More than £3bn in tenant deposits could be caught up in a government proposal to abolish insured tenancy deposit schemes, according to new research from The Letting Partnership.
The lettings data specialist analysed the latest tenancy deposit figures for England and Wales to assess the scale of disruption the proposed shift to mandatory custodial protection could create.
The findings show that around 4.7m deposits are currently protected across both nations. Of those, just over 2.1m, representing 45.6% of the market, sit within insured schemes, while just over 2.5m (54.4%) are held through custodial arrangements.
Despite accounting for a smaller share of deposit numbers, insured schemes hold the larger portion of deposit value. The Letting Partnership estimates that more than £3bn of tenant funds are currently protected via insured arrangements, equivalent to 54.7% of the total deposit value held across England and Wales. Custodial schemes account for the remaining £2.5bn, or 45.3%.
Should the government proceed with plans to phase out insured protection, all of that value would need to transition into custodial arrangements.
The proposals have prompted wide debate within the lettings industry, with discussion centring on whether landlords and agents should be permitted to hold tenant funds directly. The Letting Partnership argues, however, that the more significant issue is transparency rather than trust.
Under custodial schemes, deposits are held by an independent third party. Insured schemes, by contrast, allow landlords and agents to retain tenant funds within their own accounts while paying a fee to have the deposit registered with an approved scheme.
The result is that no single independent body holds a complete view of the cash sitting behind those liabilities at any given moment, even if individual schemes and underwriters each have partial visibility of their own exposure.
The timing of any reform is worth noting. Data from the sector suggests that the long-term shift toward custodial protection has largely stabilised, with custodial schemes holding around 54% of the market and insured schemes continuing to represent a significant share of activity. The proposed changes would not accelerate an existing trend so much as force a structural shift in a market that had reached a relatively settled equilibrium between the two models.
If the proposals become law, a phased transition is widely anticipated. New tenancies could move directly into custodial protection, while existing insured deposits would remain in place until tenancies conclude naturally. That would create a period during which many agents may need to administer both systems in parallel.
"The debate around insured deposits has often centred on whether landlords and agents should be permitted to hold tenant funds, but this framing misses the fundamental issue," said Chris Mason, chief operating officer of The Letting Partnership.
"Nobody, not the schemes, the underwriters, or the government, has a complete picture of the cash position sitting behind those liabilities at any given moment. From a client accounting perspective, that has always been the real weakness of the insured model.
"If the objective is greater transparency over tenant money, then the government is targeting the right problem.
"This isn't simply a question of moving deposits from one protection model to another. The industry is potentially looking at a significant operational transition that could take years to fully work through, particularly if existing insured deposits are allowed to run off naturally. The focus now should be on ensuring that any change is implemented in a way that minimises disruption for agents, landlords and tenants alike."
