Communities and Local Government CommitteeWritten evidence submitted by the National Approved Letting Scheme

Executive Summary

1. The National Approved Letting Scheme (NALS) is a not for profit licensing scheme for lettings and management agents operating in the private rented sector. Agents operating under the NALS umbrella are required to comply with a number of standards and be covered under a Client Money Protection Scheme.

2. NALS welcomes the Select Committee enquiry into the Private Rented Sector.

3. NALS believes that, as the private rented sector grows, more investment is needed, both in property and in improved management of it. This investment can best be encouraged if minimum standards and good practice are promoted by the sector itself, in conjunction with its representative bodies. However, we also believe that Government has a role to play, by providing an enabling legal and regulatory framework. We would emphasise that we believe this should not entail full statutory regulation of the sector, which would be both inappropriate and a disincentive to investment. We do not believe that it would be appropriate to try to replicate the regulatory regime and rent controls that apply to social housing.

4. We urge Government to support some practical measures, aimed at giving tenants and landlords confidence as consumers of the important services provided by agents. NALS recommends:

Inclusion within a Client Money Protection Scheme to be mandatory for all agents.

Membership of an ombudsman scheme to be mandatory for all agents.

Transparency in agents’ fees and charges to ensure “no surprises” for the tenant.

Greater industry intelligence sharing on rogue agents.

Robust enforcement arrangements.

5. NALS also supports the SafeAgent campaign, which offers a single marketing badge enabling consumers to recognise agents who are part of a Client Money Protection Scheme and who adhere to the measures listed above.

6. Finally NALS considers that the sector has the capacity to increase its effective self-regulation without resort to intrusive statutory intervention.

Introduction

7. The National Approved Letting Scheme (NALS) was established in 1999 by the Empty Homes Agency, with backing from the Royal Institution of Chartered Surveyors (RICS) the Association of Residential Lettings Agents (ARLA) and the National Association of Estate Agents (NAEA). The intention was that NALS would provide an overarching quality mark, easily recognised by consumers, with minimum entry requirements for agents.

8. NALS agents are required to:

deliver defined standards of customer service;

operate within strict client accounting standards;

be part of an Ombudsman Scheme; and

be included under a Client Money Protection Scheme.

9. Agents must provide evidence that they continue to meet NALS criteria on an annual basis, in order to retain their licence. The scheme operates UK wide and has 1500 firms with 2000 offices.

10. NALS was instrumental in working with the insurance sector, to enable access to a Client Money Protection Scheme, for agents operating outside established industry bodies (ie ARLA, NAEA, RICS or the Law Society—many agents belong to more than one body). A Client Money Protection Scheme provides reimbursement for consumers where there is misappropriation of rents or deposits. The insurance market does not offer client money protection cover direct to individual agencies, so access via NALS and other industry bodies providing similar arrangements offer an effective way of fulfilling this important good practice requirement.

11. NALS governance comprises an independent board, which includes representatives from the British Property Federation, the Guild of Lettings and Management and the Peabody Trust. The chair is Sheila Drew Smith. DCLG has observer status on the Board.

The Role of the Private Rented Sector

12. Recent census statistics show that the proportion of private rented households has increased from 12 % of all housing stock, to 18% in 2011 and it is expected to continue to increase. Private renting has become a tenure of necessity as well as choice, with homeownership now out of reach for many who lack the financial capacity or confidence to access mortgage finance.

13. Furthermore, shortages of social housing are also increasing the demand for privately rented homes. We are aware that many tenants, housing authorities, advice agencies and other stakeholders regard private renting as an alternative form of tenure for those whom historically would have been able to access social housing. However, the private rented sector does not and cannot operate in the same way as the social housing sector, which has its own distinctive policy, financial and regulatory regime.

14. It is NALS’ view that it is unrealistic to ask the private rented sector to replicate the kinds of standards and practices that exist in social housing. The risk is that this might alienate, rather than encourage, investment. In the private rented sector, landlords are seeking commercial return on their investment and are not necessarily altruistic. Many landlords own only a small number of properties, though an increasing number of larger players are now entering the market, encouraged by the range of Buy to Let initiatives. NALS would argue that imposition of too much intervention and red tape could result in a reduction of investment, which would be counterproductive at a time when demand outstrips supply. Likewise, there is a danger that over-regulation could undermine efforts to improve property and housing management standards, rather than promote them.

Tenants, Landlords and Agents

15. For the renting relationship to work well for all parties, the rights and responsibilities of each needs to be clearly defined and understood, to encourage a more consistent and professional offering across the sector, supporting choice and flexibility.

16. Tenants are consumers and should be able to have the right to quiet enjoyment of a rented home provided by a third party, whilst recognising that they too have responsibilities, including payment of rent.

17. Landlords are also consumers. When entrusting management of their investment to an agent, they should not switch off their commercial antennae and simply omit to check agents’ credentials, as they would with any other business partner. Too often, landlords are swayed purely by savings on fees. This can end up costing them more than they bargained for, when their agent of choice disappears with their money and they have no comeback, unless the agent is part of a Client Money Protection Scheme.

18. Where an agent manages a property, both landlord and tenant should have confidence in dealing with them. They need to know that, if an issue should arise, there is a clearly defined method of resolving complaints. It is also of the utmost importance that, should anything untoward happen to the firm, their money is protected.

Regulation of Lettings and Management Agents

19. NALS is committed to raising standards in the private rented sector and protecting the consumer. We believe that these objectives can best be served by promotion of good practice from within the private rented sector as a whole. Our view is that that government can help to facilitate this by helping to provide the right enabling framework. Specifically, there are a number of measures which could be supported by Government, which do not require implementation of full statutory regulation.

Mandatory inclusion under a Client Money Protection Scheme

20. Currently there are only four organisations operating the agents’ Client Money Protection or Bonding schemes which are mandatory for their members/firms—NALS, RICS, ARLA and NAEA.

21. These schemes, which have varying scope and limits, offer the consumer, both tenants and landlords, recompense should an agent misappropriate rent or deposits. The statutory insurance backed Tenancy Deposit Schemes—”My Deposits” and “The Dispute Service” provide recompense to consumers where a deposit has been properly protected and subsequently misappropriated, with strict timescales applied for registration of a claim. However, where a deposit has not been protected and the agent is part of a Client Money Protection Scheme, those schemes would recompense the consumer. If it was a mandatory requirement for lettings agents to be covered by one of the recognised Client Money Protection schemes, this would significantly increase consumer protection. It should be noted that the annual cost for an agent to contribute to the NALS Client Money Protection Scheme is less than £1 per day.

22. NALS also supports the “SAFEagent” campaign, which offers a single badge, enabling consumers to recognise agents that are part of a Client Money Protection Scheme. SAFEagent offers an additional marketing tool for agents, to differentiate themselves from those agents who do not fall under any Client Money Protection arrangements.

23. Government support to make inclusion under a Client Money Protection Scheme membership mandatory, which would not involve Government in specifying the detail of the scheme or schemes themselves, would, in our view, achieve the right balance between promotion of an enabling framework and formal statutory regulation.

Mandatory membership of an ombudsman scheme

24. NALS believes that it should be a requirement for all lettings and management agents to be members of an ombudsman scheme. This would be in line with arrangements in the residential sales sector. However, this requirement should not be introduced in isolation, without also requiring mandatory inclusion under a Client Money Protection Scheme. An ombudsman can deal with complaints regarding service issues, but cannot assist or offer recompense where funds have been misappropriated. This can be confusing for consumers, who believe that this is within an ombudsman’s remit.

25. There are currently two ombudsmen operating in the sector; The Property Ombudsman Scheme and Ombudsman Services: Property. The annual cost of access varies between the schemes.

Transparency of fees and charges

26. NALS recognises that the fees charged by letting agents, to tenants or landlords, will necessarily vary, both geographically and in nature, depending on the specific services offered. However, NALS believes that there should be complete transparency regarding fees and charges made by agents in all individual cases. For landlords and tenants alike, it is important for there to be clear, written information from the agent about exactly which services any fee includes, when it must be paid, and whether there are likely to be any additional fees charged in the future. One of the NALS service standards requires that agents make fees known to both landlords and tenants upfront.

27. While many letting agents are members of industry bodies, there is currently no industry-wide tariff on how much firms can charge in fees, or how this charging should be carried out. This varied picture, together with a perceived lack of transparency and a steady supply of examples and anecdotes about “rip-offs”, is leading to the widely shared assumption that charges are unfair. However, significant agents’ time and manpower does, in fact, go into essential tasks such as drawing up inventories, checking references and administration. These practices, when done properly, are valuable for all parties and the commercial reality is that they cannot be done for free.

28. The key to better understanding is greater transparency. There is a need for tenants and landlords to be clear about which services are charged for. Ideally, fees should be itemised using common, industry standard terminology. Payment terms also need to be clear. For example, tenants and landlords need to know if fees will be payable:

When looking for/trying to let a property.

At credit checking stage.

On commencement of the tenancy.

During the tenancy.

On renewal of the tenancy.

At the end of the tenancy.

29. NALS believes it is for everyone involved with housing policy and delivery to communicate why the services provided by agents are important and most importantly, what the benefits for tenants and landlords are. This would be a major step forward in improving the image of the private rented sector, which is all too often portrayed as a poor alternative to either home ownership or social housing.

Greater industry intelligence sharing on rogue agents—SAFEagent

30. Much could be achieved, by voluntary means, if there was an industry wide mechanism for intelligence sharing on rogue agents. NALS already shares information with a number of sector organisations when an agent leaves its scheme. If this practice could be established on a wider basis, it would be to the benefit of the sector and the consumer. NALS welcomes the initiative, by SAFEagent, to bring together Client Money Protection Scheme operators and their insurers, as well as the statutory Tenancy Deposit Schemes, to look at establishing such a mechanism.

Enforcement

31. If mandatory requirements are going to have any impact they must be accompanied by a robust system of enforcement.

32. NALS welcomes the expansion of the role of Trading Standards Officers and would welcome consistent and robust action against agents who mislead consumers. Trading Standards Officers have no powers to require agents to evidence that any deposits they are holding are protected with the statutory Tenancy Deposit Schemes. Currently tenants can make a claim in the Small Claims Court where their deposit has not been protected. We would welcome the power of Trading Standards Officers being widened, to include monitoring of agents in this respect.

33. It is disappointing that, when cases against fraudulent agents come to Court, sentencing is lenient. Community Service orders tend to be given, even where the amounts misappropriated are substantial and consumers are seriously disadvantaged. We welcome the most recent case, however, where an agent was given a two year custodial sentence. NALS would be happy to provide background information on individual cases of misappropriation of clients’ money to assist the Committee, if appropriate.

34. NALS also welcomes the Insolvency Service taking a tougher line on punitive action against Directors of fraudulent firms, but believes that more could be done in the area of phoenix companies to prevent agents closing down with the loss of clients’ money and re-emerging.

Minimum Standards for Agents

35. NALS believes that the above could be brought together into a set of minimum standards for lettings and management agents. If the right enabling framework, embracing client money protection, ombudsman membership, information sharing, transparency of fees and enforcement, could be supported and helped into place by Government, industry bodies would have the capacity to draw up the arrangements in detail. In our view, this would achieve the appropriate degree of regulation of the sector, by the sector.

Working with Local Authorities and Housing Associations to help Homeless People

36. NALS welcomes the increased amount of joint working that is taking place across the country, between Local Authorities, Housing Associations and the private rented sector, as regards arrangements for housing homeless people. Good practice examples of which we are aware include:

Rent Direct—landlords and agents often see payment of Housing Benefit via tenants as a significant disincentive towards letting to claimants. Where local direct payment arrangements are available, these can be extremely useful, providing unreasonable conditions are not imposed by the Authority.

Housing Benefit administration—landlords and agents report that delays in benefit payments can have a significant negative impact on cash flow. Where Local Authorities are prepared to take a pro-active approach to resolving issues, this can be a real incentive to accommodate claimants.

Help with bureaucracy—landlords and agents can often benefit from a corporate approach from the Local Authority. Broken promises, or being passed from “pillar to post” when problems arise, can be a show stopper for landlords and agents being asked to deal with homeless clients.

Landlord and agent forums—some authorities hold regular forums and provide training available for landlords and agents who are willing to help accommodate homeless tenants in the private rented sector.

Support for tenants—landlords and agents are positive about the impact of the various kinds of support that can be provided by Local Authorities, aimed at making tenancies sustainable. In particular, they welcome support for formerly homeless tenants around money, avoidance of nuisance and Anti-Social Behaviour.

37. NALS believes that there is a balance to be struck, between asking landlords and agents to take an “altruistic” approach to homelessness and the need for them to make a reasonable return. In general, landlords and agents are happy to be realistic about the challenges around working with homeless people, providing partnership arrangements with Local Authorities help underpin (rather than undermine) a viable business model. There should always be a named individual (at the council or at the relevant partner organisation if functions are outsourced) who has the authority to strike deals with landlords and agents. A culture of risk sharing should be developed, so that Local Authorities are working collaboratively with landlords and agents.

Other Related Issues

Length of Tenancy

38. There have been calls from campaigning organisations for the introduction of a new 5 year rental contract. Most landlords and agents welcome the stability of longer term tenancies but this should not be a mandatory requirement.

Rent Controls

39. NALS does not believe rent controls would be conducive to the operation of the sector as they would act as a disincentive to investors entering the market at a time when more, not less, investment is needed. We are, however, concerned about the unacceptable and occasionally threatening behaviour of unscrupulous landlords seeking unreasonable rent increases without due notice.

Note

NALS would be pleased to give oral evidence to the Committee if called upon.

January 2013

Prepared 16th July 2013