The Government is continuing to look closely at how tenant deposits are protected, and one proposal now attracting attention could have a major effect on landlords, letting agents and the wider private rented sector.
At present, deposits can generally be protected in one of two ways. Under a custodial scheme, the tenant’s money is transferred to an approved third-party scheme for the duration of the tenancy. Under an insured scheme, the landlord or letting agent keeps hold of the money, but pays to protect it through an approved provider.
The reform being discussed would remove the insured model and require all tenancy deposits to be placed into custodial protection. This would mean that deposit funds are held independently rather than remaining in thousands of landlord and agent client accounts.
According to analysis reported by BuyAssociation, more than 2.1 million tenancy deposits across England and Wales are currently protected through insured schemes, representing almost half of all protected deposits. The value involved is estimated at more than £3bn, which shows the scale of the change if the proposal moves forward.
Why is the Government looking at this?
The Government’s thinking appears to be driven by transparency, oversight and tenant protection.
Under the insured model, deposit money may remain in the hands of landlords or letting agents throughout the tenancy. While the deposit is protected by an approved scheme, the actual cash can be spread across many different businesses, accounts and management arrangements. That creates a more complicated picture for regulators and deposit schemes.
A move to custodial protection would make the system simpler to monitor. The money would be held by an independent scheme from the outset, reducing the scope for confusion over where funds are held, whether they remain available, and how they should be released at the end of the tenancy.
This also fits into the wider direction of rental reform. The Renters’ Rights Act has already changed the balance of the private rented sector, with a greater emphasis on tenant security, transparency, stronger enforcement and clearer routes for complaints. Deposit reform would be another part of that wider policy direction.
What would change for landlords?
For many landlords, particularly those using a fully managed letting service, the change may feel largely administrative. If an agent currently handles deposit registration, the agent would likely manage the transition to custodial protection.
However, landlords should not assume it has no practical impact.
Those who self-manage, or who own larger portfolios, may need to review exactly how every deposit is currently protected. Some landlords may be using custodial schemes already, while others may have deposits protected through insured arrangements without giving the distinction much thought.
If insured schemes are phased out, landlords may need to prepare for a future where they no longer hold tenant deposit money themselves. This could affect cash management, internal processes and record keeping.
It is important to stress that the proposal is not expected to mean every existing insured deposit is suddenly transferred overnight. A phased approach is more likely, with new tenancies moving into custodial protection while existing arrangements continue until they naturally end. Even so, landlords should understand their current position now rather than waiting until the rules change.
What would it mean for letting agents?
Letting agents may feel the operational impact more directly.
Many agents handle deposit registration, client accounting and end-of-tenancy administration on behalf of landlords. Where insured schemes are used, deposit money may sit within client account systems and form part of the agent’s wider compliance responsibilities.
A move to full custodial protection would reduce the amount of tenant deposit money held by agents, but it would also require changes to systems, procedures, staff training and landlord communication.
Agents would need to ensure that deposits are transferred correctly, prescribed information is served properly, and landlords understand the difference between insured and custodial protection. They would also need to manage expectations around deposit returns, deductions and disputes.
The change may remove one type of risk, but it would not remove the need for careful administration. In fact, as the Renters’ Rights Act moves the sector further towards rolling periodic tenancies, strong evidence and clear records are likely to become even more important.
Why deposit evidence will matter even more
The deposit itself is only one part of the picture. At the end of a tenancy, landlords and agents still need to prove any proposed deductions.
That means clear inventories, properly dated photographs, signed check-in records, mid-tenancy inspection notes, repair records and check-out reports will become increasingly important. Vague inventories or poor photographic evidence can make it difficult to justify deductions, especially where a tenancy has lasted several years.
The move away from fixed-term tenancies also changes the traditional rhythm of tenancy management. There may be less certainty about when a tenancy will end, which makes regular inspection records more valuable. Landlords and agents should think of deposit protection not as a one-off task at the start of the tenancy, but as part of an ongoing record-keeping process.
Could this help tenants move more easily?
One of the long-standing criticisms of the current deposit system is that tenants often need to find a new deposit before their old one has been returned. This can make moving home expensive and difficult, especially when combined with rent in advance, moving costs and affordability checks.
Although the current proposal is focused on custodial protection rather than a full “deposit passporting” system, greater centralisation of deposit money could make future reforms easier. A more uniform custodial model may give policymakers more scope to design systems that reduce the financial barrier of moving between rented homes.
For landlords and agents, that could eventually mean faster deposit transfers, clearer timelines and less friction at the start of a tenancy. However, it could also mean less flexibility and more prescribed processes.
What should landlords do now?
There is no immediate need for panic. The proposal remains part of a wider review and consultation process. However, landlords should use this moment to check how their deposits are currently protected.
A sensible first step is to identify whether each deposit is held under an insured or custodial scheme. Landlords using managing agents should ask for confirmation of the protection model being used and make sure they hold copies of the relevant deposit documentation.
Landlords should also review their inventory and inspection procedures. Deposit disputes are usually evidence-led, and reform of the deposit system will not change that. If anything, the direction of travel suggests that landlords and agents will need to be more organised, more transparent and more consistent in how they manage tenancy records.
The bigger picture
This proposed deposit reform should not be viewed in isolation. It sits alongside a much wider reshaping of the private rented sector.
The Government’s direction is clear: more tenant protection, more independent oversight, stronger enforcement and less tolerance of informal or poorly documented practices. For professional landlords and good letting agents, that means systems and paperwork matter more than ever.
The private rented sector is already dealing with significant change, including the end of Section 21, new rules on rent in advance, changes to tenancy structures, tighter enforcement and increasing compliance expectations. Deposit reform would add another layer to that process.
For landlords, the message is straightforward: know where the money is, know how it is protected, and make sure the evidence is in place before a dispute ever arises.
For letting agents, the priority will be communication. Landlords will need clear explanations of what is changing, what is not changing, and what practical steps are required. Tenants will also expect greater clarity around where their money is held and how it will be returned.
The proposal may be presented as a technical change to deposit protection, but the implications are much wider. If insured schemes are phased out, it would represent a significant shift in how tenant money is handled across the rental market.
As with so much current rental reform, the landlords and agents best placed to adapt will be those who treat compliance as part of day-to-day property management, not as an afterthought.
NetRent does not provide legal advice. This article represents our understanding of current rental property law and proposed reforms at the time of writing. Landlords and letting agents should seek appropriate professional advice where they are unsure about their legal obligations.
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