Considered in Grand Committee
My Lords, client money protection gives landlords and tenants confidence that their money is safe when it is being handled by an agent. The Government made it a mandatory requirement for all property agents in England holding private rented sector-related client money to obtain membership from an approved client money protection scheme on 1 April 2019. The client money held by agents primarily includes rent paid directly to the agent and funds provided by landlords to the agent for the purpose of making property repairs. The Government have approved six client money protection schemes protecting £3.4 billion of client money across schemes. Nearly 10,000 letting agents are now members of a scheme. Increasing the financial protections for landlords and tenants through mandatory client money protection is a positive step towards driving up standards in the private rented sector.
Before I go on to set out the detail of the regulations before the Committee, I want to establish the legislative context. The Housing and Planning Act 2016 provides powers for the introduction of mandatory client money protection. Following the passage of the Act, the Government invited the noble Baroness, Lady Hayter, and the noble Lord, Lord Palmer of Childs Hill, to chair a client money protection working group. The group reported in March 2017 and its recommendation to make client money protection mandatory was accepted by the Government
In late 2018 we reviewed the regulations, considering new concerns that had come to our attention. These included the difficulties that agents in Scotland were facing in obtaining a pooled client account following the introduction of client money protection there in January 2018. In addressing the issues highlighted in Scotland, we permitted client money protection schemes to accept as members agents who are making all reasonable efforts to obtain a client account but are unable to do so for reasons beyond their control. We applied this grace period for 12 months to 31 March this year. The amendments to the approval regulations were made and commenced on 14 February 2019, which allowed schemes and letting agents to comply with our regulations ahead of 1 April 2019, when the requirement for every agent to be a member of a client money protection scheme came into force.
The Client Money Protection for Property Agents (Approval and Designation of Schemes) (Amendment) Regulations 2020 simply extend the initial grace period for letting agents struggling to obtain a pooled client account for a further 12 months to 1 April 2021. I should point out that an error was made in the Explanatory Notes to this statutory instrument when it was laid in Parliament on 3 February. They referred to a full impact assessment but as this measure falls within the de minimis exemption, we have not produced one. With the agreement of the statutory instrument registrar, we issued a correction slip to the Explanatory Notes, pointing out that the regulations have “no, or no significant impact”.
Now that mandatory client money protection has been in place for several months, there is some evidence of UK banks being reluctant to offer pooled client accounts to agents. This issue requires attention because one of the requirements of the client money protection regulations is that letting agents must hold their client money in a client account. For the majority of letting agents, the only workable model is to hold this money in a pooled client account, thus avoiding the need for thousands of individual client accounts. However, this presents money laundering risks because funds from multiple different sources can be co-mingled and move rapidly through the account, presenting challenges in identifying the true owners of the funds in the account. To address these risks, anti-money laundering regulations place specific requirements on non-regulated firms, which includes the large majority of letting agents. These requirements include that banks should conduct due diligence on the customer holding the pooled account, the lettings agent and the customer’s clients.
This enhanced consumer due diligence has made it difficult for some letting agents to obtain a pooled client account. We are aware that certain banks are reluctant to offer them, driven by a concern to ensure compliance with money laundering regulations as well as commercial factors. We continue to monitor on a quarterly basis the number of agents on whom this has an impact. I am happy to report that the number of agents reporting such difficulties to the client money protection schemes remains low. In the last quarter for which we have data, October to December 2019, 251 letting agents reported difficulties in obtaining a client account. This amounts to around 2.5% of agents who belong to a client money protection scheme.
Forthcoming guidance for banks from the Joint Money Laundering Steering Group on their obligations under the money laundering regulations will help address the need for proportionality when assessing the risk associated with non-regulated firms such as letting agents. We had expected final guidance to be published before the end of the grace period, but, due to its unexpected complexity, a draft of the consultation is not now expected till spring this year.
We have considered the case for ending or extending the grace period in consultation with the client money protection schemes. We have concluded that there is a strong case for offering a further 12-month extension. This will guard against the risk that some agents will be unable to comply with the regulations through no fault of their own, with attendant sanctions of up to £30,000 for non-compliance. This further extension allows the time needed for Joint Money Laundering Steering Group guidance to be published and to inform commercial decisions made by banks. We will also encourage the client money protection schemes to encourage those agents who report that they are struggling to secure a client money account to make exhaustive efforts to do so. The fact remains that most agents hold such accounts with banks. Agents must not assume that the grace period will be extended again beyond April 2021.
Mandatory client money protection is an important part of the Government’s suite of existing and proposed policies to drive up standards in the private rented sector and give landlords and tenants the confidence they need when using an agent. I beg to move.
My Lords, I thank the Minister for the great detail in which he set out this statutory instrument, which is almost a one-line measure which moves a date. Behind that one line, however, is a bigger story.
I should declare my interest as set out in the register as the chairman of the advisory board of the Property Redress Scheme, one of the three ombudsman schemes. As the Minister noted, I also have a proprietary interest in this matter, having been the co-chair of the review group set up by the noble Lord, Lord Bourne, which worked incredibly well. We welcome the legislation.
The problem is: where are we now? As the Minister said, letting agents were told in the other place that this would be their last chance to comply with the CMP regulations, which have been a legal requirement for a year. Compliance was delayed to give letting agents more time to set up pooled client accounts for their landlord and vendor customers and to keep these separate from the turnover of their business.
The problem hidden by this short measure, which the Minister acknowledged in his introduction, is how the banks are helping or not helping the legislation. They take different views depending on the interpretation of the latest money laundering directive. Some do not even accept registration with HMRC as being satisfactory. I understand that government guidance will be published in the not-too-distant future which gives some banks more comfort that they can allow agents to have pooled client accounts. I hope that the Minister will confirm that such guidance is being given, although it seems that some banks have taken a commercial stance not to do so. Just to complete the picture, some forward-looking banks have offered accounts, but, naturally, the agent would have to move to those newer banks on the market.
Some banks claim that they need an individual client’s account for each landlord, which the Minister did not mention. Others have refused to open a client’s account without client money protection in place. However, to obtain client money protection, the agent needs a dedicated, ring-fenced client’s account. Is the Minister aware—given what he said in his introduction, I rather think that he is—of the chicken-and-egg situation of banks requiring CMP to set up an account when a company is not able to obtain CMP without the right bank account being set up?
We pass the law here, but the banks are thwarting that law in how they are allowing these accounts to be set up. I have the figure of 251 agents saying that they are struggling to set up pooled clients’ accounts. In a sense, it is a great achievement that only 251 or 253, whichever the figure is, are doing this—it is a great improvement in providing security for people’s money that is left with letting agents—but it means that 250-odd people want to do this but cannot seem to because of the banks’ attitude.
As a chartered accountant, I used to audit solicitors’ accounts. They always had to have clients’ accounts. They had a pooled clients’ account and, within their ledgers, you separated out that account. There is no need for a separate client’s account for each landlord or letting agent. It is possible to do that within the ledgers. I remember one solicitor who, sadly, I had to report to the Law Society and who was struck off, because he did not operate the system properly, but it exists—you can tie it down in solicitors’ accounts. If they can do it, I do not see why banks are not being more helpful in this instance.
We need from the Minster not only this extra year, which I regret has had to happen—we have the extra year for the reasons explained, which is to be fair to people who would otherwise lose their livings—but some effort to make the banks understand what is necessary. The banks have to be assured that their worries about money laundering can be covered. The Government need to speak to the banks about why they are not co-operating in something that is a great benefit to the housing industry.
My Lords, I thank the Minister for his explanation. I just want to intervene briefly. I should make it clear that although I am the Chairman of the Secondary Legislation Scrutiny Committee, which has considered this instrument, I am speaking here for myself.
I draw attention to the fact that this is what happens when an irresistible force meets an immovable object. As a result of the Government’s policy, for a year people’s deposits that otherwise would be covered will not be covered. It seems a shame that we have not been able to find a way to move forward. The noble Lord, Lord Palmer, has told the Committee in great detail about the problems of money laundering. Those of us who take an interest in the financial proceedings in the Chamber know of old that money laundering is the ace of trumps. You just have to say, “I’m doing this because of money laundering”, and the argument is shut down. If someone says, “Hang on, let’s just get some perspective on this”, they are immediately told that they are the money launderers’ friend.
The noble Lord, Lord Palmer, went through the background and what is known in the trade as the KYC—know your customer—regulations. We have all seen it: when we have tried to open a small account of £25 or £50 for a child or godchild, we are into the whole business of utility bills and identification. I raise this issue because I want once again to draw the Government’s attention to the extent to which this thing has got completely out of control.
I have here a copy of the UK Financial Intelligence Unit’s “Suspicious Activity Reports”. The SARs, as they are known in the trade, are the meat and drink of the money laundering business.
If you believe that something suspicious is going on, you have to make an SAR. You are not allowed to tell the person you are making a report about that you are going to report them, because that would be an offence under the Act. In the year to March 2019, 478,437 SARs were reported. That is, on a 250-day working year, about 2,000 a day. It is vanishingly improbable that one in 10 of those is looked at. They just create a huge mountain of paper along the lines of the problems raised by the noble Lord, Lord Palmer, and about which nothing is done.
Do these half a million SARs achieve a lot? During the same year they recovered £829,000. They managed to recover £7.9 million from HMRC and to distrain £122 million. Overall, at their most helpful and positive, £132 million was either seized or distrained. This is from an organisation which says that there are “billions” going through the City of London. Incidentally, £132 million is equivalent to £27 per SAR—probably rather less than it cost for the person to put the SAR in in the first place.
As part of this whole area we are discussing, somebody in the Government needs to step back and say, “Are we actually getting the focus right? Are we really spending all this money in the right place? Are we not getting an undesirable by-product by delaying protection to some people for a year because they cannot get the proper client money protection?” If we were to introduce a de minimis on a SAR of £500 or £1,000, you would find that about two-thirds of SARs would disappear. I find it hard to believe that you can launder money to buy a £19 million mansion in Mayfair on amounts of £1,000 or less.
This has nothing to do with my noble friend, who will say, “This is a lovely idea, but it has nothing to do with me.” He is quite right; nothing will happen as a result of this, unless, from time to time, people say, “We need to think about how we are organising this. Actually, we are not catching the right people; we are catching and sweeping up a load of small people, most of whom are entirely law-abiding. The big fish seem to swim through the net in an extremely unattractive way.”
Finally, I am not clear why, if you cannot get an account as an agent, you cannot join a deposit protection scheme. You might wish to leave that and have your own client account later; I understand you can do it on a custodial or an insured basis, but it seems to me that there is a way there for us to say, “From this moment on we will make sure that every tenant’s deposit is protected. You may do it by getting a bank account, if you can; if you cannot, join a deposit protection scheme and, once the bank can help you, you will be in a position to move across and have your own account with the bank.” My concern about these regulations is not that they are bad—they are not—but they would be unnecessary if we thought more clearly about what we are trying to achieve and more creatively about how we might move it all forward.
My Lords, I thank the noble Earl, Lord Courtown, for presenting these regulations to the Committee and explaining their purpose to us. I understand why the Government have had to table the regulations. In that sense, I fully support them. As the noble Lord, Lord Palmer of Childs Hill, set out, the problem here is that some banks do not offer client accounts, making it difficult for people who want to comply with the legislation and do the right thing to get the account to do what they need to do. That is very frustrating. I understand the point about needing the extra year and I fully support it.
The noble Lord, Lord Hodgson of Astley Abbotts, was absolutely right that some bigger organisations seem to be able to channel hundreds of billions of pounds through UK banks with no problem at all. That is fine, but when a small person trying to run a small business in the local area sets up a client account, they get caught by money laundering rules. I like the idea of maybe having de minimis rules. We need to find something to get over this. It seems ridiculous. Transparency International will talk to you about the amount of money going through some of these major UK banks; the money is from all sorts of jurisdictions around the world that certainly have less regulation—it may be more dubious where these funds are coming from. They can buy property all over London and elsewhere with no problem at all. They can do what they want.
However, for a small trader trying to run a business and do the right thing who comes up against the money laundering regulations, things are not done for you and you cannot run your business and serve your clients properly. That cannot be right. I hope the Government at least talk to these banks. It is unacceptable. You have to allow these businesses to do their job properly. They are required by law to have these accounts and protection; they need a way to actually have them or, if not, to be able to find some way forward—maybe the way suggested by the noble Lord, Lord Hodgson of Astley Abbotts—that they can enact themselves.
My Lords, all noble Lords commented on how important this issue is. Mandatory client money protection is an important part of the Government’s suite of existing and proposed policies to drive up standards in the private rented sector and gives landlords and tenants the confidence they need when using an agent.
I thank my noble friend Lord Hodgson, and the noble Lords, Lord Kennedy and Lord Palmer, for their contributions. I will deal with the questions put. Should any more detail be required, I will of course write to noble Lords after I read Hansard.
The noble Lord, Lord Palmer, started off with an issue that all noble Lords referred to: how the banks are helping, or not, in this situation, and what they are doing to address these issues. These are the issues that we expect the guidance to pick up on and address. We must remember that this is a low-risk sector, hence the low level of problems in getting pooled accounts—I think some 2.5%. I repeat what I said in my opening speech: forthcoming guidance for banks from the Joint Money Laundering Steering Group on their obligations under money laundering regulations will help to address the need for proportionality—which is what I think all noble Lords were referring to—when assessing the risk of non-regulated firms, such as letting agents.
The noble Lord, Lord Palmer, referred to his days as an accountant and looking at solicitors’ clients’ accounts. I was an agricultural property manager, collecting rents for agricultural land and the let sector. I wholeheartedly agree with him on the importance of making sure that clients’ accounts are tip-top and up to shape; it is so important for the client and the individuals involved.
My noble friend Lord Hodgson talked about the money laundering regulations. He was basically saying that they have got out of control. I will draw the attention of the responsible department to his views on that matter, which will of course write to him in due course. He went on to ask about client money and tenancy deposit protections. The client money protection and tenancy deposit protection are two separate matters. Agents can join a tenancy deposit protection scheme without being a member of a client money protection scheme. I hope that is clear to my noble friend. Finally, I thank all noble Lords for their contributions and commend the regulations to the Committee.
Could the noble Earl say a little more about where we are with what the banks are doing? It is unacceptable that hundreds of millions of pounds of illegal money goes through our banking institutions every year with no problem whatever, but they claim that they have strict money laundering procedures in place. We know that property is bought elsewhere using money gained from criminal activities, but nothing appears to be done about it. However, as the noble Lord, Lord Hodgson of Astley Abbott, has said, if you are the little person running a small firm and you want to open a client account, you cannot open one. That is ridiculous.
My Lords, I thank the noble Lord, Lord Kennedy, for asking that question. The banks have to comply with HMRC policy. There may be more that I can add in due course, so I will write to him and distribute the answer to all noble Lords attending the Committee.