The Government is considering a major change to tenancy deposit protection rules that would prevent landlords and letting agents from holding tenant deposits in their own accounts.
Housing minister Matthew Pennycook has indicated that ministers are exploring whether to move to a custodial-only system, under which approved tenancy deposit schemes would hold all deposits throughout a tenancy. Currently, landlords can choose between custodial schemes and insured schemes, which allow them to retain deposits while paying a fee for protection.
Pennycook said the Government wants deposits to be "as safe as possible" and argued that the current system creates an "inherent power imbalance" because landlords or agents hold tenants' money during the tenancy.
The proposal forms part of wider reforms to the private rented sector and would represent the biggest change to tenancy deposit protection since the rules were introduced in 2007. The Government has not yet confirmed whether it will formally abolish insured schemes, but the minister's comments are the clearest indication yet that the option is under active consideration.
Under the current system, landlords and agents can choose between a custodial scheme, where the deposit is held by an approved provider, or an insured scheme, where they retain the funds themselves while paying for protection. Many landlords, particularly those with larger portfolios, use insured schemes to manage cash flow and administrative processes across multiple properties.
Any move to a custodial-only model would remove that flexibility and require all deposits to be transferred to an approved scheme at the start of a tenancy. While tenant deposits do not belong to landlords, the change would alter how many landlords and agents currently administer deposits and could create additional work during the transition period.
Landlords who fail to comply with deposit protection rules can already face significant penalties, including fines of up to three times the deposit amount and restrictions on their ability to regain possession of a property through the courts.
"While presented as a simplification, the reform primarily shifts when obligations arise rather than fundamentally altering what landlords must do," said Kristine Ng, partner at Morr & Co. "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."
Ng said landlords should begin considering the practical implications of any future changes.
"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."
She added that landlords should also review their processes ahead of any implementation.
"Landlords should also ensure agent instructions and tenancy documentation are updated to reflect the new approach."
