The recent criticism of letting agents and deposit insurance schemes, which began with a probe by the BBC last weekend, will not have gone unnoticed by most of the industry and we could all be forgiven for thinking there is another insurance scandal in the offing.
Letting agents have come under heavy fire, with claims that they are mis-selling the deposit insurance schemes. In reality, the majority of letting agents ensure that tenants understand how the alternative deposit schemes work; are clear that the fees are generally non-refundable; and have understood the terms and conditions of whatever choice they make – whether it is a traditional deposit, or an insurance scheme.
The letting agents Canopy is working with, whilst happy to offer deposit insurance as an affordable alternative to tenants, have actually refused to take any commission from Canopy on this product.
The deposit alternative providers must provide adequate training to letting agents and educate tenants about the costs and benefits of deposit alternative solutions, in simple English.
Unfortunately, a minority of letting agents are not making it clear to tenants that payments for replacement products are non-refundable.
There is clearly growing demand for alternatives to traditional cash deposit schemes and increasingly, tenants are looking for flexible, deposit-free products. With the average tenant deposit now standing at £1,110, according to the most recent figures from the tenancy deposit scheme, it’s no surprise that tenants are struggling with rising rental costs.
Canopy’s deposit free insurance provides landlords with 8 weeks protection as opposed to 5 weeks with cash deposits. The policy is purchased by the tenant, is a one-off policy premium, and covers both parties for the length of the tenancy contract. Similar to a traditional cash deposit, Canopy protects the landlords against damages and unpaid rent.
The tenants remain responsible for settling any financial loss or damage suffered by the landlord under the assured short hold tenancy agreement. If the tenant does not settle the claim with the landlord within 10 working days, then the insurer would pay the landlord and recover the amount from the tenant. If, however, the tenant has suffered a major life event (e.g. job loss, critical illness), in that exceptional scenario, Canopy would settle the claim with the landlord and not seek recovery from the tenant. Claims are capped at the coverage limit being eight weeks deposit cover.
However, whilst most alternative deposit schemes look similar, there are significant differences in terms of regulation, affordability, risk protection, transparency, training and value for money.
Below are some tips on selecting the right provider for deposit alternative solution:
+ Letting agents must ensure that the deposit alternative product they are selecting, covers their landlords. Specifically, ask for proof of who is ultimately underwriting specifically the cash deposit risk. For instance, some providers carry the cash deposit risk on their balance sheet whilst reinsuring the broad credit risk. As such, there is nobody underwriting the risk in its entirety, and deposits may not be covered if everyone makes a claim. Letting agents using these providers must make it clear to landlords that they are protected by way of general coverage only, that relies upon not everyone claiming under it.
+ Perform commercial and financial due diligence
+ Check the providers status on FCA register
+ Always select a provider that has a third-party underwriter for the cash deposit risk. This will protect landlords. If the deposit insurance provider goes under, the landlord is protected, along with the deposits. Beware of providers that carry some of the risk because in doomsday scenario, the landlord could potentially lose their deposit. Landlords need to protect themselves from this risk.
We need to stop bashing agents for mis-selling insurance deposit schemes and instead pull together, to build trust across the rental value chain.
Tahir Farooqui, founder and CEO, Canopy.
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The main disadvantage to prospective tenants is not the added cost of no-deposit schemes, compared to the almost zero cost (loss of potential interest earned) of normal deposits for responsible tenants entitled to the full deposit being returned.
It's the question marks that resorting to such extra cost measures plants in the minds of landlords. Are these tenants actually destitute, financially illiterate or simply not responsible enough to ensure that the property will be returned in good condition at the end of the tenancy?
In all cases, however, the answer is the same. Avoid such tenants and opt for tenants who have been able to save up the modest deposit and first month's rent required to be regarded as financially responsible and thus a safer bet to merit consideration as a tenant.
Not at all interested in these '' no deposit schemes'' no deposit no tenancy simple.
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