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Citizens Advice warns about deposit replacement schemes

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Citizens Advice is alerting tenants to the drawbacks of using deposit replacement products instead of a traditional deposit, protected in a government-backed scheme.

The advice charity’s warning follows a BBC investigation, which found that many tenants did not understand that money paid into deposit replacement schemes is non-refundable and does not offset any financial liabilities at the end of a tenancy.

Deposit replacement schemes are insurance policies aimed at tenants in the private rented sector, who do not have enough cash for an upfront deposit. Instead, tenants pay a monthly or annual fee on top of their rent.

The schemes offer landlords protection against unpaid rent or damage and may pay out more than the amount of money which can legally be held in security deposits. But, while the landlord will be reimbursed by the insurer, the tenant may still be pursued for the claim. Where tenants pay into the policy for years, it may cost them far more than the maximum five weeks’ rent, which can be held in a security deposit.

Citizens Advice has also highlighted the issue of letting agents receiving commission to promote the schemes to tenants, which means they could be breaking financial conduct rules.

Amy Hughes from Citizens Advice said: “Tenants should be wary of deposit replacement schemes and, in particular, should consider the cost over the anticipated duration of the tenancy when compared to a deposit, now generally capped at five weeks’ rent in England.

“Tenants should also be mindful of the fact that a traditional deposit can be offset against any future liability, refunded if no such liability arises; gives access to free arbitration via protection and allows sanctions against the landlord if protection requirements are not met — deposit replacement schemes offer none of these.”

Writing in Landlord Today, Tahir Farooqui, CEO of deposit insurance provider Canopy defended the industry: “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.”

Read more in this blog from Citizens Advice and in Landlord Today.

Neil Jennings

Neil is the Operations Director at Assetgrove Lettings, London's Leading Rent Guarantee Company, providing Landlords with no voids, property maintenance, fee-free property management and stress-free service.

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