Banking barriers for start-ups and how to overcome them

Start-up letting agents looking to enter the market are finding it increasingly difficult to set up in business as banks point blank refuse to open client accounts for them.

At The Letting Partnership, we are seeing an increasing number of start-ups coming to us for advice because they simply cannot gain access to a client account.

This problem first surfaced when Anti Money Laundering (AML) legislation was tightened as part of the implementation of the EU 5th AML directive January 2020.

The pandemic has only made matters worse, with the majority of high street banks closing to new business entirely, whatever the sector. This is mostly due to the banks’ commitment to support existing customers, particularly with a surge in demand for services such as Bounce Back Loans.

We speak to start-up letting agents who are working very hard to be compliant from day one and follow industry guidelines, but it is made extremely difficult to set up in business.

This week, another start-up letting agent came to us for help because a major high street bank had said they could open a client account, but only once they had Propertymark membership. Ironically, to join Propertymark a letting agent must first have a client account. It’s a chicken and egg problem we see occurring time and time again at The Letting Partnership.

Start-up letting agents must join an ombudsman scheme to trade legally, run either by The Property Ombudsman or the Property Redress Scheme, but each have their own entry requirements intertwined with Client Money Protection which in turn leads back to the client account.

Sometimes there are informal workaround solutions to these problems, but it’s not straight forward. First the agent needs to be aware of this workaround, then all the involved parties need to agree to it and of course it all takes time. It’s hassle, stress, complication and confusion that a letting agent looking to get their business off the ground could do without, when what they want is to start earning money.

Securing a client account is the key to easily unlocking the door to trading for a letting agent. Without this, it’s hard for the cards to fall in their favour.

Looking at the issue from the banks’ perspective, letting agents are not regulated by the Financial Conduct Authority (FCA), which makes our industry less appealing to banks which value the rigours of the FCA highly.

The letting industry has previously come under fire for a lack of independent regulation and indeed self-regulation. Whilst the letting industry has billions of pounds flowing through its client accounts, it’s likely banks are deciding they are simply not prepared to take the risk.

This is true even for established letting agents, who are also finding it hard to access and retain client accounts. Just last month, we heard of a major bank serving notice to close all their client accounts in January 2021, with no exceptions.

Some banks will open a business account for a start-up letting agent, but not a client account. This is a worrying development because it might be tempting for letting agents to use a business account as a client account, but trading without a client account breaches Client Money Protection rules.

Without a client account, agents will not be able to obtain Client Money Protection (CMP). If they fail to secure CMP from one of the six providers, they will be trading illegally and could land themselves in hot water. Trading Standards carries out spot checks and can impose a fine of up to £30,000 on agents trading without CMP.

Understandably, this can all prove a bit overwhelming and unattractive to people looking to bring fresh ideas to our industry. The solution for letting agents looking to set up a business is to shop around until they find a bank which will help them or to look for an outsourced provider with a long trading history which will be able to provide expert advice and set up a client account on their behalf.

To ensure the best chance of opening a client account with a bank, new entrants to the market should ensure they have adequate Professional Indemnity insurance, that their policy specifically covers lettings activity and ideally membership of  an industry trade body.

However as discussed, securing membership of a trade body is impossible without first having a client account. They should also be prepared to allow sufficient time to find a bank that is willing to open a client account for them. They should also ensure they register with HMRC for Anti-Money Laundering supervision. Whilst this is not necessarily a legal requirement for lettings in most cases, it will strengthen the application.

The problem in the letting industry is that there are multiple banks, industry bodies and CMP providers. It’s not designed to work seamlessly together so letting agents often find themselves tied up in red tape.

Despite these hurdles, there are solutions available and start-up letting agents are working tirelessly to be compliant and to set up their new business.

*Chris Mason is Operations Manager at The Letting Partnership