Client money and the regulation governing it is changing

PayProp’s recent Rental Confidence Index survey polled property professionals about their biggest concerns for 2022. Unsurprisingly, new regulations were a top three worry, along with portfolio growth and the ongoing impact of COVID-19.

There are already more than 170 laws and regulations to comply within the private rented sector (PRS) and more are on the way, so it’s important that we take stock and offer assistance to regulators in creating a fair, transparent and trusted PRS that works for agents, tenants and landlords alike.

The point(s) of regulation

I was recently invited to the Institute of Government and Public Policy’s Second Annual National Local Government Event to give a talk on “The past, present and future of client money in the private rented sector”.

With reform of the PRS a priority for the government, we think it’s important that lawmakers consider the objectives of client money regulation, that upcoming rules focus on controlling risk rather than mere compliance, and that we keep an eye on the future for property payments.

Let's look at a number of hot topics.

Stamping out money laundering

The government’s aim in implementing EU anti-money laundering (AML) directives and the Proceeds of Crime Act was to get the private sector to better manage and help police the risk of financial crime. For property agents, the requirement was to register a money laundering reporting officer and report to HMRC any single payment over €10,000. However, a risk-based approach to the issue of financial crime shows serious shortcomings with this. For example, if an agent makes €9,000 in rental payments for 20 properties, no enhanced due diligence is legally necessary. This may be one of the reasons the government is currently consulting on this issue, as they want our industry to better manage that risk and ensure the PRS isn’t a haven for the proceeds of crime.

A consultative approach is to be welcomed, as we’ve seen when such an approach isn’t followed. One recent example was the introduction of client money protection in the UK. After the policy was introduced, it had to be delayed because agencies were viewed as an insurance risk by providers and therefore unable to get the required coverage, even when they were fully compliant with the law. In addition, many agencies who thought they were operating client accounts in fact held normal business current accounts, which meant any client money protection scheme would have been invalid.

By consulting on any new AML laws, government can help avoid a repeat of the issues the industry faced with the introduction of client money protection and ensure a fair, balanced and transparent regulatory environment.

A regulated industry?

While successive Westminster governments have continued to regulate client money and the PRS, they have yet to licence practitioners. The recent RoPA report shows the government is moving towards this, but progress has been slow.

On the flipside, this means there’s more time for those working in the industry to put their case to government – something PayProp is doing and encouraging our peers to do. As most UK agents work in small to medium-sized enterprises, the industry needs to make the case for streamlining and avoiding even more onerous administration as businesses will be unable to absorb the cost of compliance. Instead, government ought to look at embracing the efficiency and reliability of tech-led compliance when it brings forward the Rental Reform white paper.

Our latest Rental Confidence Index already shows widespread adoption of PropTech by agencies, with almost 60% of those surveyed increasing automation in their business in 2021 and 67.8% thinking automation will improve rather than threaten their jobs over the next five years.

Future payments

But what about the future? Through what channels will tenants be paying their rent as the industry moves forward, and what can legislators do to create a framework now that is fit for the future?

First, it helps to look at the people who will be renting and their attitude towards finance. According to a report from June 2021, 45% of 18 – 29-year-olds seeking new investments put their money in cryptocurrencies instead of more traditional investments. This interest in cryptocurrencies is set against a backdrop where governments and central banks have been increasing the supply of money in the economy at double-digit rates which some estimate may be devaluing currencies and contributing to the current rates of high inflation. We can expect cryptocurrencies to become more mainstream as investors seek higher returns, putting more pressure on the industry to accept it.

While some may see cryptocurrencies as investments, others will want to use them as a medium of exchange to purchase goods and services. And indeed, the first property purchase using cryptocurrency has already taken place. That being said, letting agents will need to consider the risks and rewards of accepting cryptocurrency payments.

This also raises issues for the government. How does one regulate or tax a decentralised financial system? Again, technology has a crucial role to play if we are to simplify the future admin burden for agents, tenants and landlords.

In summary: Industry consultation is key

No matter what the future of client money holds for the PRS, it’s important that government focuses not only on protecting tenants, but also those that work in the sector. By leaning on the experience of agents, taking stock of the systems they use and incorporating modern technological capabilities into practical solutions, government can help build trust between landlords, tenants and agents.

*Neil Cobbold is the managing director of PayProp