Client Money Protection
From April 1st 2019, all letting agents in England will be required to belong to a client money protection scheme when they are holding client money. This requirement is also in place already for Wales as part of the Rent Smart Wales licensing conditions. This provides insurance to landlords and tenants in the event the agent steals money from their clients.
The purpose of this guide is to provide a primer for agents on what they need to do to comply with these regulations, what the potential penalties for not complying, and which schemes are available at the time of writing.
What is client money protection?
At its most basic, the client money protection regulations require anyone engaging in property work to pay to belong to one of the recognised and approved client money protection schemes. This will insure any money paid by the landlord or tenant, so that if it is stolen by the agent, the landlord is covered.
What is client money?
Client money is any money received from a client (landlord or tenant) in the course of business that is held for another person. Rent for example is client money as the money is received in the course of business and held on behalf of the landlord. Similarly, a holding deposit or other charge would count as client money.
If a security deposit is held in your account in accordance with an insurance scheme (such as TDS/DepositGuard) then this money is not classed as client money.
What client money protection schemes can I join?
At the time of writing you can sign up to -
- Client Money Protect
- Money Shield
- The National Approved Letting Scheme
- UK Association of Letting Agents (UKALA)
What do the schemes require for membership?
Each scheme has its own rules and membership and agents will have to comply with the rules of the scheme they choose (published on the individual websites).
For example, the scheme rules may require you to -
- Have a separate client money account for rent and deposits
- Provide 3 months of bank statements for your client accounts
- Ensure that no manager or director of the company has a criminal conviction for a financial crime such as fraud
- Register each individual franchise with a separate membership even if all franchises use the same account.
These are just some examples however. The agency must ensure they are complying with all the requirements of their schemes and they should ensure they have familiarised themselves thoroughly with their chosen scheme's rules for membership.
The fees vary based on the maximum amount of client money held. Can I pay the minimum fee even if I occasionally hold more client money?
No, it is a legal requirement that your scheme membership results in a level of compensation that matches the maximum amount of client money held. Failure to do so will mean you are in breach of the regulations and may face penalties.
Do I need to tell my clients which scheme I belong to?
Yes. The regulations are very clear on this point and it operates in the same way as the redress scheme requirements.
Agents must clearly display on their website a copy of the certificate showing which scheme which they belong to.
In addition, they must display a copy of their certificate of membership in each of their offices in a prominent location that is easily visible to clients (ie not in the back office but in the window).
Finally, if a client requests a copy of the certificate you must provide this free of charge.
These are known as the transparency requirements.
Do I need to inform clients if I swap schemes or lose my membership?
Yes. If you swap schemes, let your subscription expire, or the scheme expels you, you must inform all of your clients within 14 days in writing of this occurring.
As a landlord, how do I check that my agent is definitely a member of the scheme?
Each scheme must display the members of their scheme in a searchable database on their websites. Alternatively, you may ring the schemes direct.
Who will enforce the client money protection requirements?
Any local authority may enforce against an agent for breaching the requirements of the regulations.
What penalties can be issued for non-compliance?
There are two separate penalties that can be issued -
- Failure to comply with the transparency requirements
- Failure to belong to a scheme
If an agent fails to display their certificate properly, or notify their clients when swapping schemes, then they can be issued a penalty of up to £5000.
If an agent fails to belong to a scheme they can be issued with a penalty of up to £30,000.
An agent can only be issued one penalty for each breach at a time but can be penalised again if they fail to address the issues after the notice period expires.
How long is the notice period for action by a local authority?
Once a notice is served by the local authority (which must occur within 6 months of having sufficient evidence of the breach) then the agent has 28 days within which to make representations to the local authority.
After that period of time, the local authority can choose to impose a final penalty notice setting out the amount to pay, the agent's rights to appeal and the reasons for the penalty notice.
The agent is then free to bring an appeal to the First-tier Tribunal within 28 days of the final notice.
Are local authorities likely to enforce?
Any penalties recovered may be retained by the local authority to pay for the enforcement actions in the private sector so logically some will see it as a great way of improving the funding to their housing departments. However this remains to be seen.