Communities and Local Government CommitteeFurther supplementary written evidence submitted by Which?

1. Introduction

Which? is delighted about the Government’s decision to make it a requirement for letting and property management agents to sign up to a redress scheme via an amendment to the Enterprise and Regulatory Reform Act (ERR13) (Sections 83–88). This was one of the key recommendations we made in our report about letting agents (Renting Roulette, November 2012).

We will be developing a full position on the detail of the new scheme when the Government produces it consultation in the summer. In this response we outline:

(a)Our views on whether the existing amendment goes far enough; and

(b)Points that the Government should consider in advance of issuing secondary legislation.

2. The Existing Amendment

The need for mandatory redress in the lettings market was one of the key policy recommendations we made following the research we published at the end of last year. This revealed that both consumer landlords and tenants are vulnerable to poor practice in the market because: 40% of agents are not signed up to a redress scheme; tenants shop for the property and therefore have little control over which agent they rent through; and landlords often aren’t checking for membership of a professional body when they sign up with an agent. Just 37% of landlord’s checked for this before hiring an agent. We think that the amendment has the potential to bring protection for consumers but also to raise standards in the market. We are encouraged by the application of the Consumers, Estate Agents and Redress Act 2007 (CEARA07) to the sales market: non-compliance is low with nearly all agents signed up to The Property Ombudsman or the other, smaller, OFT approved scheme run by Ombudsman Services. Complaints in the market are also fewer than in lettings: there were 4,186 complaints relating to sales in 2011 compared to 7,641 in lettings.

The new legislation that will be applied to letting agents does not go as far as that for estate agents. In addition to requiring estate agents to sign up to a redress scheme, the Estate Agents Act 1979 gives the OFT the power to ban an agent where it has been found to breach regulations, but it also makes it a requirement for agents to have professional indemnity insurance. We supported this being extended to cover lettings agents to provide parity between the two markets and to avoid a potential situation where the OFT bans a sales agent who could in theory set up in the lettings market. The differences between the two markets are set out in this table below.

Regulatory area	Estate Agent	Letting Agent
Membership of independent redress scheme	Yes (CEAR Act 2007)	No
Providers may be banned for bad practice	Yes (EAA 1979, strengthened by CEAR Act 2007)	No
Professional indemnity insurance	Yes (Condition of membership of redress scheme (required by CEAR Act 2007))	No
Must have an approved complaints procedure	Yes (Condition of membership of redress scheme (required by CEAR Act 2007))	No
Code of Practice for members	No. The Property Ombudsman has a voluntary code of practice which is signed up to by the large majority of its members. Those who are not signed up to it are assessed on the basis of what is fair and reasonable.	No
Entry requirements	No	No
Professional qualifications	No	No

While this is still our preference, we think that the most important feature is access to redress to ensure that where consumer experience problems they are resolved. In the future, there may be scope for reviewing standards in the lettings market and considering what more might be needed. For example, there may be a good case for at least one person in a lettings or sales agency to have a qualification given the level of skills and knowledge requirements of effective agents. Others have also supported a move towards positive licensing which may help address existing challenges to enforcement due to financial pressures facing Trading Standards. We welcome the work that the sector has done and is trying to do to raise standards in the market, including the proposed Property Council that may be established by the existing ombudsman schemes. This will provide a useful forum to discuss further measures to raise standards in the market.

3. Points for Consideration Advance of Issuing Secondary Legislation

We will be developing a detailed view of the points that the Government should consider ahead of issuing the secondary legislation over the summer. However, our overall comments are as follows:

Timing

We would urge the Government to implement the legislation as soon as possible to provide more consumers with protection from the earliest date possible. If this needs to be in line with common commencement date procedures then our preference would be that it is implemented by 1 October 2013, but certainly no later than 1 April 2014. This is particularly important given the rate at which the sector is expanding at the moment and the amount of churn within it.

Client Money Protection

As referred to above we think that it is very important that agents are required to have Client Money Protection. Our research identified numerous cases where both tenants and landlords had lost money because the agent had misappropriated it and this could not be reclaimed. Some examples are provided below. This predominantly affects the landlord but can also affect tenants where the agent is holding a security, a holding deposit or other cash sums.

A CAB in the South East reported the case of a landlord owns a house that he rents out using letting agency X. For the last three months, tenants have been making payments to letting agency X, but landlord has not been receiving any rent. She sent emails to the agent, phoned them and visited their offices. They have not responded and the office is always shut. The landlord is out of pocket on rent by up to £2,400 and is liable for the tenants’ deposit of £1,200.

A CAB in the East reported the case of a landlord who decided to rent out her house using letting agency X. The agency found a tenant to rent the property for one year. The landlord paid 10% of the rent as a management fee to the agency every month. The tenant caused considerable damage to the property and even took the curtain rails with them when they moved out. The letting agency failed to produce an inventory when the tenant moved in. They did not carry out any inspections and returned the tenant’s deposit without inspecting the property. The landlord complained to the agency, which admitted negligence but failed to offer compensation or mediation, saying she would have to take them to court. In addition to the fees paid to the agency for “management” the landlord has had to pay £7,897 in repair bills to restore the property to a rentable condition following damage by the tenant.

A CAB in the South East reported that a landlord hired a letting agency to mange a new intake of tenants to her property, including carrying out reference and ID checks. The landlord discovered that the reference checks had clearly not been carried out correctly as the tenant’s stated previous address was in fact a shop. The tenant has now sublet the property to at least two other people, the landlord is no longer receiving rent for the property and it is in a state of disrepair. He is now faced with the prospect of legal procedures to get his property back due to the negligence of the letting agent.

The problems with a two-tiered membership route

As it stands, estate agents who are signed up to the Ombudsman by CEARA07 can choose whether or not they also sign up to the Ombudsman’s Code of Practice. This is not a requirement of CEARA07. While the majority of estate agents are signed up to it, those that are not are simply assessed on the basis of what is “fair and reasonable”. In contrast letting agents who are voluntarily members of the Property Ombudsman are required to sign up to the Code of Practice. Our concern is that this will not be a requirement of a new scheme, in line with rules relating to the scheme for estate agents. Signing up to a code of practice provides a means to raise standards in the sector—it makes clear in writing the standards that agents should adhere to and provides a means for consumers to assess where they have been subject to poor practice. It also prevents two tiers of practice coming into effect. For these reasons we would rather that, as part of the new scheme, letting agents had to follow a specified code.

One complaints body

In line with the above, we think it would be fairer and more effective if one Ombudsman scheme for letting agents was in operation. Our concern with having more than one scheme, as is the case presently, is that there is no agreed set of standards for the market and there is greater potential for a race to the bottom as agents choose whichever complaints scheme that makes the least requirements upon them.

It would also be far simpler for consumers, and therefore would be helpful in raising awareness of the scheme which would in turn enable consumers make better use of the legislation by acting as enforcers of it. Our research found that consumers had low awareness of the existing bodies and were confused by the different codes of conduct and standards that each applied. The Property Ombudsman is currently the largest in the market with 10,000 letting agent member covering about 60% of the market.

Publishing data—Transparency

We think that it is important that data on complaints about particular agents is transparent. This means an open publication policy. This would serve to “shame” companies who don’t deal well with consumer complaints, warn consumers against using these companies and also provide some level of good publicity to well behaved traders. The Financial Ombudsman has recently mentioned that banks will use the data published by FOS in press releases as a means to demonstrate how well they are doing/how they have improved, thereby encouraging improvements in the market.

May 2013