The Committee consisted of the following Members:
Chair: James Gray
Ali, Rushanara (Bethnal Green and Bow) (Lab)
† Dakin, Nic (Scunthorpe) (Lab)
† Evennett, Sir David (Bexleyheath and Crayford) (Con)
† Fabricant, Michael (Lichfield) (Con)
† Fitzpatrick, Jim (Poplar and Limehouse) (Lab)
† Heald, Sir Oliver (North East Hertfordshire) (Con)
† Healey, John (Wentworth and Dearne) (Lab)
† Hughes, Eddie (Walsall North) (Con)
McFadden, Mr Pat (Wolverhampton South East) (Lab)
† Merriman, Huw (Bexhill and Battle) (Con)
† Morgan, Stephen (Portsmouth South) (Lab)
† Morton, Wendy (Aldridge-Brownhills) (Con)
† Rashid, Faisal (Warrington South) (Lab)
† Smith, Royston (Southampton, Itchen) (Con)
† Tredinnick, David (Bosworth) (Con)
† West, Catherine (Hornsey and Wood Green) (Lab)
† Wheeler, Mrs Heather (Parliamentary Under-Secretary of State for Housing, Communities and Local Government)
Laura-Jane Tiley, Committee Clerk
† attended the Committee
First Delegated Legislation Committee
Tuesday 12 June 2018
[james gray in the Chair]
Draft Client Money Protection Schemes for Property Agents (Approval and Designation of Schemes) Regulations 2018
I beg to move,
That the Committee has considered the draft Client Money Protection Schemes for Property Agents (Approval and Designation of Schemes) Regulations 2018.
With this it will be convenient to consider the draft Client Money Protection Schemes for Property Agents (Requirement to Belong to a Scheme etc.) Regulations 2018.
It is a pleasure to serve under your chairmanship, Mr Gray. The regulations were laid before the House on Thursday 3 May 2018. I will refer to them as the approval regulations and the requirements regulations respectively. The private rented sector is an important part of our housing market. It has doubled in size over the last decade, and letting agents now hold approximately £2.7 billion in client funds. The client money held by agents includes rent money and money provided by landlords for the purpose of making property repairs. At the moment, however, there is no legal requirement for agents to obtain client money protection. Tenant and landlord money is therefore at risk if an agent goes bankrupt or if client funds are misappropriated. The main letting agent representatives, ARLA Propertymark and the National Approved Letting Scheme—NALS—support making this protection mandatory. Indeed, it is estimated that around 60% of agents already hold such protection.
I thank my hon. Friend for his interesting question. I will come to it in the rest of my speech.
Making client money protection mandatory will ensure that every tenant and landlord has the financial protection they need. It will bring the property agent sector into line with others where client money is held, such as the legal profession and travel operators.
Before I set out the detail of the regulations, I want to establish the legislative context. The Housing and Planning Act 2016 provided powers for the introduction of client money protection requirements. Following Royal Assent, the Government invited Baroness Hayter and Lord Palmer of Childs Hill to chair a client money protection working group. The working group reported in March 2017, and its recommendation to make client money protection mandatory was accepted by the Government. The Government consulted on implementing mandatory client money protection in November 2017, and there was broad support for our proposals.
I will now introduce the two sets of regulations. The first set—the approval regulations—establishes the procedure for Government to approve privately run client money protection schemes. The second set—the requirements regulations—requires agents in the private rented sector to belong to one of those approved schemes if they handle client money. These two sets of regulations, which together provide the framework for client money protection, are the subject matter for debate before the House today.
I turn first to the approval regulations, which require any client money protection scheme to be approved by the Secretary of State in order to operate. This is to ensure that all schemes meet minimum standards and offer sufficient financial protection. The Government do not intend to create their own scheme at this time. That would be unnecessary, given the number of schemes in the market already. However, the regulations allow the Government to do so in future, so that any protection can be maintained in the unlikely event that the market ceases to offer provision.
In order to obtain approval, client money protection schemes must meet certain conditions, including those that are designed to ensure that landlords and tenants can easily obtain compensation. The scheme administrator must ensure that it has procedures in place so that valid claims are paid as soon as reasonably practicable—I love that word. It cannot make deductions from those claims. The scheme administrator must also hold a level of insurance cover that is appropriate given the amount of client money held by its members. Schemes must put in place arrangements so that in the event of the scheme closing, their members would be notified and transferred to an alternative scheme.
The approval regulations also establish minimum standards that must be set in scheme rules. They include requirements for members to hold money in a separate client account; to have written, transparent procedures for handling client money; and to maintain adequate records.
I am grateful to the Minister for giving way in her explanation of what she describes as the approval regulations. What would be her success or failure criteria, which would trigger the Government’s re-thinking of the matter and their implementation of the provision in the regulations for setting up their own scheme?
I thank the right hon. Gentleman for that question. We do not anticipate any failure, particularly because the schemes are backed by insurance. It is, however, a matter of form that the Government always provide in regulations that they can react, should the need arise.
Scheme rules must also require members to hold an appropriate level of professional indemnity insurance cover, to ensure that client money protection schemes are not overwhelmed with claims. The first port of call for a consumer making a claim should be their agent and their agent’s insurers; I hope that that somewhat answers the right hon. Gentleman’s question. Finally, schemes must provide key information to the Department on a quarterly basis to enable us to monitor their performance. If a scheme’s standards are not maintained, its approval can be withdrawn.
I will come to that in my closing remarks. I turn to the requirements regulations, which will require all property agents in the private sector to obtain membership of a Government-approved client money protection scheme by 1 April 2019. Those agents will need to meet increased transparency requirements, publish details of scheme membership and inform clients when they lose cover.
The Government recognise that robust and effective enforcement is essential to the implementation of mandatory client money protection. Agents that fail to get client money protection may be subject to a financial penalty of up to £30,000. Those that do not meet transparency requirements will face a penalty of up to £5,000. The regulations level the playing field by ensuring that it is not just reputable agents that offer protection.
For those agents that do not yet have client money protection, we anticipate that obtaining it will not be disproportionately burdensome. Indeed, the average annual fee for cover is only between £300 and £500. It is important to highlight that these requirements apply only where landlord and tenant money is held by a property agent, and so is at risk. Agents can instead choose to eliminate the risk by, for example, allowing tenants to pay their rent to the landlords directly. The new requirements should therefore not deter new entrants to the market.
Hon. Members may be aware that we have committed to introducing a new regulatory framework for letting and managing agents, and to prohibiting letting agents from charging fees directly to tenants. Mandatory client money protection will be an important part of this regulatory framework, which will give landlords and tenants assurance when using an agent. I will close there and answer the questions.
I want to follow up on the point that my hon. Friend the Member for Lichfield made about less successful agents. There are references in the notes to agents that are unable to obtain CMP cover and meet due diligence. What is the justification for allowing such agents to trade? If they are so bad that they cannot meet the diligence requirement, why would we want them trading?
My right hon. and learned Friend asks an extremely good question. We want to make sure that there is enough time for a firm to get its business plan in order, and we expect all letting agents that deal with client protection money to get CMP cover. Similarly, if there is any problem, they can alter their business plan so that matters such as rents go direct, and they are not in charge of those things. I hope that that helps. I will answer other questions in my round-up, after the right hon. Member for Wentworth and Dearne has said a few words.
It is a pleasure to serve under your chairmanship, Mr Gray, and to have the Minister back in her place on the Front Bench.
If the hon. Member for Lichfield and the Minister look at the consultation document on client money protection schemes, they will see that the total funds held by what the draft regulations call “regulated property agents” are estimated to be around £2.7 billion at any one time. The consultation document states that only around 60% of those agents are members of voluntary schemes, and that suggests that around £700 million or £800 million is held by agents that are not part of a scheme. That helps to underline the case for the draft regulations.
I am grateful to the right hon. Gentleman for his helpful comments. No doubt we will hear from the Minister about this, but does the right hon. Gentleman have any indication of how many actual failures there have been? Yes, that money is unprotected, but where are the examples—there must be some—of money not being passed on?
If the hon. Gentleman reads Lords Hansard from 17 March 2016, he will see that my colleague Baroness Hayter of Kentish Town, who led for Labour on the Housing and Planning Bill—as the Minister mentioned, that contains the parental provisions for the draft regulations—in pressing the case for a compulsory scheme rather than the existing voluntary scheme, cited several examples of property agents pocketing money, from landlords as well as renters, and going missing. Baroness Hayter cited six or seven obvious, recent cases, but there is a track record of hundreds of such cases in recent years, which underlines the case for the draft regulations. I encourage him to look at that debate, although the Minister may well give him other examples.
I was diverted before I had started. The Minister has introduced two draft regulations, so will she confirm which four housing regulations she will repeal? It is important for the Committee, before it approves the draft regulations, to understand the consequences for provisions or protections in other fields. If she cannot do that, will she confirm whether the Government’s policy of two out, one in for regulations, which has been their policy for several years, is still in place or whether it has been dumped?
As the Minister said, the draft regulations derive from the Housing and Planning Act 2016, which was given Royal Assent in May 2016. I happen to have led from the Front Bench the opposition, inside and outside Parliament, to that Bill. The draft regulations are, in many ways, a ghost from the past. This debate reminds me of many of the debates we had during the long proceedings on that long Bill. I am reminded, too, of the 19 defeats the Government suffered on it—double the total number of defeats on all the Bills in the previous Session. Of course, that does not count the concessions that the Government made during proceedings on the Bill, which led us to withdraw amendments that we might otherwise have pressed to votes that we might well have won.
That is the background to the draft regulations. Pressed by Labour, both in the Public Bill Committee in this place and in Committee and on Report in the other place, the Government were prepared to talk and to consider this issue further, so, although it very well might have done, it did not register as defeat No. 20.
Order. We do not need the hon. Lady’s rereading of the original Bill. We are considering the statutory instruments in front of us today, not the Bill itself. Perhaps the shadow Minister will return to that subject.
I am grateful for your instruction, Mr Gray. I think my hon. Friend is too generous in her description of that piece of legislation. Compulsory client money protection schemes were the subject of debate, and the case for them was pressed strongly by my hon. Friend the Member for Erith and Thamesmead (Teresa Pearce) in this House and by Baroness Hayter in the other place.
I welcome the fact that, after Royal Assent, the Government were prepared to set up the working party that the Minister mentioned, and to have it chaired jointly by Baroness Hayter and Lord Palmer. That marked a welcome move in the Government’s standpoint beyond the unthinking dogma of the Minister’s predecessor. Of the proposal to make these schemes mandatory, as these regulations do, he said that he was concerned that requiring letting agents to belong to a client protection scheme
“would be a step too far and would overburden a market that is perfectly capable of self-regulation”––[Official Report, Housing and Planning Public Bill Committee, 10 December 2015; c. 719.]
I am glad to say that, two and a half years on, the Minister has made it clear that the Government’s mind has changed. As she said, when the working group reported in March 2017, its first recommendation was that
“The Government uses its powers in the Housing and Planning Act 2016 to make Client Money Protection mandatory”.
That is very important background to the detail of this legislation. In some respects, the regulations represent the implementation of a welcome part of that Act. Flagship parts of the Act—starter homes, the forced sale of council housing and the extension of the right to buy to housing associations—
Order. We really must stick to the two statutory instruments in front of us, not the rest of the Act.
Order. The right hon. Gentleman says what he says in such an elegant, amusing and charming way that it is very difficult to interrupt him, but it is important that we keep this debate purely to the two statutory instruments that are before us. We have had some fun discussing the background to the Bill in general over the past couple of minutes, but we should now focus entirely on these two statutory instruments and nothing else.
I have never understood why my really talented hon. Friend hides himself away in the Whips Office. He has quite clearly demonstrated how effective he would be speaking from the Front Bench, rather than simply sitting on the Front Bench.
That was perhaps a rather long preamble. What I really want to say is that the Opposition welcome these regulations, because they cover the ground that we urged on the Government previously. In a way, they make good a gap. Solicitors, other professionals and even estate agents are required to have money protection schemes in place. We have a mandatory money protection scheme in place for renters’ tenancy deposits. The regulations are well overdue, and they are welcome because of that. Many of the better firms in the industry have backed this for some time. The Association of Residential Letting Agents, the British Property Federation, the Association of Residential Managing Agents, the ombudsman and the Housing, Communities and Local Government Committee have, for some time, all been of the view—as have the Opposition—that this is a necessary step.
In the end, the principled case for these regulations is surely that there is no real market in letting agents for renters. Renters cannot shop around for their letting agent, because they do not choose the letting agent who is responsible for the home that they rent and live in, or for the home that they want to rent; that decision is for the landlord. People have no choice about that, because they choose the property and not the letting agent. The draft regulations are a well overdue and welcome recognition of that fundamental point.
We do. I have been known to describe some parts of the private rented sector as the wild west, to pick up on her analogy. The draft regulations are narrow; they are a welcome but small step in a market that may leave the majority of renters satisfied at the moment, but that contains some significant rough or rogue practice. The measures will, in a small way, help to make the market fairer and better for landlords and tenants. One of the important secondary arguments in favour of these regulations is that they will clearly benefit landlords as well as tenants.
I want to reinforce the point just made by my hon. Friend the Member for Hornsey and Wood Green. It is good news that the Government are bringing forward the draft regulations. They are overdue. Good agents in the industry are given a bad name by the cowboys out there, and these measures will reinforce the efforts of local authorities that introduce licensing schemes to tidy up the whole sector.
My hon. Friend is right. He knows—although I do not wish to try your patience, Mr Gray—that I am a strong advocate of licensing schemes for landlords, but those are for landlords and the measure we are discussing is for regulated property agents.
The real question is to what extent the draft regulations will work. Will the regulations do the job, and will they work well enough? I have a number of questions for the Minister—[Interruption.] She sighs, but I am afraid that is her job, as it is my job and that of the Committee to ensure that regulations we may accept or approve are up to the job that she says she wants done.
The Minister said in her opening remarks that the draft regulations must provide robust and effective enforcement. On the question of enforcement, how was the figure of £5,000 as the maximum fine for failing to display the details of scheme membership decided, and is it sufficient? How was the figure of £30,000 as the maximum fine for failing to register in a scheme decided, and is it sufficient?
As I said to the hon. Member for Lichfield, the Government’s consultation document makes clear the scale of funds held by agents that are not their money but are held on behalf of landlords and renters in different ways—£2.7 billion. Set that alongside some of the big companies in the field, such as Foxtons, which expects lettings income in 2017-18 of about £66 million—Countrywide expects total earnings of 10 times more than that—and that puts into some perspective the question of maximum, not automatic, fines of £30,000 and £5,000. There are real questions about whether that will be sufficient sanction, or deterrent, for companies in the field. After all, two out of five of them could already be doing something through voluntary schemes, but are not doing so. Is the level of fine sufficient to do the robust, effective enforcement job that the Minister talks about?
The Minister may say that landlords can be fined, for example, for overcrowding their houses up to a similar maximum level, but landlords can also be banned from being landlords in the worst cases. Those worst rogues may be the cowboys talked about by my hon. Friends. Why is there no similar provision in these regulations, and what consideration did the Minister give to a similar—let us use what seems to be the term of the moment this week—backstop power? Finally on fines, why write the figure into the draft order? That clearly means that it is then fixed, unless and until the House decides to legislate again to alter, and perhaps necessarily to raise, those fees.
On enforcement, who will enforce the draft regulations? I encourage the Minister to turn to regulation 5(1) in the requirement regulations—in her terminology—which says:
“It is the duty of every local authority in England…to enforce the requirements of regulations”.
Paragraph 7.18 of the draft explanatory memorandum says:
“Local authorities will be responsible for enforcing these requirements.”
Which part of local authorities will do the enforcement? Will it be trading standards? That is my assumption, because the transparency provisions in place at present under the voluntary CMP schemes are enforced by trading standards. If that is the case, not every local authority has a trading standards department. As the Minister will know from representing South Derbyshire, which is a two-tier area, not every authority has the powers of a weights and measures authority. What will be the enforcement capacity and role of, for instance, district councils in two-tier areas?
On enforcement, I will mention the costs. I looked carefully at the draft impact assessment—I do not know if the Minister signed it off—but I could not see any estimate of costs to the local authorities responsible for enforcement. Will she tell the Committee how much the Department has calculated that this will cost the local authorities that have effective and robust enforcement? Clearly, the draft regulations contain a provision for local authorities to retain any fines levied. Has she calculated how much she expects local authorities to be able to levy through these provisions on a stable annual basis? Finally, has the Department applied the new burdens principle to this new duty of enforcement, which, if the draft regulations are written correctly, will apply to every local authority? That seems clearly appropriate to me.
Finally, the experience of implementation—particularly of important measures over the last eight years—has reinforced the case that the Government are often very bad at doubling back and assessing whether what they have done has actually worked. I encourage the Minister to give the Committee an undertaking that, say, 12 months after the draft regulations come into effect, she will review the way they are working and will report to the House, so that we can see whether the case she put to the Committee in support of the draft regulations has been realised and the regulations are working as intended.
What a pleasure it was to hear those three extra questions, further to the three earlier questions. I thank you for chairing the debate, Mr Gray. I also thank the Committee Clerks and the Doorkeepers and everybody who has been involved in organising it, and I thank right hon. and hon. Members for their contributions.
To address some of the points raised, there have actually been only a small number of cases in which claims have been made against existing CMP schemes. The reason why we are going forward with the draft regulations is that this is a growing sector, and so claims may sadly increase in the future. The point of the draft regulations is to protect people involved in this area. We are finishing off the original legislation.
Does the Minister accept that the measure of why the regulations are needed is not complaints against members of current schemes? The basis for the regulations is that those not in schemes are stealing money, keeping money and sometimes prosecuted for doing so when it is not their money. That is why it is so important to have mandatory schemes to fill the gap. The problem is not with schemes and members of them making complaints. The biggest case for the regulations is to fill the gap where no schemes exist and members are operating as regulated property agents without regulation.
Of course, the right hon. Gentleman is completely correct. We want a level playing field across this area of work. To answer his first three questions, the intention is to designate a governmental scheme only if market provision is insufficient. There is no indication at present that that is likely, but it is good and prudent practice to put that measure into legislation, should the need arise.
It would not be appropriate to publish quarterly, as the information would contain some commercially sensitive information. However, the Government will scrutinise and challenge if standards are not met. As regards the housing regulations and what might be repealed, to repeat myself, these statutory instruments finish off the 2016 legislation, so it is not a matter of deleting other areas of legislation.
I am sorry, but it must be a matter for the Committee. It must be relevant to the two regulations that the Minister is asking the Committee to approve. If Government policy requires that four regulations, probably in the housing field, must be repealed as a result of what we might approve, that is clearly a matter for the Committee. I am asking a simple question: does the Government still have a two out, one in policy on regulations? Yes or no is the only answer that is needed.
No, I will carry on. Who will enforce the regulations? Trading standards will be responsible. More importantly, the Secretary of State will nominate a lead authority in trading standards for areas that get into difficulty with existing trading standards. That is common practice, and that is what is happening in the Tenant Fees Bill that is going through the House.
May I encourage the Minister to get her head together with her colleague, the Under-Secretary of State for Housing, Communities and Local Government, the hon. Member for Richmond (Yorks) (Rishi Sunak)? He dealt with that point, which she is right is relevant to the Bill that has been considered in Public Bill Committee today. He made it clear to that Committee this morning that every local authority will have an enforcement role, not that a lead authority would be appointed to do that job for them in some areas. I will not press her for a definitive answer now, but may I suggest that there may be a difference in the view we are getting on the same day from two Ministers from the same Department? Perhaps they could get their heads together and get it clear for both pieces of legislation and write to members of both Committees.
I would be delighted to answer the right hon. Gentleman now. This is a different piece of legislation under different law—the 2016 Act. This is consumer focused, which is why it is about trading standards. It is not a matter of housing, where we are worried about enforcement and environmental health issues, which is why district councils are getting involved in that Bill. This is completely different.
The right hon. Gentleman obviously had a very lenient Chair, who allowed Members to stray into that area on the Bill this morning. We are now talking about this Bill and this matter. As regards the figures of £5,000 and £30,000, we believe that those figures are high enough, particularly given that it is per individual case of failure, not over the course of a year, so we agree that that is the correct level. As it happens, it does also mirror the other Bill, which I will not mention again.
Of course, the right hon. Member for Wentworth and Dearne suggested that some very large property agents—I think he mentioned Foxtons and Countrywide—have very substantial incomes. However, I thought that they were already in client money protection schemes. Is the Minister aware of any examples of a really large property agent that is not?
No, I am not. I thank my right hon. and learned Friend for that interesting question; he makes a very good point.
I will close my remarks there. The Government are determined to strike a better deal for tenants, landlords and their agents. All tenants and landlords should be comfortable in the knowledge that their money will be safe in the hands of the agents that they use. Making client money protection mandatory will ensure that that is the case. I therefore commend the regulations to the Committee.
Question put and agreed to.
That the Committee has considered the draft Client Money Protection Schemes for Property Agents (Approval and Designation of Schemes) Regulations 2018.
DRAFT CLIENT MONEY PROTECTION SCHEMES FOR PROPERTY AGENTS (REQUIREMENT TO BELONG TO A SCHEME ETC.) REGULATIONS 2018
That the Committee has considered the draft Client Money Protection Schemes for Property Agents (Requirement to Belong to a Scheme etc.) Regulations 2018.—(Mrs Heather Wheeler.)