4. CHAPTER 2: CONDITIONS FOR APPROVAL OF A TENANCY DEPOSIT SCHEME
Part I: General conditions for approval
Scheme administrator to be a fit and proper person
4.1 Part I sets out the general conditions that must be met before a scheme can receive approval. The first thing to note is that the person who acts as the scheme administrator must be a fit and proper person. To this end, scheme proposals must include a declaration of relevant criminal convictions or certain civil sanctions (such as disqualification from acting as a company director) alongside any other pertinent information. Any such information can be taken into account in assessing whether a person is fit and proper to act as a scheme administrator.
Types of tenancy deposit scheme
4.2 The regulations currently provide that any scheme must be based on one of two models; a custodial scheme and an insurance scheme.
4.3 A custodial scheme provides for the landlord to submit the deposit funds to the administrator of the scheme. The sum is then safeguarded in a designated account until it falls to be repaid under the terms of the scheme. The scheme is free to tenants and landlords and should generally be funded by interest earned from investment of the pool of deposits safeguarded by the scheme.
4.4 An insurance scheme permits the landlord to retain the deposit amount in a designated client account until it falls to be repaid at the end of the tenancy. It is only when a dispute is notified to the scheme administrator that the landlord must submit the disputed amount, to be held by the scheme administrator in a designated account. The disputed amount of the deposit will be retained by the scheme administrator until it falls to be repaid under the scheme rules. Appropriate insurance is held by the scheme administrator to cover against failure of the landlord to submit the disputed deposit. All tenancies that are to be safeguarded by the scheme must be notified to the scheme administrator. A fee is payable by every landlord who wishes to participate in, and become a member of an insurance scheme. The regulations do not set an amount, or maximum amount of any fee which may be charged, but do state that fees should not exceed the amount required to cover the running costs of the scheme that are attributable to a landlord's membership.
4.5 Specific conditions relating to custodial and insurance schemes are contained in Parts II and III of this Chapter respectively. Flow charts showing an example of how a custodial and insurance model might operate are included at Annex C and D respectively.
Geographical coverage and administrative requirements
4.6 Every approved scheme must be available to all landlords and tenants of a property let under a relevant tenancy in Scotland. The regulations will permit landlords to participate in more than one scheme, although a single deposit can only be protected by one scheme at a time. Approved schemes must not prevent a landlord from being able to hold deposits in accordance with any other approved scheme. To ensure that scheme services, including a customer service facility, are easily accessible, the regulations will require that services must be available both electronically and by paper based methods.
Financing and sustainability
4.7 In order to ensure that the focus of public investment in housing remains on those that need it most, any proposal to set up a scheme must demonstrate that the scheme is able to become financially self-sufficient and sustainable, and state within what time period that is expected to be achieved. Until that date it must be shown that the scheme has available finance to fund the set up and running costs of the scheme. The proposal must also indicate when it is expected to be operational and ready to safeguard deposits. These provisions should ensure that only viable schemes are approved to become operational. Additionally a scheme must have safeguards in place to protect deposits and to ensure repayment in the event that a scheme ceases to be operational, for whatever reason.
4.8 The scheme administrator will be required to have designated accounts for the purpose of holding deposits. These accounts must be interest bearing and must only hold deposit amounts, fees paid by landlords and certain other specified amounts. The account must be subject to accounting and administrative procedures to ensure the sums can be attributed and repaid to the respective parties. Withdrawals must only be made from these accounts for certain purposes such as repayment and the use of interest accrued on the sums held. The provisions allow approved schemes to distribute, apply or invest any income in excess of that required to pay the running costs and repay deposits as long as there is no negative affect on the sustainability or self financing of the scheme. This means that a scheme can choose how to use any excess income, including whether it pays interest on deposits to tenants and landlords.
Question 10: The regulations permit a scheme to hold deposits in a designated interest bearing account. Do you have any views on whether other types of investment should be allowed?
Question 11: Do you have any views on the provisions relating to the use of excess income accrued on deposits?
Part II: Custodial scheme model rules
4.9 This Part sets out a framework of key rules that every proposed custodial scheme must adopt.
Payment and receipt of tenancy deposits into a custodial scheme
4.10 For custodial schemes it will be a requirement that the deposit is submitted by the landlord to the scheme administrator within 30 working days of receipt. The landlord must also give the scheme administrator information that enables him or her to identify the lease, the parties to that lease and the property concerned. Once the landlord has delivered the funds the scheme administrator must pay the funds into a designated account and confirm to both the landlord and tenant in writing that this has been done.
Repayment of tenancy deposits in accordance with a custodial scheme
4.11 The first step in the process for repayment of a deposit is that the landlord must apply to the scheme administrator within 10 working days of the end of the tenancy, including a statement of the amount of deposit to be repaid (not to exceed the deposit) and to whom. The scheme administrator will contact the tenant to establish whether the requested amount is agreed or disputed. Where the amount is agreed the deposit will be repaid within 10 working days of the application. The tenant can also apply for repayment of the deposit but is not obliged to do so.
4.12 If an amount is in dispute then the rules must enable the repayment of the undisputed sums to the appropriate parties, pending the dispute over the remaining sum being resolved. If at the end of the tenancy the landlord does not apply for repayment then the default position of scheme rules must be to allow the full amount to be repaid to the tenant. This repayment must only be made after the administrator has made reasonable efforts to contact the landlord to check that the tenancy has ended and he/she does not intend to apply, and not before 60 working days has expired.
4.13 Where the amount is disputed, only the disputed amount will be retained by the scheme administrator until the dispute is resolved. The remainder will be repaid to the landlord and/or tenant as agreed by them. On resolution of the dispute, the scheme administrator will pay the deposit within 10 working days of agreement being reached by the landlord and tenant, or notification of an independent adjudication or court order.
4.14 We also have to cover situations where the parties do not consent to using an alternative dispute resolution mechanism ( ADR) to court action, and no court application is made. The presumption is generally that the deposit should be repaid to the tenant unless the landlord is successful in establishing a case to the contrary (hence the landlord's deemed consent to ADR, and the provision allowing repayment to the tenant where the landlord does not claim any amount). However, if the tenant does not agree to ADR and takes no other positive steps to resolve the dispute (such as court action), the deposit should be repaid to the landlord in full after a period of 30 working days has lapsed.
4.15 A tenant can seek a review of the decision of the adjudicator, or appeal against a decision of the court. Where this action is notified to the scheme administrator, the deposit will be repaid within 10 working days of notification of the final decision or court order.
Part III: Insurance scheme model rules
4.16 This Part sets out a framework of key rules that every proposed insurance scheme must adopt.
Membership of an insurance scheme
4.17 The rules will require that a scheme is available to all landlords who wish to participate in it. A landlord may be a member of more than one scheme, and membership may only be terminated at the request of the landlord. These provisions will ensure that a landlord is not prevented from meeting his or her legal obligations in the event that the only scheme to be proposed and approved is an insurance scheme.
Duty to hold tenancy deposit in a designated account
4.18 A landlord must hold deposits in a designated client account until it falls to be repaid to the tenant, or to the scheme administrator. Holding the funds in a separate account should ensure that they are readily available at the end of the tenancy.
Provision of tenancy details to an insurance scheme
4.19 If a landlord intends to use a particular insurance scheme they will be required to furnish details of each tenancy to the scheme administrator within 30 working days of receiving the tenancy deposit or joining the scheme. The landlord will also be required to confirm that he or she is holding each tenancy deposit in a designated client account. The details the landlord provides must be sufficient to allow the administrator to identify the parties, the date the tenancy started and the amount of the deposit.
Payment and receipt of tenancy deposits into an insurance scheme
4.20 Scheme rules must require that when the sum due at the end of the tenancy is agreed upon that figure must be repaid to the tenant by the landlord. Alternatively if the amount is not settled there must be a procedure for the landlord to make payment of the disputed amount into the scheme within 3 working days of failing to reach agreement with the tenant. The landlord must notify the tenant of any disputed amount that has been so submitted.
4.21 A scheme must have a mechanism for the tenant to notify the administrator where the deposit has not been repaid within 10 working days, and they have not been notified of a disputed amount being paid to the scheme. On receipt of such notice the scheme administrator must order the landlord to submit the funds to the scheme within 10 working days.
4.22 The scheme administrator will safeguard the disputed amount, and issue written confirmation to the tenant and landlord that the money is held in a designated account within 5 working days.
Repayment of tenancy deposits by an insurance scheme
4.23 When the sum falls to be repaid the scheme rules must allow for such repayment within 10 working days of an agreement being reached either privately, through dispute resolution or by the court. In the same way as a custodial scheme, if dispute resolution or court action is being taken further then the payment must be made within 10 days of the court's final decision. The same principles must also apply in relation to repayment where the tenant does not agree to ADR and takes no other positive steps to resolve the dispute, and where a review of a decision of the adjudicator decision or appeal against a court order is notified.
4.24 A scheme must also have procedures in place to ensure repayment of the disputed deposit in a reasonable time in the event that the landlord fails to submit the required amount.
Repayment of deposits to joint tenants
4.25 The draft regulations do not currently make any specific provision for the repayment of deposits in the case of joint tenancies, either for custodial or insurance schemes. There are a significant number of properties in Scotland that are let as shared properties between joint tenants. Houses in multiple occupation ( HMOs) in particular are occupied by three or more tenants. The total number of HMO tenants is estimated to be over 50,000. Groups which are most likely to be living in HMOs, or in other joint tenancies are students and migrant workers.
4.26 Where a property is let to multiple tenants, particularly students, we are aware that a landlord or letting agent may use a lead tenant. A landlord may request a deposit from each individual by standing order or bank transfer. However, the lease may state that a lead tenant will be nominated within the group and all the deposit funds will be made to that individual for dispersal. We are aware of cases where joint tenants experience difficulties in recovering their deposit share from the lead tenant. This may be due to changes in the tenants occupying the property; the lead tenant may move or simply keep the full deposit.
4.27 We welcome your views on whether you think tenancy deposit regulations should make provision for schemes to repay deposits to lead tenants if so used, or to individual tenants. The latter would require a landlord to notify individual tenants and deposits to a scheme, regardless of whether the deposit was submitted as a single amount.
Question 12: Do you have any particular views on the requirement for schemes (particularly insurance schemes) to be available to all landlords?
Question 13: Do you consider that both custodial and insurance scheme models afford adequate protection for tenancy deposits and should be permitted in the regulations?
Please answer either Yes or No and explain your response.
Question 14: The regulations currently only provide for fees to be charged in respect of insurance schemes. Do you think that fees should also be permitted for custodial schemes?
Please answer either Yes or No and explain your response.
Question 15: If your response to Question 13 is Yes, what would be an appropriate fee structure?
Question 16: What are your views on whether the regulations should specify an amount or maximum amount of any fee which may be charged and the impact this might have on a scheme's ability to be self financing?
Question 17: If you think a specific amount or maximum amount of any fee charged should be set, what would be an appropriate level
Question 18: What are your views on whether approved schemes should repay deposits to lead tenants if so used, or to individual tenants?