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Difference between deposit protection schemes

Matthew Hooker

January 24, 2020

Matthew Hooker is co-founder of Ome

The repayment of deposits is currently the biggest cause of tenancy disputes and so it comes as no surprise that the majority of landlords opt for a custodial scheme whereby the money is placed with a third party.

This entity also act as judge and jury if a dispute arises when it comes to returning the money to the tenant so that both sides have a fair say on the amount due.

Data from Ome shows that the number of deposits protected via insurance-based deposit protection schemes has fallen by 8.3% on the previous year, while the number of deposits protected via custodial schemes is up 24.4% on the previous year.

A trend that has been seen consistently since Ome’s parent company, Hamilton Fraser, launched a custodial protection scheme alongside their insurance-based option since 2015.

However Ome’s Deposit Replacement Membership now offers a third option for tenants and removes the requirement of a cash deposit altogether, with a landlord or agent registering the tenancy online and inviting the tenant to create their membership.

So, what’s the difference between each scheme?

Insurance-backed Deposit Protection

With an insurance-backed deposit protection scheme, the landlord or agent takes the security deposit from the tenant and registers it with a government approved scheme but the money remains in their bank account.

This allows them to control the money for the duration of the tenancy but requires a small fee to be paid to the scheme provider.

At the end of the tenancy, the landlord or agent is free to negotiate any return with the tenant, agreeing on deductions before returning the money without needing to involve the deposit protection scheme. This is often the quicker of the two traditional deposit protection schemes when ending a tenancy.

The scheme reimburses the tenant at the end of the tenancy should the landlord or agent be unable or unwilling to return the right proportion of the deposit to the tenant when it is legally due following a dispute resolution process.

The landlord is expected to send the scheme the disputed amount whilst the scheme decides who gets what.

It is the scheme that is insured rather than the tenant to cover the scheme’s liability to pay the tenant when the landlord or agent won’t.

Custodial Deposit Protection

With a custodial scheme, the money is collected by a landlord or agent and then lodged within a government-approved protection scheme.

This scheme provider then takes custody of your money and holds it for the duration of the tenancy, only releasing it once both parties agree on a returned sum or a tenancy dispute has been resolved.

Both landlord and tenant can initiate the request to return funds, but both must agree on the sum being returned.

Today, all of this can be done easily online via a portal that all parties will have access to.

The benefit to a tenant is that an independent third party has control of the money and again, the money remains safe if the landlord or tenant goes out of business.

The money will only be returned once a tenancy has finished or if the landlord or agents wish to move it to another protection scheme.

Ome’s Deposit Replacement Membership

With a deposit replacement membership, tenants pay a small monthly membership until the end of the tenancy, at which point the tenant and landlord are free to negotiate any end of tenancy settlements.

Where an agreement cannot be met the negotiation can be escalated to the same adjudication team as mydeposits use.

The core benefit to tenants is cash flow.

Unlike cash deposits, or even some of the more traditional deposit alternatives, the tenant can manage their finances over a longer period of time.

A landlord can feel comfortable that they receive the same financial security as a cash deposit, however as no money exchanges hands are not threatened with a fine of up to three times the deposit should they forget or fail to protect a deposit properly.

Even where a tenant leaves the property early (or fails to maintain their membership fee) Ome ensures landlords are reimbursed for their losses as a result of a tenant’s breach of contract.


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