Communities and Local Government CommitteeSupplementary written evidence submitted by the Office of Fair Trading

Likely Impact of this Amendment

1. We welcome the proposals to increase access to redress in this sector, following the recommendation in our recently published report on the lettings market.1 The introduction of a mandatory redress scheme has the potential to increase confidence for both landlords and tenants when dealing with letting agents and property managers and raise standards across the lettings market as a whole.

2. The Act creates a power for the Secretary of State to require letting agents and property managers to join a redress scheme. The actual impact of this reform will therefore depend on how the Statutory Instrument is drafted. We consider there is therefore great potential in the Act, and we include in our comments below some observations which will be relevant also to the content of the SI.

Extent to Which the Amendment Addresses the Issues Raised in our Evidence

3. Our Intelligence Review of almost 4000 Consumer Direct (2011) complaints identified five overarching problematic areas shown in the table below.

Fees and charges	1,557	30%
Agents providing poor service	1,211	23%
Security Deposits	1,015	20%
Delayed, substandard repairs	668	13%
Unfair business practices	565	11%

4. We believe 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. For example we think it should deal with issues such as:

Disputes between the tenant and agent about pre-tenancy holding deposits, agents charging tenants fees they didn’t expect to pay, disputes about notice periods, agents not passing on rent to the landlord, delayed and substandard repairs experienced by the tenant where the agent is responsible

Disputes between the landlord and the agent around fees and charges and the agent failing to undertake repairs for the landlord as per the contract

5. However, in some circumstances, such as complaints relating to security deposits, agents providing poor service and substandard repairs, it is not always clear whether it is the landlord or the agent who has failed to act and may therefore be responsible for any misconduct.

6. For example, where a security deposit has not been protected, in some cases this is because the landlord relied on the agent to do it, whereas in others it is because the landlord simply failed in their duties. Likewise in the case of poor service and delayed repairs, sometimes there is a dispute between the agent and the landlord about who is actually obliged to carry out the repair –and so the tenant may not get a satisfactory outcome if they bring their complaint against the agent only.

7. There are some issues identified in our report which will not be dealt with by this amendment. These include:

instances where letting agents are involved in fraudulent activity and are therefore very unlikely to participate in a redress scheme; and

disputes between landlords and tenants who do not use a letting agent.

8. We think that these potential problems can be minimised by ensuring 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.

Please see Annexe 1 for an analysis of the issues from our report.

9. In relation to enforcement, we would note that it is important that enforcement officers have the formal powers to be able to efficiently identify the traders behind websites offering letting agent services. This is because we would foresee that it is most likely to be in the online field that agents, who do not wish to join a redress scheme, will advertise for business, take fees and then fail to provide an adequate level of service.

10. In 2006 only 66% of all private renting arrangements involved a letting agent. Disputes between landlords and tenants who do not use a letting agent require tenants and landlords to attempt to resolve their disputes by other means (usually the courts, or the arbitration systems provided by the various deposit protection services). We believe that it would be useful to consider the impact of providing a forum for landlords and tenants to resolve disputes in a cost effective way –perhaps by widening the remit of the deposit protection schemes to cover allegations of disrepair brought by tenants against landlords, for instance.

11. We would add that given that some deposit disputes can be settled either by recourse to arbitration by the deposit protection scheme, or by bringing a claim in the county court (where the deposit was not protected at all), it is important that tenants benefit from clear signposting and/or a referral mechanism to ensure that complaints are directed to the appropriate mechanism.

12. We consider that a redress mechanism is likely to be most beneficial to the two top areas of complaint found in our evidence—lack of clarity about upfront fees and poor levels of service/substandard repairs. However, we believe that the remit of the redress scheme should be broad, so that it deals with the full range of conduct by agents.

How far the Amendment will go in Raising Standards in the Letting Agent Industry

13. We believe most letting agents aim to provide a good service, but there are occasions when things go wrong where the intervention of a third party to reach a resolution will be of benefit. In our view any mechanism which puts right harm is a valuable, practical tool. In many cases access to redress mechanisms may result in better outcomes for complainants, who may not always receive recompense where enforcement action is taken, and the availability of such a system is likely to have the effect of improving standards amongst agents, because of the ease with which it can be accessed by consumers. Easy access by tenants/landlords to a user friendly redress scheme may also provide an incentive for agents to improve their service to get it right first time.

14. A requirement for all letting agents and property managers to be a member of an approved redress scheme should provide a level playing field for agents and ensure equal access for all complainants to redress in this market. We think it is important that the same minimum standards apply to all agents. We are aware for example, that self-regulatory schemes in this sector currently apply different requirements for membership, and may offer different remedies. For example, some ombudsman schemes will not offer recompense if an agent misuses clients’ money (that is, they do not have Client Money Protection), and only offer redress where there is a service issue. This creates some confusion for consumers, and makes it more difficult for them to know in advance what their rights will be if things go wrong. However we believe there should also be opportunities for redress scheme providers to exceed any minimum standards and to highlight these to potential users.

15. In addition, some schemes set out clearly the sanctions they can impose on members as a result of a complaint, whereas others do not. Different schemes also have different in-house complaint handling requirements for members. Some schemes set strict deadlines for members dealing with complaints in-house, whereas others do not. These differences make it more difficult for letting agents to compare the elements of each scheme and make a fully informed choice of redress provider.

16. To ensure that an approved redress scheme meet the needs of this sector, the criteria for approval and proposals for monitoring the effectiveness of such schemes will need to be sufficiently robust. The EU Directive on Alternative Dispute Resolution (ADR), when implemented, will provide for minimum standards for redress schemes. In areas such as the letting market where specific problems have been identified, we would wish to see appropriate standards which reflect this. For example, we consider that it would be useful to clarify that all agents should keep client money safe, and not use it for funding the operating expenses of their businesses—so it would be best if protection of client money were a requirement of being able to join any redress scheme.

17. We consider that a mandatory redress mechanism will provide an incentive to letting agents to improve their standards. Prospective tenants do not select properties on the basis of the agent handling the process and the level of customer service, but by the property they wish to rent. Landlords may select agents based on their commission rates rather than standards of service such as the prompt collection of rent, repairs/maintenance or charges that are imposed post contract. Therefore we consider that it is important that any redress scheme also publicises its outcomes, naming those agents adjudicated against, as this will be an important incentive to letting agents to provide a good service.

18. It may also help to raise standards within the sector by more easily identifying and excluding rogue letting agents who will be unlikely to choose to sign up to a redress scheme. However there will need to be effective monitoring of membership and sanctions/penalties to ensure there is a sufficiently strong deterrent for those who operate without being a member of a redress scheme.

19. The law in this area is complex and we believe few tenants/landlords/agents are clear about their rights and obligations. Therefore a key aspect in ensuring that standards can be raised is to ensure that all parties to a lettings agreement know their rights and responsibilities—this would make it easier for all to be able to articulate their concerns clearly and confidently. We are aware of the information published by the Department for Communities and Local Government for landlords and tenants. As this provides useful guidance for all parties, we suggest that this is reviewed regularly and publicised widely.

20. We also note that Scotland has recently introduced a new system for regulating standards in the letting sector. We suggest that the government should consider and evaluate how effective these measures are and what could be implemented to raise standards in the rest of the UK.

Points for the Government to Consider in Advance of Issuing Secondary Legislation

21. We consider the government should take the following into account in advance of issuing secondary legislation:

To ensure the approval mechanism, criteria and monitoring procedures will result in effective redress schemes being in place, there should be a full consultation exercise on the proposed approval criteria and monitoring proposals. The minimum standards for all schemes will need to be very clear, in particular in relation to client protection, sanctions, levels and types of redress etc.

Clear and accountable performance targets should be agreed between an approved redress scheme and the approving body. Schemes should be required to independently measure levels of customer satisfaction on at least an annual basis and take remedial action when they fall below agreed levels.

The scope of complaints/disputes to be caught within the redress schemes should be as comprehensive as possible to ensure access to redress is universal and not unnecessarily restricted.

There should be a simple enforcement process for non membership—penalties should be set at levels to provide a strong deterrent.

The interaction between the letting agent/property management redress schemes and deposit protection schemes should be considered.

Annex 1

ISSUE2	EXTENT THE ISSUE COULD BE ADDRESSED BY ACCESS TO A REDRESS MECHANISM
Agents non-refund of (pre-tenancy holding) deposit + deposit disputes	Yes—this would be helpful for tenants in England.
Delayed/substandard repairs by landlord/agent	Access to a redress mechanism as proposed by the amendment would not be helpful if the landlord alone is responsible for delay or substandard repair. But in circumstances where the contract between the landlord and agent specifies the agent is responsible for repairs, it could be helpful.
Agents not fulfilling their contractual obligations/poor service	Yes, for example where agents fail to undertake the required reference/credit checks resulting in an unsatisfactory tenant access to a redress mechanism could be helpful.
Charging tenants a fee they didn’t expect to pay	Yes, if fees are hidden in the contract and there is a dispute access to a redress mechanism could help
Agents not passing on the tenants rent to the landlord	Yes, unless this is a fraudulent activity where it is unlikely to help. If mandatory membership of a redress scheme ensured mandatory ‘client money protection’ this could assist in circumstances where agents go out of business and do not pass on rent.
Advertising misrepresentation/providing false information	Yes
Tenant requesting advice about fairness of charges	Yes, in relation to fees charged by the agent, not the landlord.
Agents not using a Tenancy Deposit Scheme (TDS)	May be helpful where the landlord relies on the agent, and the agent fails to properly protect the deposit. Access to a redress scheme would not be of assistance where the landlord fails to protect the deposit. Existing Tenancy Deposit Schemes are clearly defined but may need wider promotion to ensure adherence by all.
Agents not contactable/have gone out of business	Where an agent has gone out of business it may be more difficult for landlords and tenants to seek redress. But if agents are required to be a member of a redress scheme with Client Money Protection and Professional Indemnity Insurance (such as the SAFEAgent requirement) to be a member of a redress scheme could assist.
Excessive charging for services eg Reference/credit checks	Yes, access to a redress mechanism could assist with disputes.
Disputes about notice periods	Yes, access to a redress mechanism could assist with disputes.
Unfair business practices	Yes, although complaints regarding fraudulent activities and rent scams may not be covered.
Landlord requesting advice about fees and charges	Not directly, unless a dispute has occurred with an agent.
Rent scams/Fraudulent activity	Fraudulent agents are unlikely to sign up to a redress scheme. However, if they do so and the redress scheme requires that agents also have client money protection this could be helpful.
Failure or delay in agent finding the tenant a house/flat	Yes. For example if the failure or delay is as a result of misleading advertising by the agent, access to a redress scheme to resolve a dispute could be helpful.
Agent not undertaking repairs for the landlord as per contract	Yes
Insufficient clarity around fees/services in advertising or website	Yes, for advertising provided by the agent
Landlord renewal Commission charged where no ongoing service is provided	Yes
Harassment by agent/landlord	Yes , where there is harassment by an agent towards the tenant or landlord (Depending on the circumstances)