New rules to improve security for client monies held by property agents
Published on 15th Mar 2019
On 7 March 2018, the Ministry for Housing, Communities and Local Government (MHCLG) announced new regulations that aim to protect client monies held by agents in England (including tenant deposits and rent payments held on behalf of landlords) against agent misuse, insolvency or fraud.
Under the new rules, letting and property management agents of private residential property in England are required by 1 April 2019 to become members of a government-approved client money protection (CMP) scheme. A list of government-approved CMP schemes is here (although the list of schemes is likely to expand as MHCLG continues to approve new providers).
Local authorities can impose fines of up to £30,000 for failure to register with an approved scheme. Separately, if a property agent fails to comply with certain transparency requirements (such as displaying membership details or informing clients if its membership of a scheme has been revoked, and providing specific information about its membership of a scheme), it faces a potential fine of up to £5,000. If enforcement action is taken, the rules provide a 28 day window to appeal to the First-Tier Tribunal, which will have the power to confirm, quash, or vary the notice.
Osborne Clarke comment
Previously, membership of a government-approved protection scheme has been voluntary, with only 60% of property agents in England registered, according to MHCLG's estimates. Given that an estimated £2.7 billion in client funds is held by property agents in England, mandatory registration with an approved CMP scheme will go some way to ensuring that deposits and rent payments held on behalf of landlords will be better protected.
However, time is short for the estimated 40% of residential property agents in England who have yet to register with a scheme, as those who have yet to register must do so by 1 April 2019. Such agents should consider the entry conditions for each scheme as different entry conditions apply for each, although all schemes require members:
- to have appropriate professional indemnity insurance;
- to implement robust client money protection policies; and
- to ensure that monies are held in a client money account with a bank or building society authorised by the Financial Conduct Authority (FCA).
Where reasonable steps to open a client money account with a bank or building society authorised by the FCA are under way by 1 April 2019, CMP schemes are permitted to offer an extension to open such accounts up to 1 April 2020.
For those agents who have yet to apply for membership, having to ensure that policies and practices are fully compliant with a specific CMP scheme and applying for membership within a short timeframe may present a challenge. The changes are not, though, unexpected. Draft regulations for mandatory CMP scheme membership were issued in June 2018, following powers introduced by the Housing and Planning Act 2016. At the time, MHCLG indicated that it intended to implement such changes in 2019. It remains to be seen whether local authorities take this into account when exercising their enforcement rights in the weeks and months after the regulations come into effect.
These measures are part of MHCLG's ongoing drive to regulate the "cowboy practices" of a minority of rogue agents and to ensure consistency in professional standards across the letting industry. The majority of property agents already comply with most (if not all) of the requirements of such schemes, and the obligation to belong to an approved CMP scheme will be welcomed by the industry as a whole.