A leading property expert is warning that letting agents applauding government plans to make Client Money Protection Schemes Compulsory might be celebrating too soon – and might be about to be hit with “astronomical” insurance premiums.
The Department of Communities and Local Government last week confirmed that it plans to make membership of a Client Money Protection schemes compulsory for letting agents in a move designed to prevent people being left out of pocket when property management firms go bust.
When letting agents have not kept tenancy deposits – which are supposedly legally protected – and rents – which are not – in separate accounts both renters and their landlords have been left out of pocket when they go out of business.
Client Money Protection Schemes insure the money of landlords and tenants in the event of a letting or property agent going into administration or serious theft.
Housing Minister Lord Bourne confirmed to the House of Lords that the government will amend the Housing and Planning Acts to make membership of such schemes compulsory for letting agents and “consult on how mandatory client money protection should be implemented and enforced”,
“There is no question that any announcement aimed at keeping client money safe is to be welcomed – but there are obvious unforeseen consequences to this announcement I think the industry should be concerned about.
“It’s the industry’s dirty little secret that client money is routinely used for supposedly prohibited purposes and in 2016 alone rogue agents were convicted of stealing £1m of tenancy deposits. By the looks of figures we’ll be releasing next week that figure is on course to be exceeded in 2017.
“This misappropriation only gets exposed when people get caught with their hands in the till or when firms go under which doesn’t always happen and often gets hushed up. So no-one knows how much money is really missing or where it’s missing from.
“£2.3bn of client money is currently held by letting agents and my contacts in the insurance industry have already indicated to me of their concerns as there is no robust mechanism for even estimating how much could be missing.
“It’s inevitable that underwriters will have to take this into consideration when assessing premiums, which could be astronomical if the true scale is uncovered and by that time it may be too late. As an agent I don’t want to be paying for the cost of money which may or may not be missing from my competitor’s client accounts.
“There’s also the matter that the decision assumes that the current Client Protection Schemes are working faultlessly, and I’m not sure they are.
“If you are member of certain trade bodies you get CMP as part of your membership and are audited accordingly. But there are more than enough examples – like the recent case of Premier Property Management in Cornwall – of apparently audited firms going under or having staff members convicted of stealing from customers – in one case over a five year period!
“The simplest step towards genuine client protection would be to for all existing tenancy deposits to be transferred into any of the three custodial schemes, which would reveal the scale of any missing money and highlight any “rogue” operators.
“Prior to the introduction of mandatory CMP this would allow insurers asses any risk and set premiums accordingly. If this doesn’t happen and insurers uncover the truth about missing client money no agent will be able to escape premiums which reflect the risk the insurers face. So be careful what you wish for!”