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New no-deposit schemes for tenants could turn market into ‘Wild West’, warning

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Question marks have been raised over the growth in tenancy deposit replacement products, with one provider admitting that the unregulated market could turn into the ‘Wild West’.

Jon Notley, who has yet to launch the Zoopla-backed Zero Deposit, was speaking after a highly critical ‘white paper’ report of the new marketplace by Eddie Hooker, of MyDeposits.

However, at least one other provider was scathing, saying that MyDeposits simply wanted to protect its market.

With the no-deposit products, a tenant typically pays the equivalent of a week’s rent upfront.

This is far less than the deposits currently required, usually six or eight weeks’ rent in advance.

But Hooker says there may be no appetite for the new no-deposit products given the Government’s intention – announced in the Queen’s Speech – to cap deposits at a month’s rent.

Hooker’s intervention comes despite one of the Hamilton Fraser firms, HF Resolution, being said to have contracted to provide independent dispute resolution to one provider, flatfair.

Hooker, CEO of Hamilton Fraser, which runs MyDeposits, expressed a number of other concerns.

He said: “There are now several no-deposit insurance products that offer a solution whereby a tenant can rent a property without having to put down a deposit.

“Despite the initial attraction, I have been unable to find clear answers to some pertinent questions. Landlords and tenants entering into such contracts should do so with their eyes wide open.”

Tenancy deposit protection was introduced as a legal requirement in 2007 following government statistics which suggested that 20% of deposits were being unfairly withheld from tenants.

Some ten years later, over 4m individual deposits are protected by the authorised schemes and dispute levels have fallen to less than 2% of all ending tenancies.

Hooker said: “The no-deposit products use the 2% dispute levels as proof that they can keep their claims and premiums low, but they are misusing the statistics.

“In fact, more than 40% of deposits are returned to the tenant with an agreed deduction. That means at least 40% of landlords will have to make a claim.”

Hooker went on: “I question whether the no-deposit products will be as interesting to tenants as they may have been. These products command a premium the equivalent to one week’s rent.

“This will now equate to 20-25% of a deposit and is non-refundable, whilst also leaving a tenant liable for reimbursing the insurer for any claims they pay out.

“I struggle to see how this is a viable option for the hardest pressed tenants and is not just another fee they will have to pay.”

Yesterday, Notley said: “I understand and agree with the concerns that Eddie has raised.

“Currently there is a deposit protection regime which is government approved and covered by very clear legislation. Players are entering the deposit replacement market with apparently very little regulation, if any.”

He said that his own scheme, Zero Deposit, is currently undergoing a stringent process of due diligence and will enter the market as a fully regulated product with reinsurer Munich RE standing behind every policy written.

He said: “Agents need to think carefully about any provider in this space who is not regulated and protected by underwriting that clearly reflects their tenancy agreement, and consider the potential impact to their business if something goes wrong.

“Regulation in the financial services and insurance markets exists to make sure that businesses are clearly thought out, well capitalised and with clear penalties should there be any failings. Everything that Zero Deposit is doing is to make sure we have provided agents, landlords and tenants as much protection and reassurance as possible.”

Of concerns also expressed by Hooker that asking a tenant to pay the equivalent of a week’s rent in advance of moving in will be seen as just another fee, Notley said: “Zero Deposit has been actively involved in the recent consultation on tenant fees, liaising with the officials who are overseeing the process.

“We are entirely aligned with the Government in wanting to create a more affordable and better renting environment for tenants.

“Our product will always be offered as a choice for tenants and as such our product will never be a pre-condition of any tenancy.

“The Government has been very clear that they are looking at ways to reduce the costs of moving for tenants, and Zero Deposit delivers exactly that.”

Franz Doerr, of flatfair which has already launched its ‘flatbond’ scheme which it emphasises is not an insurance product, said: “We appreciate that this white paper addresses the growing no-deposit insurance market.

“Some points raised by Eddie might hold true for insurance-based products. However, flatfair does not fall into this category.

“For the avoidance of any doubt, our product was developed with the support of the FCA innovation hub and stands as the simple, affordable and secure alternative to tenancy deposits.”

Doerr also said he had taken legal advice on whether a ‘flatbond’ could count as a fee – a crucial point, since tenant fees will be banned.

He said: “Since we give tenants the choice to either use our service or a deposit, the payment of the fee is optional and therefore the regulation on fees does not apply.”

Tahir Farooqui of another provider, InsureStreet, last night said of the ‘white paper’: “It screams of protectionism and fear coming from the CEO of a company who earns a healthy return from the status quo.”

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