House of Commons - The Private Rented Sector - Communities and Local Government Committee

The Private Rented Sector - Communities and Local Government Committee Contents

4 Letting agents

68. The growth of the private rented sector has brought to greater prominence the role played by agents both in the process of finding tenants and letting properties, and in the management of housing on behalf of landlords. In this chapter we will consider how letting agents should be regulated. We will also look at key concerns raised about letting agent behaviour, in particular the fees they charge to landlords and tenants. Where we use the term letting agents we refer both to those agents who find tenants and those who manage properties on behalf of landlords. By sales agents, we mean those involved in the sale of properties.

Regulation of agents

69. A number of witnesses considered the regulatory framework covering letting agents to be inadequate. The Residential Landlords Association stated that the letting and managing agent part of the sector had "remained unregulated far too long and as such is on occasion unprofessional".[127] The Royal Institution of Chartered Surveyors (RICS), which has described the lettings sector as "the property industry's Wild West",[128] considered that the "the regulatory framework in the lettings market and the ever-increasing number of registration schemes offers limited protection for the consumer and costs business money".[129] Time and again, we heard concern that anyone could set up as a letting agent without qualifications or prior knowledge of the industry.[130]

70. We heard that the lack of regulation was giving rise to bad practice in parts of the industry. The consumer organisation, Which?, referred to research it had carried out in 2012, which identified a number of problems in the market including, from a tenant perspective: the mishandling of deposits; missed appointments, aggressive sales tactics, poor customer service and out of date and misleading adverts; opaque and variable fees; and the letting of properties in poor condition.[131] From a landlord's perspective, Which? found agents: not passing on rent; not properly vetting tenants; and failing to carry out regular inspections or adequate check-out procedures.[132] We heard particular concerns about the fees charged by letting agents, which we consider in more detail later in this chapter.

GOVERNMENT PROPOSALS: REDRESS

71. Initially, the Government told us that it did not believe that "significant burdensome regulation was needed" as "new regulation could increase costs for both landlords and so far tenants".[133] In April 2013, however, the Government laid an amendment (subsequently enacted) to the Enterprise and Regulatory Reform Bill providing for an order-making power to require letting agents (and agents providing management services for leasehold housing) to belong to an approved redress scheme.[134] In a letter to our Chair, the Government explained that

ensuring that landlords and tenants have access to redress, via an Ombudsman, will not only provide an avenue for dealing with complaints when they arise, but in the case of those agents who do not currently offer redress, will act as a strong deterrent to those providing unacceptable services and engaging in unlawful practices.

The Government said that it would carry out a consultation and consider the Committee's recommendations before bringing forward secondary legislation.[135]

72. We found support for the Government's amendment. The Office of Fair Trading (OFT), which had carried out a review of complaints made about letting agents to Consumer Direct, said that "an effective redress scheme should be able to deal with the majority of complaints identified in our report, where the issue involves an allegation of misconduct by a letting agent".[136] To address potential problems with the scheme, the OFT suggested it was important that "the benefits of using an agent that is a member of a redress scheme are sufficiently publicised, and that there is robust enforcement against agents that do not join a scheme".[137] It also suggested that the Government should consider the "interaction between the letting agent/property management redress schemes and deposit protection schemes".[138]

73. The Property Ombudsman, who already provides a voluntary code of practice for letting agents,[139] was keen that adherence to a code of practice be made mandatory alongside the redress scheme:

While the Government's amendment will set up a basic redress mechanism for letting and managing agent consumers, if an adherence to a code of practice is not made mandatory [...] there is a real concern that letting agents will continue to operate to their own set of standards until such times as they are brought into question. This would mean that, for the foreseeable future, consumer confidence in relation to the service provided by letting and managing agents may remain low.[140]

The Housing Minister, Mark Prisk, intimated that the redress scheme would be underpinned by a code of practice.[141]

74. We welcome the Government's moves to require letting agents to be part of an approved redress scheme. There are a number of issues the Government should consider in implementing the scheme. We recommend that, as part of its consultation on the redress scheme, the Government seek views on how best to publicise such a scheme and what penalties should be in place for those agents who do not comply. The Government should also explore how the redress scheme fits alongside existing arrangements for deposit protection. We further recommend that the redress scheme is accompanied by a robust code of practice that sets out clear standards with which agents are required to comply.

FURTHER REGULATION

75. A number of witnesses described the Government's proposals on redress as a "first step".[142] It was suggested that they had to be part of a wider regulatory framework. RICS set out what it saw as the two "first steps" to a simplified framework.[143] The first of these arose from concern that letting agents were not subject to the same regulation as estate agents. RICS proposed amending "the definition of 'estate agency' in section 1 of the Estate Agents Act 1979 to include lettings and managing agents",[144] and associated changes to the Consumers, Estate Agents and Redress Act 2007.[145] This, it said, would

give the OFT powers to ban agents who act improperly, require agents to provide client money protection, professional indemnity insurance and clear redress mechanisms in the event of a dispute. It will prevent sales agents who have been banned from operating from starting up a new business as a lettings and/or managing agent.[146]

The second of RICS's suggested changes was to implement section 22 of the Estate Agents Act 1979, which would "require all sales, lettings and managing agents to acquire statutory minimum professional standards before they start trading".[147] Mechanisms such as mandatory client money protection and minimum professional standards or qualifications enjoyed support from many of those submitting evidence to us.[148]

76. We also received a number of suggestions that letting agents should either be licensed or required to be registered with an accredited industry body.[149] The Association of Residential Letting Agents (ARLA) has published its own proposed structure for regulation of the property industry. Under this structure,

letting agents and other property professionals would be licensed, registered and monitored by an accredited industry body—such as ARLA, [the National Association of Estate Agents], RICS and others. These bodies in turn would be audited and overseen by a single industry regulator. ARLA would propose that The Property Ombudsman would be the most appropriate body—its structures already exist, and would only need to be 'beefed up' and better resourced, as opposed to created from scratch.[150]

77. We asked Mr Prisk whether he would be prepared to look at regulation beyond a redress scheme. He said:

In due course, but let us not get ahead of ourselves. We have quite a complex process to go through, and if we can get the code of practice right that underpins the redress scheme we probably will drive out the vast majority of the kinds of problems that our constituents face.[151]

78. While the Government's proposals were welcome, there was widespread recognition that much more was needed. There is a strong case for a single regulatory framework covering all agents, be they involved in lettings, management or sales. We recommend that the Government make letting and managing agents subject to the same regulation that currently governs sales agents. This includes giving the Office of Fair Trading the power to ban agents who act improperly, and making client money protection and professional indemnity insurance mandatory. Moreover, if any changes are made to the regulation of sales agents, these changes should also be applied to letting and managing agents. Any proposal to require sales agents to meet minimum professional standards before they begin trading should also be applied to letting and managing agents. In addition, if at any point a requirement for sales agents to be registered with an accredited industry body is to be introduced, this should be part of a wider framework also covering letting and managing agents. We recommend that the Government review these arrangements in two years' time.

FEES AND CHARGES

79. We heard many concerns about the fees charged by letting agents, both in terms of the amount charged and lack of transparency. In June 2013, the housing charity Shelter published a report which stated that fees were "variable but high, costing £355 on average" and that one in seven renters who had used a letting agency had paid fees of more than £500.[152] The OFT, when conducting its analysis of complaints about letting agents made to Consumer Direct, grouped the complaints into five main areas. The largest of these areas related to complaints about fees and charges, which represented 30% of the total number.[153] Jason Freeman, Legal Director of the OFT's Goods and Consumer Group, explained that mainly, these complaints related to "drip pricing", that is charges were revealed gradually to the prospective tenant:

The effect tends to be that people become increasingly committed to the transaction psychologically, if you like. They do not have the opportunity to appraise the whole cost of the letting at the time they are going to compare properties. They might compare based on the level of rent or the amount of security deposit they need to pay, but they would not factor in the many other fees that they might need to pay.[154]

He added that the second main area for complaints about fees and charges related to holding deposits and that there seemed "to be quite a lot of uncertainty around what holding deposits are for and how people are going to get them back".[155] We heard in other evidence that the fees charged for referencing, inventories and contract renewal were not commensurate with the costs to the agency.[156] Moreover, Cllr Sarah Hayward, Leader of Camden Council, suggested that there were instances where agents were "double charging, so charging both the landlord and the tenant for searches".[157]

80. Opaque charging is not confined to a small number of "rogue" agents. Which? told us about a mystery shopping exercise it had carried out at London branches of four leading agents (Barnard Marcus, Foxtons, Martin and Co and Your Move).[158] This exercise suggested that the agents were often failing to provide potential renters with upfront information about fees:

None of the letting agents provided information about fees in any property listings on their website, on Rightmove.co.uk or after tenants had registered online.

Only one tenant (at a Foxtons' branch) was proactively given fee information when they registered in branch or called to arrange a viewing

No tenant was provided with a written schedule of charges.

In some cases tenants were either not given fee information even when they asked, or they were not given the complete details.[159]

81. The Advertising Standards Authority (ASA) told us that it had "ruled against an ad by the estate agent, Your-move.co.uk, that appeared on the property website, Right Move, for not making clear that administration fees had been excluded from the quoted price, or providing enough information to allow the consumer to establish how further charges would be calculated".[160] The ASA explained that

The ruling makes clear that advertisers must include all compulsory fees and charges upfront in the price quoted. If the fee cannot be calculated in advance because of, for example, an individual's circumstances, then the advertisers must make clear that compulsory fees and charges are excluded and provide adequate information for consumers to establish how additional fees are calculated. This means that potential tenants will have all the information they need in the first instance to help them make an informed choice and to avoid being drawn into contracts they haven't budgeted for.[161]

The ASA added that it was now working to ensure that its rulings were "followed by the sector as a whole".[162]

82. Those representing agents suggested that publishing fees on a website was not straightforward. Caroline Kenny, Executive at the UK Association of Letting Agents, said that "there is an element [of tenants' fees] that agents could perhaps display on their website, but other fees will be more complex and would need to be calculated according to individual circumstances".[163] She added, when asked why agents could not set out the costs of an inventory from the start, that properties were "rented so quickly because of market conditions that it may be quite onerous for agents to do that".[164] Mark Hayward, representing ARLA, suggested that "because of the climate with lettings at the moment, the urgency to secure a property is such that people will not read the small print" and that even if the information was "bold, compelling and specific, they will not necessarily see it".[165]

83. These arguments are less than convincing. That there is currently so much urgency to secure a property makes it all the more important that tenants are aware of fees and charges from the very start, before they commit themselves to a particular property. It is also important that landlords are made aware of what the tenant is being charged. Agents should include details of their fees and charges to tenants with property listings on their website, in their windows and elsewhere. We are therefore very concerned to hear reports of letting agents being less than transparent about their fees and charges, especially as this practice appears to extend to some of the leading high street firms. It is encouraging that the ASA is cracking down on such sharp practice but more needs to be done. A requirement for transparency should be enshrined in the new code of practice. We recommend that the code of practice accompanying the new redress scheme include a requirement that agents publish a full breakdown of fees which are to be charged to the tenant alongside any property listing or advertisement, be it on a website, in a window or in print. This breakdown should not be "small print", but displayed in such a way as to be immediately obvious to the potential tenant. The code should also require agents to explain their fees and charges to tenants before showing them around any property. Furthermore, the code should forbid double charging, and there should be a requirement that landlords are informed of any fees being charged to tenants. If agents do not meet these requirements, the fees should be illegal. Finally, the professional bodies should make a commitment to full, up front transparency on fees and charges a requirement of membership.

THE SCOTTISH APPROACH

84. In 2012, the Scottish Government announced that the law would be "clarified so that all tenant charges, other than rent and a refundable deposit, will be deemed illegal".[166] A number of witnesses suggested that fees and charges to tenants should also be made illegal in England.[167] We also, however, heard strong opposition. One agent, Simon Shinerock, told us that the Scottish market was "now in a total mess" as a result of the decision to ban fees to tenants.[168] RICS said it "would not support regulation of agent fees as this would be a restriction of the market".[169] Mark Prisk said that he was "generally not in favour of banning things" and that, in Scotland, some agencies had gone out of business as a result of the ban.[170]

85. A particular concern about banning fees to tenants was that it could lead to an increase in fees charged to landlords, and that landlords could then raise rents to cover this increase.[171] The Building and Social Housing Foundation suggested, however, that, even if rents were to increase, a ban on fees might still be advantageous:

Although the Scottish approach is likely to result in higher charges to landlords by agents, which may be reflected in rent levels, it ensures that tenants are not excessively burdened at the start of a tenancy, or hit by additional charges at later stages. This reduces the barrier to entry for tenants to the sector and makes it easier for tenants to predict their outgoings. However, the wider consequences for the market as a whole warrant further investigation.[172]

86. At the very least there should be a requirement for complete transparency on fees. In addition, we are interested in the approach that has been adopted in Scotland but consider that the impact on overall costs and the operation of market should be fully understood before a decision is made to make fees to tenants illegal in England. We intend to gather further information on the impact in Scotland of the decision to make fees to tenants illegal, and to return to this issue in 2014.

127 Ev 154, para 6.2 Back

128 "Renting: Property's Wild West", RICS press release, 22 November 2012 Back

129 Ev 187 Back

131 Ev 206, para 3.7 Back

132 Ev 207, para 3.10 Back

133 Ev 301, para 27 Back

134 Enterprise and Regulatory Reform Act 2013, sections 83-84 Back

135 Letter from Mark Prisk MP and Jo Swinson MP to CLG Committee Chair, 15 April 2013, published on CLG Committee website, www.parliament.uk/clg Back

136 Ev 183, para 4; see also, for example, Q 460 [Richard Blakeway]. Back

137 Ev 184, para 8 Back

138 Ev 185, para 21 Back

139 Ev 194, para 1.6 Back