Before I call the first Member to ask a question, I remind all hon. Members that questions should be limited to matters within the scope of the Bill and that we must stick to the timings in the programme motion that the Committee has just agreed. For this session we shall have until 10.25 am. Also, I ask whether any members of the Committee wish to declare any relevant interest in connection with the Bill.
May I draw attention to my entry in the Register of Members’ Financial Interests. I have eight residential properties and three commercial properties, for none of which, however, we charge deposits or use letting agents.
Q Good morning. This is a fairly informal process to help the Committee get views as background for when they go through the Bill line by line. It might be an idea, starting with Mr Cox, to make an opening statement.
Thank you, Mr Bone. We do not support the Bill. We do not think it will achieve its aims. The market has grown up over a period of time. It is already quite a heavily regulated market. We estimate that there are about 145 pieces of legislation and 400 sets of regulations that govern the lettings industry. When talking about greater clarity and control, one of the problems that we have had is the complete lack of enforcement in the sector.
The Select Committee on Housing, Communities and Local Government has recently carried out an inquiry looking at the private rented sector. Enforcement levels are pitifully low. The London Borough of Newham prosecutes about 250 landlords and agents a year, and that accounts for half the number of prosecutions in the sector. I am sure that Isobel will talk about some research that NALS did last year on the impact of enforcement with respect to the agent transparency regulation from 2015. If laws were being enforced—if trading standards was going out and enforcing the law—we would not have the problem that the Bill is trying to solve.
We are worried that there will be a repeat of what has happened every time before: a new law is passed; professional agents—our members—will abide by that law; and unregulated and unprofessional agents will continue operating and charging fees with absolute impunity because there will be such low levels of prosecution.
Lending fees represent legitimate costs to business. They cover three essential elements of a contract: the tenant referencing, the contract negotiation and the inventory check-in/check-out report. Those services are provided to tenants, and landlords pay for the different services.
At the moment, an agent is effectively the servant of two masters. They are the agent to both, and they have a legal duty of care to both. We are worried that, when the fee ban comes into force, the services to tenants will probably diminish because the legislation effectively states that the primary consumer of the letting agent service is the landlord. Therefore, the customer service enhancements that legislation over the past 20 years has focused on—good property condition and good management practice—will be undone.
The research we undertook through Capital Economics last year indicates that it is likely that tenants will pay about £103 per tenant per year more in rent as a result of the ban. They will make a saving if they move more regularly, but we, like everybody else in this room, want to see longer-term tenancies. According to Capital Economics, the over-under is two and a half years. Therefore, people who want well-maintained tenancies—three-year tenancies—will end up paying more as a result of the ban than they would if we left it as it is today.
I concur with everything David just said. I am a representative of a letting agent organisation, and our aim is to raise standards in the private rented sector. We are very concerned about the impact of the ban. We think it will result in an increase in rents, which is ultimately not in the interests of the tenant. Landlords faced with additional costs may move to self-management, which would not ultimately be in the interests of the tenant either.
During the passage of this Bill, I am sure you, as consistency MPs, have visited letting agencies in your constituencies, so you know that they are good, sound businesses, and that people work hard to deliver the service to tenants. There will be an impact on those small businesses, which are the eyes and ears of the local housing community. Businesses will close, and there will be a loss of employment. It was sad to read the Government quite glibly say in their impact assessment that the impact of the ban will be about £10,000 per branch of a letting agent company, because £10,000 outside London is the cost of a part-time member of staff. A small business—perhaps a sole trader with only one member of staff—will have to get rid of that part-timer, who could easily be a tenant, so there is an impact there.
David mentioned enforcement. We carried out a survey of 42 local authorities in June last year, looking at the enforcement of the Consumer Rights Act 2015. Of those 42 local authorities, 93% had failed to issue a single financial penalty against a letting agent in the previous two years.
What are we going to be faced with with the fee ban? Enforcement really needs to come to the fore. The Government have mentioned that there will be a lead enforcement authority. We need to know who that is, how they are going to gear up and how they are going to be resourced. That is what I would like to see.
Just to give you some context, OpenRent is the largest letting agent in the UK. We let 70,000 properties last year, and we are on track to let 100,000 properties this year. Our policy since inception six years ago has been to ban admin fees. We provide quite a compelling case study that the fee ban is not at odds with running a successful and sustainable letting business.
Further to that, I do not believe a fee ban would increase rents. The logic for that is that our rents across the country are in line with the national average. Roughly, the nationwide average is about £900 per month, and the London average is about £1,500 per month. In fact, by switching to OpenRent from a high street agent, landlords save, on average, over £1,000, and we often see those savings passed back to tenants in the form of lower rents. I am here today hopefully as a case study to show that some of the concerns the industry has raised might not be valid.
We have two specific concerns about the Bill. One is the issue of default fees. The concern is that, as the Bill is currently drafted, tenants might not have the full protection that it intends. I have further comments on that, which I will probably come to later. Secondly, there is the treatment of holding deposits relating to false and misleading information provided by tenants. The period during which a tenant is referenced is quite complex, and I feel that the current drafting does not quite provide the incentives to get the right outcomes for tenants or landlords acting in good faith. We have those two concerns about the detail of the Bill, but at a high level we are supportive.
Thank you, Mr Bone. I wonder if I could get your views on the ban on tenant fees in Scotland. Obviously, there was a revision to the 1984 ban on tenant fees in 2012, and I would like your views on what that did to the sectorQ .
As you pointed out, tenant fees were technically banned in Scotland in 1984, but the legislation was not well drafted and it therefore required revision in 2012. It meant that tenant fees in Scotland between 1984 and 2012 were generally lower than they are in England, at around the £50 or £60 mark.
Various organisations have done research into this, and I would point to the Scottish Government’s own statistics, which suggest that in the 12 months after the ban came into force, rents in Scotland went up by 4.2%. Against that, the English housing survey suggests that rents in England went down by 0.7%. There was, therefore, a 5% difference—well, 4.9% to be specific—between rents in England and Scotland during that period. That is not based on our statistics; that is based on official statistics from the Westminster and Scottish Governments.
I do not suggest that the whole 5% is attributed to tenant fees, but a good proportion of it will be. That is a good example based on official Government statistics that show what is likely to happen. That is why in the impact assessment the Government have accepted that rents are likely to go up, and when this measure was announced in the autumn statement, the Office for Budget Responsibility said that rents will go up as a result. I am fairly sure that everybody who gave evidence to the Select Committee in the pre-legislative phase said that rents will go up as a result.
Q What did that mean in cash terms, and what do you make of Shelter’s 2014 report that said that the market had improved, and that that was one of the reasons why?
I am afraid I only have percentages; I do not have that figure in actual cash terms. On Shelter’s report, I draw your attention to the then Communities and Local Government Committee’s eighth report of the 2014-15 Session. It noted that the Committee had concerns about the methodological approaches adopted, and the sample used in that report equates to 29 letting agent managers surveyed. Its conclusion was that the information was inconclusive based on the small sample size. I would probably agree with that determination, and that is why I prefer to use the Scottish Government’s statistics, which come from a much broader sample base.
Q Mr Cox and Ms Thomson, you both mentioned enforcement. Why do you think financial penalties have not been issued on the scale that you referenced in your opening statements?
I think there is a lack of resources—I think the will is there to do it, but there is a lack of resources. Because of that, as an organisation, we produce an enforcement toolkit for trading standards officers to use to assist them in their work. Although, of course, we were, and are, happy to do that work, we think that they should have the resources themselves to produce such documentation.
I agree with everything Isobel just said. If I may, I will add two quick anecdotes. First, not long after the fee transparency rules came into force, I was on BBC Radio 4’s “You and Yours” programme with the head of the Chartered Trading Standards Institute, discussing their enforcement. The gentleman said on air, “Our budgets have been slashed, and we are reducing trading standards offices around the country. Would you prefer us to enforce against children’s toys that are dangerous and choking children, or to check whether tenant fees are being correctly displayed?” With the best will in the world, live on air, I could not say tenant fees.
The other example is of agents up and down the country coming to me and ARLA on a regular basis to tell us about agents that are not displaying their fees correctly. We notify the local trading standards departments, and we get nothing back. As an example, just before Christmas, I notified a trading standards department in the north-west of the country of 13 agents in its area. We provided the evidence that it needed. We got a “Thank you. We will reply within 30 days” email and then nothing. That was five months ago. We are doing the most we can.
That is why we are very supportive of the lead enforcement authority, because ARLA’s sister organisation on the sales side, the National Association of Estate Agents, has the national trading standards estate agency team, so we can feed all the intelligence across the country into one body, which can disseminate it more effectively and forcefully than we can to the local trading standards and environmental health department. We hope that the lead enforcement authority under the Tenant Fees Bill will have a similar impact on the letting side.
Q The intention of the Bill is that it will be cost-neutral and that fines will cover the cost of any enforcement activity. Do you think that fines set at the level indicated in the Bill will manage to do that, given that fines for non-display are £5,000 at the moment?
They may do ultimately, but there will need to be an accumulated number of fines applied to meet the cost of running the service. They need a pot of money to kick-start the lead enforcement authority, and they need it quickly, because in the Bill there is great reliance on the guidance that they will give to consumers. They need to scale up and be ready, but we have not had any indication yet of when that will happen.
I agree entirely. Possibly, in years two or three and beyond, they will, once they have the teams up and running, going out and doing the enforcement. But if they do not have any of the seed funding across board and even in the trading standards department to resource the team in the first place to start going out and doing the enforcement, they will never get to that point where they can start to self-fund. It needs that initial seed funding. There is money set aside for seed funding, but I do not think it will be enough at this point in time.
Q One final point and then I will be quiet. You said that between 1984 and 2012 tenant fees were lower in Scotland. Why do you think the industry in England did not follow the lead of Scotland and reduce tenant fees during that period?
Scotland and England are different markets. Rents and house prices are much lower across the board in Scotland. Rents follow house prices. The costs incurred are different, based on employment costs, office costs and the general nature of the business. Our research suggests that tenant fees in London are more expensive than they are outside London, to take into account the increased costs of running businesses in the capital, compared with the costs of running businesses outside the capital. Scotland is cheaper than England.
To loop back to the previous point on enforcement, I would add that one of the great things that, hopefully, the Bill will bring through is the ability to self-enforce better. Currently, there is legislation that was designed to promote transparency and to make sure that tenants are aware of what fees will be charged, without seeking to limit those. That has not been totally successful, partly because it is quite difficult for a tenant to prove whether they were shown those fees and whether they were made clear to them. It is a somewhat abstract concept whether they were aware of the fees before they were asked to pay them at a later point in the process.
The good thing about a clearer and higher-level fee ban is that a tenant paying money is a far more provable event. A tenant can get to that point in the process and then simply refuse to pay the fee if it is presented to them. Even if they get past that phase and they were not aware that they were being charged a fee illegally, it is then easier to prove that they did pay a fee and to unwind that. I feel that self-enforcement is far easier with the legislation being proposed than with the current set-up.
Q May I explore some of the comments that you all made? David Cox, you said effectively two things. First, you said that you do not support the Bill, and then you criticised it for the lack of an adequate enforcement mechanism. The two are totally different things, aren’t they? If you do not support the Bill, the fact that it has not got an adequate enforcement mechanism is neither here nor there. If you are not supporting the Bill because it has not got an enforcement mechanism, the focus is on your offering some suggestions as to how that could be helped. The shadow Minister’s comment about whether the price of the fines is going to be adequate to help finance good trading standards teams is pretty relevant to that. Why do you think that the Bill is not going to achieve its aims, when Adam Hyslop of OpenRent has clearly said that it will?
In terms of why we made comments about enforcement, we have to take a practical consideration, and the likelihood is that the Bill will go through and become law. Therefore, we want to ensure that what comes out the other end from this Committee and the parliamentary process is a Bill that will affect the whole of the market, not just those professional agents who are our members and who will do this, as we have seen with so many previous pieces of legislation.
Q Okay, but let us focus on the first bit first. Adam Hyslop has said clearly that the Bill will achieve its aims. He had a couple of queries that we can come back to. You have said that it will not, but you have heard his experience. How can you defend your position against that?
There are different types of agencies in the market. Adam’s business is very different from a traditional letting agent’s. The traditional high street letting agent that you walk into, or the one you are considering as a letting agent, is not offering the same service as Adam and OpenRent provides. As I understand it, they are very much more geared towards a listing service for landlords who want to self-manage. I do not think they have an option where they manage the properties on the landlord’s behalf—Adam will be able to answer that. Traditional agents do an awful lot more than the basic listing service, which is a service that they charge the landlord for. They charge the landlord for going out and doing the viewings, for example.
The tenant aspect is much more around issues as they arise, such as issues at the beginning of the tenancy, to ensure that agents are providing the best tenant and to ensure that the tenant is not getting into any financial difficulty as a result of taking properties that they cannot necessarily afford. In particular areas of the country, such as the north-east, a lot of letting agents will go that extra mile for the tenant, to help them apply for benefits and with their benefits paperwork. They do it because applying for the local housing allowance—or now universal credit—is an incredibly complicated process. Therefore, they sit there with the tenant and go through the application processes.
Q Those are all important aspects of what letting agents can do. I argued, when we last debated this, that there is a critical role for letting agents in compliance—keeping landlords and letting agents within the law—ensuring tenants know where the fire escape is, and all the rest of it. Given the importance of those issues, why do both you and Isobel Thomson believe that, suddenly, letting agents are going to close down and there are going to be lots of job losses? Is that not so important that it is the key thing to market to both landlords and tenants?
I would argue it is a cost issue. Capital Economics estimated last year that letting fees account for approximately 20% of the sector’s turnover, or approximately £700 million a year. In its most plausible scenario, it expects agents’ turnovers to reduce by about £200 million, landlords’ costs to increase by about £300 million a year—
Q It sounds a little like what the betting association predicted when we changed the rules on the maximum amounts you could bet. Do you not think this is possibly exaggerated?
These are the figures from an independent market research agency that has been used by all sides of the argument. Shelter uses the agency on a regular basis, as well to do independent analysis, and those are the results that it has come back with. There are about 55,000 letting agents in the country, and it estimates that about 4,000 jobs will be lost as a result of this.
Q If I may ask one more question, Adam Hyslop, you were hinting that there could be a problem in terms of tenants having full protection on default fees. Do you mind expanding that a bit?
Sure. This is probably the lower of the two points I would like to make today. The common practice at the moment is not only to charge admin fees up front but to have fees listed within the tenancy agreement—things such as cleaning and an inventory check-out report at the end of the tenancy. I believe the Bill’s intention is to ban those as well—they are not permitted payments. So, the intention is to prohibit them, but my concern is that, in practice, some of those will be left in and you will have tenants feeling obliged to pay them towards the end of tenancy agreements, even though they might be outlawed payments.
I do not know how this will be addressed in practice, but a lot of the—let us call them—disputes are where you have got a landlord asking a tenant to pay, say, £150 to clean the property at the end, when actually what is reasonable is for the tenant to restore the property to the level of cleanliness when they moved in, which could be by using their own cleaning company or doing their own housework, as it were.
A lot of these disputes end up with the deposit protection services. I do not know whether they will be briefed that these fees would be immediately thrown out if they were ever disputed. But, actually, before you get to that stage, it is a very low single-digit percentage of deposits that ever go to formal arbitration in these schemes, so there is a big piece to do, whether in the wording of the Bill or in guidance, to ensure that tenants know that these are also explicitly prohibited and that they should not accept any agent or landlord saying, “No, it is in your tenancy agreement. You signed up to it with free will at the start.”
The current drafting is basically that a holding deposit is placed, and if a tenant passes referencing, everything obviously proceeds, and it would usually go to contract signing. If the tenant fails referencing, the current intention is that the holding deposit, with no deduction, is refunded back to the tenant. That is fair, and that is in line with how my own business operates at the moment.
What is more complicated is where there is a sense that a tenant provided what in the current drafting is “false or misleading information” to the landlord—information that could be exaggerating their own financial situation. So the landlord accepts the holding deposit, takes the property off the market, incurs the cost of referencing and then is left in a difficult situation when it turns out the tenant is not really who they say they are.
My concern around that—this may be stating the obvious—is that the point where a holding deposit is placed and referencing is under way is by far the most stressful part of a tenancy application process on both sides. You have got a landlord who is basically saying, “I really hope this tenant is who they say they are—I just want to get them signed up so that I have the certainty of them moving into the property at a future date,” and you have got a tenant going, “I really hope I get this property so that I do not have to reset my search back to square one,” with all the stress that comes with that.
Referencing is quite a complex process. Actually, what the tenant said to the landlord up front is not a particularly clear area. First, there is significant variation in the kind of application forms that a landlord or agent might put in front of a tenant. Second to that, the actual process of referencing itself is quite complex. A reference usually involves a credit check, an employment check and a previous landlord reference, but I believe that the overarching wording of “Did the tenant provide false or misleading information?” would in practice be quite problematic. Sometimes a referencing company will literally capture the tenant’s address history, where they work and how much they earn. I believe that the drafting of the Bill was done with the perception that referencing is a lot simpler than it is.
You can imagine some really simple cases. If I say that I earn twice what I earn, and referencing then finds me out—my employer says that I earn x—that is a clear case of false and misleading information. Actually, we find that when references fail, only 25% fail due to income and affordability. The other case in which you might provide false or misleading information is neglecting to mention that you have a former bankruptcy, a CCJ or something like that. Those are simple ones that the current Bill is completely fit for purpose for—if a tenant withholds or distorts that information, that tenant absolutely should lose their holding deposit, because they placed it under false pretences by making claims to the landlord that were not substantiated.
The majority of cases, however, will not be as clearcut as that. There will be things like whether a tenant was aware that they had a good credit score or a bad credit score which resulted in them failing the reference. There may be previous landlord references or elements of the employer reference that are not as simple as, “This person earns this amount of money”—it might be length of contract and things like that. Unless you have a completely exhaustive, fully transparent application form—a theoretical one—that the tenant fills in and where they declare everything about themselves, which can later be demonstrated to be false or misleading, then, in practice, there will be lots and lots of cases where it is unclear and some kind of arbitration is needed, or at least some kind of dispute arises.
What that means in practice, I believe, is that where it is the majority case—that is, the tenant may or may not have provided misleading information, and there is now a dispute about it—either you will have landlords who lose their holding deposit, despite the tenant applying in bad faith, because they are unable to prove that the tenant provided false and misleading information, or you will have tenants who lose their holding deposit because the agent or landlord asserts that they applied in bad faith. What that means is that the Bill will not actually protect the landlord or the tenant in that case.
I therefore conclude that the fairest way to put this into practice is to permit a cost of referencing—to have referencing as a permitted payment within the Bill. I would recommend that that is capped, because I do not want it to be an unlimited fee that becomes an admin fee of £300. We charge £20 for a reference per applicant, which is basically the market cost. The reason we do that is precisely this: referencing is very messy and will very quickly turn into disputes around whether it is false or misleading, or what people’s intentions were, unless there is a really clear way of saying, “You’re rejected because your referencing failed, but we don’t need to go through a full arbitration of whether it is false or misleading.” You cover the cost of your referencing, which aligns the incentives, so that the tenant covers the cost of referencing and will basically lose that amount if they invalidate it in the first instance.
Q This is very interesting. In the contributions we have the new and future economic model in this industry, and the old economic model. One is protecting the status quo and one is saying, “This direction will be fine.” Adam, will you just talk us through—whatever you feel comfortable with—your growth as a business in recent years, including any employment opportunity growth that you have provided by virtue of these 70,000 properties last year, please?
Sure. At a high level, those are the numbers, so we are taking significant market share. What is really interesting is that I do not see our business pitched against the status quo of the high street. Actually, 50% of landlords do not use an estate agent. What we try to do is to provide—our watchword—accessibility, which is in terms of not only ease of use but cost.
David is not quite correct about the service that we provide. We do not provide a fully managed service—25% of landlords use a fully managed service, in which they do not want to meet the tenants and they want a professional to handle the interaction. We do not serve that 25% of the market. We do serve the 75%, which is the 25% of people who use an agent for tenant finding and the 50% of people who effectively do everything themselves. What we try to do is to make that accessible, so for £50 we will do everything from taking that holding deposit to referencing, contracts, deposit protection, first month’s rent collection and things like that.
What we are actually doing is professionalising the 50% of the industry who do not currently use a high street letting agent. We believe the only reason they do not use a high street letting agent is cost. We think that, by doing that for £50 rather than the average fee of over £1,000 a year, we provide huge accessibility. In terms of our high-level growth, those landlords are coming from the DIY sector and obviously we are taking share from the high street as well.
In terms of actual gross employment, I do not really like the word “disruption” to describe what we are doing. There is a lot of good practice in the industry already. A lot of our processes layer technology on to that, but we are not trying to tear up the rule book and pretend that we can do something better than what is already in the Housing Act or, say, the property ombudsman code. Those are ways of working that are really important to protect consumer rights. What we think we can do is put those things in place in a very systematic way and provide access to those services to the entire market, so that basically every landlord and tenant has access to a professional tenancy creation service. By having the holding deposit placed in a sensible way, having money held in a client money account and having a professionally drafted tenancy agreement, we provide a huge consumer benefit across the industry—on both sides, actually.
Sorry, I meant to loop back to the question. We are not really disrupting in the sense of eliminating employment or anything like that—that is one of the myths here. Actually, most of the suppliers that we use are those used by high street agents anyway. We have a large contract with a referencing company, which does all our tenant referencing. We contract gas engineers, inventory clerks, photographers—all those different services—across the industry.
The idea—this is no secret in the industry—is that it is possible to have good practice in the industry in terms of following a professional tenancy creation process, but to use technology to make that something that does not need lots of phone calls and interaction in between. That is one of the main insights that keeps our core headcount low. Yes, we have far fewer people working on administering holding deposits and administering contract drafting, for instance, simply because we have the technological systems and processes in place to manage those.
Q Mr Cox and Ms Thomson, I take it on board that Adam is saying his business is not actually hugely disruptive. It sounds pretty disruptive in terms of some of its transformative impact and the market share he is taking from the high street, but I am assured that he uses existing networks, contractors and professionals in the sector. How are you catching up with that way of working to improve accessibility? It feels like there is an equalising quality to Adam—he is saving money for the landlord and for the tenants. Are you just behind the curve on this?
I am afraid I would disagree. I would not characterise it in the same way at all. It is a different type of service. We have to factor in the fact that the places most tenants, buyers, sellers and landlords go to look for their properties are Rightmove and Zoopla—the big properly portals. An individual landlord renting out a property on their own cannot access Rightmove and Zoopla. Therefore, services like Adam’s, which are entirely necessary in the market, act as the entry point into Rightmove and Zoopla so that those landlords who want to self-manage and want to be able to advertise their properties on Rightmove and Zoopla can do so. That is why Adam is able to charge much lower fees. The middle service is £29 to a landlord and £20 to a tenant. A couple renting a one-bedroom property, if they reference through Adam, will actually end up paying more than the landlord. That is not the case with the traditional agencies, where the landlord always pays significantly more—around £1,000, as Adam points out.
You asked specifically about the number of people employed for those 70,000 tenancies. I can think of only one large corporate agency off the top of my head for which I know the statistics, but I know that one of the three large corporate agencies manages 60,000 properties and employs 7,000 people to do that. That is about much greater interaction on the ground on a day-to-day basis during the tenancy. I suppose the question is what we want a letting agent to do in the future. Are the Government saying that a letting agent is like a sales agent, to a certain extent? Once you hand over the keys in a sales transaction, the estate agent’s role is finished. Someone has bought the house, and they move on to the next property. In a lettings transaction, once you hand over the keys that is just the start of your relationship with the tenant. If the letting agent is managing the property they are there to help landlord and tenant throughout the entire process of the tenancy. It is a much longer term.
Q In your opening contribution you talked about serving two masters. I would say that the premise of that is inaccurate. The tenant has no choice as to who the agent of their property is. The landlord instructs as the client. That relationship does not change ever, at all. The decision maker remains the landlord. A relationship might be involved; you may well have more involvement with the tenants than the landlord, but the landlord is the decision maker here, and therefore I would challenge the very premise by which you are protecting this status quo. I do not believe that the tenants hold an equal relationship.
I do not think we are comparing like with like. I think Adam Hyslop’s service, which is obviously really good, is meeting a need for a certain part of the market; but I feel that lettings is a people business. It is the letting agent who mediates between the tenant and the landlord, so when the tenant fails the reference and something comes out of the woodwork the agent sits down with the tenant and often says, “Okay, well look, I understand you had that five years ago; I will have a word with the landlord.” It is that interface and activity that the agent is offering.
Also, for example, for housing benefit tenants, a mechanical, online technological system is not necessarily going to give that type of tenant access to the private rented sector, whereas the agent who sits down with the tenant, talks it through and presents the case to the landlord often facilitates that. It is not old-fashioned; it is a need.
The trouble with these sittings is that we could go on forever, because it is so interesting and it helps the Committee enormously, but a number of Members want to ask questions, so I will move us on.
I would like to pick up on the question of conflict, which David Cox brought up at the beginning. Is it not the case, Mr Cox, that in most regulated industries, such as financial Q services, it is already unlawful for a professional service provider to charge both sides of the transaction, which in this case means both the tenant and the landlord? The reason that in regulated activity such as financial services it is unlawful to charge both sides of the transaction is that it creates a conflict of interest. Is it not therefore appropriate, Mr Cox, that under the Bill agents should charge only one side of the transaction—the landlord—because that will eliminate the conflict of interest?
I am afraid that, not having worked in those industries, I do not know. I will take your word for it. I do not think it creates a conflict of interest. It is why we have a lot of the systems in place that already exist—to a certain extent to take the agent out of those conflict of interest issues. For example, before the Housing Act 2004, tenancy deposit protection was only voluntary. Our organisations required our members to put the moneys in a deposit protection scheme. The Housing Act 2004 put that into law, and that cleaned up the deposit protection and deposit market completely because it takes the agent and landlord out of those conflict situations.
Particularly, when I talk about being the servant of two masters, it comes down to things that Adam has mentioned in the default fees. If the agent is managing the property and the tenant locks themselves out at 2 o’clock in the morning, they phone the agent. An agent who is not providing a service to the tenant is unlikely to get out of bed at 2 am, drive to the office, pick up the keys, drive to the property, let the tenant in, drive back to the office, drop off the keys, drive back home and go to bed again. At that point, is it a conflict of interest or a service purely for the tenant?
Q I will come on to default fees in just a moment. In your earlier evidence you mentioned that one of the services paid for by the tenant was to provide the best tenant for the landlord, but there is clearly a conflict there. From a landlord’s perspective, they want the most creditworthy tenant, but any individual tenant just wants to get the house. There is an inherent conflict there, and to represent both sides of that is misleading. I put it to you that this legislation clears up that conflict by making it clear that the agent is acting for the landlord.
I think we have to factor in what would happen if a tenant took a property that they could not afford. Government statistics already suggest that now that the private rented sector is larger than the social sector, the largest cause of homelessness is ending an assured shorthold tenancy. That makes sense now that the private sector has overtaken the social sector. Tenants regularly have eyes larger than their pockets—I cannot find a better way of saying that—and they will try to take a tenancy that they simply cannot afford. The agent is there to say, “You can’t afford this tenancy. If you want to move in you are going to dig yourself into massive debt, and you will end up getting evicted. This is not the right property for you.” They will then say, “However, we’ve got all these other properties.” When the ban comes into force, it is unlikely that people will even get to that point. We are expecting pre-viewing vetting to start taking place, so that agents, with the best will in the world, do not waste hours every day going on viewings with tenants who cannot afford the property.
Q But you are saying that they cannot afford those properties, so it will avoid tenants wasting their time. Let me move on to your other point. You suggested that in 2012 rents in Scotland went up, whereas in the rest of the UK they were flat or very slightly down, and you sought to ascribe that to the changes in fee arrangements. Are you potentially confusing coincidence with causality? The first thing you get taught when you study science is that correlation is not the same as causality.
Q I am interested that you have conceded you have no direct evidence—that is a very important admission. I suggest one reason might be that whereas average incomes in England and Scotland are broadly similar, average rental prices in England are about 50% higher, so that relative move you described simply closes a very small part—about one tenth—of the relative differential between those two nations. You said you do not have any direct evidence, which is a very helpful admission.
Before I turn to your comments on referencing, Mr Hyslop, let me commend you on setting up such an effective and efficient business. It has clearly grown very quickly and I was impressed by what you said about the way your company operates and the low costs that you have managed to deliver to both tenants and landlords. Congratulations on innovating in that way. As a former entrepreneur, I strongly endorse what you have done.
On your question about misleading information, you gave examples of information that is clearly misleading, such as a mis-stated salary. You went on to give examples of things that are less clear, such as a poor credit score or employer reference. Is the point that the prospective tenant will not have made a representation or statement about their credit score or their employer’s reference, so they will not be guilty of having given misleading information? They will not say, “My Experian credit score is at least 800,” so they will not get caught by the clause because they will not have provided misleading information?
My point is that this can fall on either side. Sometimes a tenant who applied in good faith might lose their holding deposit, and other times a landlord who accepted an application in good faith might not be able to retain a holding deposit. The example you have given is one that would disadvantage the landlord because they cannot charge for referencing. Essentially, you would have an asymmetry of information. The tenant knows their own situation far better than the landlord. Indeed, the purpose of referencing is to close that gap.
A tenant might not know their exact Experian score, but they will have a good sense of whether they might pass this referencing—or at least a better sense than the landlord. In the case you described, you might have a situation where a tenant does not think they can afford the property but they might be in a desperate situation so they will apply anyway, knowing that, because they never stated their precise credit rating or anything like that on the form, if the landlord later discovers the tenant is not suitable, the landlord is obliged to refund the entire holding deposit. The landlord is out of pocket by the cost of referencing and however many days the property was held off the market. That is a case where the disadvantage is to the landlord, and I think the remedy is the same: the referencing fee should be permitted to a reasonable level at cost.
If we drop it to four weeks—the security deposit is a risk mitigation product, and therefore four weeks is effectively one month. If the tenant leaves without paying the last month’s rent and damages the property, if it is a month, they will either have the money for the lost rent or the money for repairing the property. That is why we have suggested the cap or agree with the cap at six weeks—because it gives the ability for the tenant not to pay the last month’s rent and to damage the property. That is why we have suggested and support six weeks, bearing in mind that, provided everything goes smoothly, the tenant will get that full money back at the end.
I would like to see a permitted payment or an exemption for the situation where a tenant has a pet. Often, agents charge a higher deposit because of having a pet. We would not want to disadvantage people with cats and dogs, would we? That is something that should be looked at.
I agree. The risk from limiting the level of deposit is simply that it limits tenant choice. Some tenants are higher risk than others. Pets are a good example where a landlord might want to take a higher deposit. Another example is that we get quite a lot of people who come from overseas and they are harder to reference. Although you can contact employers, they do not have a UK credit score and things like that. The remedy, without charging that tenant an actual fee, would be to increase the deposit to a reasonable level.
There are things such as rent in advance that can work around that, but frankly, a six-week deposit feels like a reasonable compromise to protect tenant choice on this, rather than foreclosing on some groups.
Q May I thank all the panellists for being with us this morning and thank you for engaging with the Department during the course of the formulation of the Bill. I appreciate all the time you have given.
For the record, the Government and I do not have the intention of trying to drive letting agents out of business, as was potentially characterised early on. We very much recognise the valuable role that high quality letting agents play. We have got a great example of one here this morning. This Bill is just about improving the industry to make it work for tenants where there have been abuses of the system and an asymmetry of power. I wish to put on record our thanks for the work many good letting agents do.
In the brief time we have—and in a quick answer to the question—the Bill allows for default fees for things such as a lost key or a late rental payment. Do you think that is a sensible provision to have in the Bill? Also, the Bill allows for payment for changes to the tenancy agreement at the request of the tenant—such as an extra sharer added to the tenancy agreement—capped at the landlord’s reasonable fees for that. Do you think those are sensible? Do you think they should be limited or broadened?
I would say that they are eminently sensible but we just need guidance around how they will operate. I know that civil servants have already started to engage with stakeholders on that.
I would support that; I think they are absolutely necessary. I highlighted one example a few moments ago. Under the Bill, they will have to be written into the tenancy agreement so that tenants are aware of them from the outset. Our reading of the Bill is also that anything that is in the tenancy agreement will need to be in the fee schedule, that is displayed prominently in the office and on the website and, under the Bill, on any third-party websites such as Rightmove or Zoopla. I would just query on that one. A lot of agents use Twitter to display their fees; I am not sure how they would get the fees on to the advert in the necessary number of Twitter characters.
We also have to factor in that—
Order. I am very sorry to interrupt. You have been a very engaging and useful panel and we could have gone on much longer, but I am afraid that under the programming motion, I have to bring the session to an end. Thank you very much for attending this morning.