass on to clients, and they should publish details of the scheme that they are members of, on their website and in their office.
Failure To Comply
Local authorities will be given the power to fine offenders under the new regulations. Those that have not registered with a recognised scheme will face a fine of up to £30,000, and those that do not display details of scheme registration will be fined up to £5,000. The penalties for failing to meet these new regulations far outweigh any potential costs of joining a recognised scheme.
ARLA’s David Cox described the move as being “a vital step forward in improving consumer protection in the rental sector; probably more so than the myriad of other laws passed over the last two decades.”
PDF Estates Ltd
PDF Estates Ltd is a member of ARLA and we are happy to have been enrolled in their Client Money Protection Scheme for some time. We strongly believe that landlords and tenants should be treated fairly, and it is only right that the money handed to agents like ourselves be securely handled. If you have any questions about our ARLA or CMPS membership, or if you want to speak to somebody about how we can help manage your property portfolio, please call us on 020 3815 7952 and speak to one of our professional team.