What is the difference between an insured deposit scheme and a custodial deposit scheme? Read what our experts have to say.
When renting a property, it is standard practice to pay a deposit – usually the equivalent of a month’s rent – upfront.
You will pay this deposit to the letting agent or the landlord and, by law, they must submit that deposit into a tenancy deposit scheme. There are two different type of schemes – custodial and insured.
The main difference between the two schemes is that:
- In a custodial scheme, the money is held by the third-party scheme provider.
- In an insured scheme, the landlord can keep the money in their own bank account during the tenancy.
Why does a deposit need to be protected?
A deposit is used to give the owner of the property a degree of financial security in the event that the tenant damages the property or goods go missing.
The landlord must protect the deposit by law. This ensures that the tenants’ money is secure and gives the tenant reassurance that they will get back what they are rightly owed at the end of the tenancy. There is a 28-day time frame from when you pay your deposit to the landlord or agent, for them to:
- protect it with an authorised scheme
- provide the prescribed information
The prescribed information will include information about the scheme chosen, such as contact details, how to make a claim at the end and details of the deposit and tenancy.
You have a right to make a compensation claim against the landlord or agent if the deposit was not protected or if it was protected outside of the 30-day time frame. You have 6 years to make a claim. Naturally, it is advised to wait until you have left the property to avoid any potential dispute with the landlord whilst still living under their roof, but you can still make a claim if you are living in the property.
There are two types of schemes that your landlord can protect your deposit in.
What is a Custodial Deposit Scheme?
If you rent your home on an assured shorthold tenancy (AST), your landlord must protect your deposit. The most common way to do so is through a Government-backed custodial tenancy deposit schemes. These three schemes are:
After registration, the third-party scheme provider takes custody of the money and holds it for the duration of the tenancy. You should be given a copy of the prescribed information and a deposit certificate that will include all the relevant information on the deposit and tenancy.
Upon the end of the tenancy, the landlord or the tenant can then submit a request for the deposit and both parties must agree on the amount to release to each party.
If the landlord and tenant disagree on any deductions, a dispute can be raised, and this is where the custodial tenancy deposit scheme comes in. This can all be done online, via a portal to which both the landlord or agent and tenant can access.
What is an Insured Deposit Scheme?
The main difference in the Insured Deposit Scheme is that the landlord or agent will retain the deposit for the duration of the tenancy. This allows them to control the money but requires a small fee to be paid to the scheme provider.
Not all deposit schemes offer this method of working.
At the end of the tenancy, the landlord and tenant can hopefully agree how the deposit should be divided and consequently, the landlord returns all or some of the deposit without any third-party interference. This is often the quicker option out of the two deposit protection schemes when ending a tenancy, as there is no third party involved.
If the landlord and tenant disagree the third-party scheme will step in. The scheme reimburses the tenant at the end of the tenancy should the landlord or agent be unable or unwilling to return the deposit (or proportion of) to the tenant, following a dispute process.
The landlord is expected to send the scheme the disputed amount whilst the scheme makes their decision. It is the scheme that is insured, rather than the tenant, to cover the scheme’s liability to pay the tenant when the landlord or agent will not do so.
What tenancy deposit scheme is better?
The pros and cons for both schemes are very similar, with not too much difference between the two. The main priority for you is ensuring that your deposit is protected with either a custodial or insured scheme.
It appears that there is a growing preference of Custodial Deposit Scheme. Data from My Deposits, which provides both insured and custodial schemes, found the number of deposits put in its custodial scheme was up 24.4% annually in 2019, while use of its insurance-based alternatives has declined 8.3% over the same period.
Matthew Hooker, co-founder of Ome, the soon-to-be launched deposit replacement scheme said:
There isn’t a huge difference between an insurance or custodial deposit protection scheme from a tenant perspective and both will deliver a certain degree of protection.
However, it’s clear that the industry is slowly moving away from the insurance-backed protection scheme and this is largely due to a focus on raising standards and increasing transparency across the sector.
What can a tenant do to help ensure they get their deposit back?
Dealing with a deposit dispute with your landlord can be stressful and costly for all parties so it is always preferable to avoid this.
One way to minimise the risk of a dispute is to have a comprehensive inventory. Prior to you renting the property, it is good practice for the landlord or agent to organise an inventory of the property. The inventory will detail the status of the full property including walls, flooring, fixtures and furnishings. The inventory then becomes helpful at the end of the tenancy and when you want to request your deposit back as this can be used as evidence to show the state of the property at the start of the tenancy compared to the end.
In the event that the landlord or agent do not get an official inventory drawn up at the start of the tenancy, then it would be good practice for you to take pictures of all areas of the house on your first day of moving in. You can then use these images if any disputes arise regarding damage to the property when you come to claim your deposit back.
How Can We Help
By law, under the Housing Act 2004, every landlord is obligated to protect a tenancy deposit into one of the three Government approved deposit protection schemes mentioned above. These schemes are:
At Tenancy Deposit Claims, we have a dedicated team of experts who are used to dealing with landlords, day-in, day-out. If your deposit has not been protected and you do decide to make a claim against your landlord, we are committed to securing the best possible outcome for you and we will keep you up to date in relation to your case, every step of the way.
Your landlord is liable for up to three times the amount of the original deposit.
At Tenancy Deposit Claims we make claiming for compensation easy:
- No Win, No Fee*
- No Upfront Payments
- An Expert Team
- Regulated and Authorised by The Solicitors Regulation Authority
You can get in touch with expert team today by completing our online enquiry form here. Enter your details and we will be sure to get back in touch with you within 48 hours.