The Financial Conduct Authority (FCA) has been urged to review how deposit replacement scheme products are being sold to tenants.
Deposit-free schemes have emerged as a way for letting agents to earn referral fees and cut costs for renters.
The idea is that tenants are given the option to pay a small fee, rather than a traditional deposit, to purchase a product that covers the landlord for varying levels of arrears or damages.
But Jon Notley, former Zoopla commercial director and founder of the Zero Deposit scheme, is warning that various commission levels, business models and types of regulation in the sector could create a payment protection insurance-style mis-selling scandal.
In particular, he is urging the FCA to monitor where firms are claiming to sell an insurance product but may not be regulated themselves or could have the paperwork written in a way that it isn’t clear who the policy covers.
He warns that if a firm isn’t fully regulated by the FCA, they could be selling products that appear regulated without meeting the necessary requirements on pricing and transparency.
Tenants could also end up losing cover they thought they had paid for and get pursued by a landlord if a firm went bust, he added.
In contrast, if a tenant uses a firm fully regulated by the FCA, they could complain about issues to the Financial Ombudsman Service and have losses covered by the Financial Services Compensation Scheme if a business collapsed.
Notley said: “We have always believed that taking the fully FCA regulated route is best for customers. The FCA’s system of regulation provides an external yardstick by which firms can be measured and a shield for consumers when needed.
“Customers must be given sufficient information to understand the value of the products they are purchasing and given a safety net when they don’t.
“Non-regulated firms have the freedom to offer higher commissions and inferior products without sufficient controls and safeguards in place, which could expose a large number of tenants and landlords to serious harm.”
Dan Wilson Craw, director at Generation Rent, said: “No deposit schemes are relatively new, but we’ve already heard from tenants who have made extra monthly payments only to be hit with spurious damage claims upon moving out, and with no confidence in the process of challenging them.
“If these schemes are to be an option for tenants, they must be regulated properly so that tenants have somewhere to turn if they feel they’ve been mistreated.”
Deposit replacement schemes have already gained negative coverage.
Last month, This Is Money reported on a case of a Leaders Romans Group tenant who had opted for the agent’s ‘no deposit option’ but had mistakenly believed it was an insurance policy so was shocked to receive a £1,318 bill at the end of her tenancy.
ARLA Propertymark has also warned agents to do their due diligence on these schemes and has produced the table below that shows the various business models and levels of regulation among some of the main providers.