What are the CMA's concerns over zero deposit and deposit alternative products for renters?

The Competition and Markets Authority (CMA) decision to initiate an in-depth investigation into the controversial deposit alternative concept has been welcomed by the leading suppliers in the sector. The CMA recently announced its intention to provide updated guidance for lettings agents to ensure tenants and tenants-increasingly-love-corporate-landlords'>landlords clearly understand their rights and responsibilities.

The CMA also pointed to specific areas of concern. One of the primary issues the CMA has drawn attention to is the zero deposit schemes. This is not the first time such schemes have come under the CMA scanner.

Are zero deposit and deposit alternative schemes considered to be tenant fees and what about the Tenant Fees Act which banned tenancy fees?

Last year, a leading newspaper reported that some agents were potentially bypassing the ban on tenant fees by making renters sign up for these schemes as a prerequisite for their tenancy. In addition, in 2020, questions were raised about the ability of renters to fully understand the complex concept of deposit replacement compared to traditional government-backed tenancy deposit schemes.

An investigation has revealed instances where individuals were required to enrol in a zero-deposit scheme as a mandatory condition for renting a property. These schemes involve the payment of a fee equivalent to approximately one week's rent instead of the conventional deposit amount, which is an amount equal to five weeks' rent.

What are tenants’ obligations under a zero deposit or a deposit alternative product?

Many tenants are unaware that the zero-deposit scheme does not absolve tenants of their responsibility to cover property damage costs throughout their tenancy. In addition, unlike a traditional deposit, the fee is non-refundable, and tenants remain liable for any damages at the end of their tenancy. They may also incur additional expenses for membership renewals and could face charges for adjudication in case of a dispute, ultimately leaving them in a less favourable financial position.

Under the zero-deposit scheme, renters are frequently advised to opt for the zero-deposit alternative, and letting agents can earn up to a 30 percent commission from these referrals. Deposit alternatives such as Zero Deposit has welcomed the CMA's announcement. They strongly support the CMA's efforts to improve industry standards and address unfair practices, especially within the deposit replacement category. As a deposit alternative deposit company, they have underlined the need for comprehensive standards and a code of conduct within the deposit replacement market. They believe such a move can protect tenants from potentially harmful practices.

The company has invested significant resources yearly to meet and exceed regulatory standards.

How do zero deposit schemes work in residential lettings?

Deposit alternative products charge a small upfront fee (usually 1 weeks' rent), add a cooling-off period, and should share enough information about the tenants’ rights and obligations via a transparent sales process. It is paramount that renters are empowered to make informed choices without feeling any pressure. Some zero deposit or deposit alternative products also offer interest-free payment plans for any liabilities.

What aspects of the letting industry is the CMA investigating?

The CMA's investigation also extends to other issues in the rental sector. They include sham licences, unfavourable guarantee clauses, potential unlawful discrimination, and retirement housing fees. The CMA says it is fully prepared to take enforcement action as it has received complaints suggesting that some tenants-increasingly-love-corporate-landlords'>landlords and letting agents may not be complying with consumer protection laws. They have plans to update its guidance for lettings professionals to help them understand their obligations better.