Why regulation is good for the deposit replacement sector

Since I started working with Zero Deposit for me the market leader in deposit replacement alternatives, the most common question I am asked by fellow industry professionals is why did I want to get involved in this relatively unknown sector of our market?

The answer is simple: my reasons for doing so exactly mirror the reasons when, back in 1991, I chose to join a small, mainly London centric, group of lettings market professionals called ARLA.

The growth of lettings and self-regulation

Back then, even though the private rented sector had shown some growth during the recession of the early eighties, the lettings market was always deemed by estate agents to be something of a ‘poor relation’, despite the positive changes to the Housing Act in 1988.

The recession of 1991/1992 - and the perfect storm of falling house prices combined with increasing mortgage interest rates which accompanied it - brought about a sea change in attitudes to the lettings market.

We saw a surge in estate agency businesses urgently seeking an alternative income stream and lettings departments sprouted in many estate agencies around the country. The problem was that many had little or no knowledge of the sector, nor its responsibilities and liabilities.

A burgeoning new industry took hold, but one without recognised standards and little understanding on the part of the consumer. At that time, joining ARLA was a no brainer for me. Its philosophy of self-regulation, its drive to raise standards and protection of the consumer were just what the industry needed.

The new kids on the block

Fast forward to today: deposit-free alternatives are the new kids on the block in terms of a new and growing sector and are steadily changing the way people rent for the better.

But - as with lettings in the nineties - this is a sector that has no recognised standards upon which consumers can trust or rely.

With the exception of the three approved deposit protection schemes - the TDS, MyDeposits and the Deposit Protection Service - there is no government oversight in the marketplace.

Earlier this year, Generation Rent declared: “Deposit replacement products are an unregulated wild west, and there’s been a steady stream of new ones popping up in the market...deposit replacement schemes offer a tempting opportunity to move to a new house with lower upfront costs.”

“But beware of drinking the deposit replacement Kool-Aid; most simply mean tenants paying more in the long run, for less protection.”

Learning lessons from the past: regulation raises standards

Without regulation, it’s very difficult for landlords and tenants to fully understand and compare the benefits and protections available to them via the various schemes.

This is exactly why I wanted to work with Zero Deposit. Its team has worked hard to achieve full FCA authorisation which ensures that all stakeholders to a Zero Deposit Guarantee are fully protected and provides a much-needed benchmark for consumers.

In the absence of specific government regulation, I strongly echo Jon Notley’s calls for other deposit replacement entrants to embrace FCA regulation too in order to sustain growth and trust in the sector and continue to improve the industry for landlords, tenants and agents alike.

Of course, from my experience at Propertymark it is clear that persuading the government of the benefits of regulation can be a tortuous and long process.

Whilst it has paid off in the long run and full regulation is on the horizon, who knows how much such a delay has cost in terms of financial loss to the consumer, and the perceived reputation of the industry overall?

It is worth remembering that it was that poor reputation that brought about the previously piecemeal approach to regulation that existed over many years and did such harm to the industry, in terms of income and its acknowledgement as a ‘professional’ sector.

The forthcoming regulation of lettings and sales, changes to Consumer Protection Regulations, combined with improved enforcement will enhance the perception of the industry as a whole; and provide a consistent level of protection and recourse to the consumer.

It will also bring about the much-needed level playing field in commercial terms that self-regulated agents have sought for so long.

The risks of unregulated deposit replacement providers

Some may remember the siren cries of ‘the end is nigh’ when the regulation of financial services and investment were first mooted, and then understandably strengthened in 2013.  Despite this, the sector continues to thrive and prosper.

We now find ourselves in a new age of communication and consumer awareness. Our government is far more open to influence from pressure groups which brings with it the danger of unwanted and often misplaced intervention by legislators.

It is my contention therefore that unless the deposit replacement sector works together to set the highest standards of protection, transparency and dispute resolution, there is a risk that unregulated providers could damage the industry as a whole if they fail their customers.

We will fail to convince our detractors, and the many stakeholders out there that continue to remain wary and non-committal with regard the use and future of deposit replacement schemes and their place in the lettings process.

We will also fail existing tenants who have decided to use a deposit replacement product, by choosing to ignore the possible risks that both tenant and landlord may be exposed to in a growing unregulated environment.

How agents can safeguard themselves

As I alluded to previously, the deposit replacement industry faces the realistic possibility of intervention by government on its terms, driven by consumer pressure groups and others who will no doubt closely monitor our progress and problems.

So, a word to the wise: as regulation of sales and lettings begins to bite to ensure the distinction between market places, agents will need the certainty that a regulated deposit replacement provider brings them.

Until regulation is extended to this part of the market, agents should in my opinion safeguard themselves now by choosing an FCA regulated deposit replacement partner from the outset.

Finally, a cautionary tale - one current topic occupying the minds of those who legislate: referral fees. Do ensure that the consumer is aware, and that the agent declares that such fees are paid, including a precise figure where possible.

As an industry, lettings has an ever-reducing window of time to demonstrate that we can comply on a voluntary basis and as with tenant fees, failure will lead to a total ban.

You have been warned!

*Peter E Savage is an industry spokesperson for Zero Deposit and former President of ARLA Propertymark