Subordinate Legislation
Tenancy Deposit Schemes (Scotland) Regulations 2011 (Draft)
We now come to item 3, which is to take evidence on the draft Tenancy Deposit Schemes (Scotland) Regulations 2011. The minister has been joined by Stephen White, head of consumers in private housing, and Denise Holmes, a policy officer in consumers in private housing. Does the minister wish to make any opening remarks?
Yes, please, convener. I will keep it as tight as I possibly can because I know that the committee has more to do after this.
I am delighted to be here today to discuss the draft regulations. Many of us have waited quite a long time to see this day.
There have long been concerns about the unfair withholding of tenancy deposits and the difficulty that tenants have in recovering their money. Although I recognise that many good and professional landlords—the vast majority—behave responsibly, the issue affects a significant number of the wide range of tenants across the private rented sector. The draft regulations make it clear that the practice of unfairly withholding tenancy deposits will not be tolerated in future.
Our main objective in making the regulations is to end the practice of unfairly withholding deposits, to ensure that deposits are safeguarded throughout the duration of a tenancy, and to ensure that a deposit is returned quickly and fairly, particularly when there is a dispute about its return to the tenant or the landlord. The regulations have been drafted to create as straightforward and cost-effective an approach to safeguarding deposits as possible. The regulations seek to minimise the costs and administrative requirements for landlords, at the same time as maximising the protection of deposits for tenants.
The draft regulations are based on a number of key principles: approval of a robust model that ensures that deposits are safeguarded by an independent third party; schemes being free to tenants and landlords; schemes being able to demonstrate that they will operate without reliance on subsidy from the taxpayer; quick repayment of deposits when there is no dispute; schemes offering access to a free and independent dispute resolution service to tenants and landlords when a dispute arises; and landlords being required to provide tenants with information about the tenancy, their deposit and how it will be protected.
The draft regulations will empower tenants to seek sanctions through the courts against landlords who fail to comply with them. Schemes will also provide information that is obtained about a landlord’s registration status to relevant local authorities, thereby increasing the authority’s ability to identify unregistered landlords and properties.
The draft regulations pave the way for a more professional approach to tenancy deposit management. Landlords and the private rented sector more generally will benefit from tenants’ increased confidence in the sector as a safe, modern and desirable housing option.
I commend the regulations to the committee and am happy to answer any questions that members might have.
As I indicated to the minister during the stage 1 debate on the Private Rented Housing (Scotland) Bill, I have a number of questions about the scheme’s administration, particularly about allowing private landlords to take deposits and hand them to the scheme administrator. Does the minister consider that to be appropriate? Would it not be more appropriate for the tenant to give the deposit directly to the administrator?
I also noted the minister’s comment that the scheme would be run at no cost to the taxpayer. The business regulatory impact assessment clearly indicates that there will be a cost to the Scottish Government in setting up the scheme and that there will be on-going costs in advertising its operation. What will be the overall cost of the scheme? What will it cost the Scottish Government?
The minister also implied that the scheme would become self-financing. That view is based on certain assumptions about staff grades and payments, but I see no costings for rental of office accommodation, updating of equipment and anything else associated with running an independent scheme—unless, of course, independence in this context means that those involved in the scheme will be allocated some corner of St Andrew’s house or Victoria Quay.
I hope that the minister can answer those questions.
I call Mary Mulligan, to be followed by Bob Doris.
Are you taking all the questions first, convener?
Yes.
That gives me more time to prepare my answers.
I have three questions. First, why did the minister choose this scheme instead of an insurance-based scheme? Secondly, it has been suggested that Scotland’s private rented sector is of such a size that if the scheme is to be self-financing—to which John Wilson alluded—only one can be introduced. What is the minister’s view on that? Thirdly, if the scheme gets the go-ahead, what will be the timescale for its commencement?
My first question is similar to the one that Mary Mulligan asked. I do not know whether this happened to her but I put on record first of all the fact that I was contacted by the Deposit Protection Service, which is very keen to be the one provider of the custodial scheme. If outside commercial interests are involved, I think that I should say so for the sake of transparency.
Like Mary Mulligan, the Deposit Protection Service has suggested that if the idea is for costs to be met from interest on tenancy deposits, the introduction of multiple schemes rather than a single scheme could undermine the cost neutrality of the scheme to the public purse. What is the minister’s opinion on that?
As for registered landlords who already hold a number of deposits and use them to account for debts and as part of their businesses’ overall cash flow, it has been suggested that they would have nine months from the date of commencement of the regulations within which to lodge those deposits with the central scheme. Is that period of time appropriate? I am content with that provision but if the Government chose to review it, would individual businesses be able to make a specific case for needing longer than nine months to liquidise their assets and produce those deposits?
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If that is all the questions, I will try to deal with each of them in as much detail as I can.
On John Wilson’s question about whether it would be more appropriate for the tenant to lodge the money with the independent agency, a point of law is involved in that the contract or lease is between the tenant and the landlord and therefore the money exchange is between the tenant and the landlord. However, I think that underlying John Wilson’s question is a concern to ensure that the tenant can be assured that the money has indeed been lodged with the agency. We will ensure that the provisions and the rules ensure that that happens and that the tenant is able to find out quickly from the independent agency whether their deposit has indeed been lodged with it. That will minimise any risk that it would not be.
Furthermore, a landlord will take the money on the understanding and, indeed, the legal requirement that they will then deposit it with the independent agency. If the landlord does not do that and retains the money, they will be culpable and can be taken to court for fraud because they have got the money under false pretences. The information pack that will be available to tenants will make it clear that there is a legal requirement on the landlord to lodge the deposit with the independent agency.
On the costs to the Scottish Government, we have looked at the scheme that operates south of the border—this is where some of the other questions about the scale of the sector in Scotland are relevant. Our estimate is that, although the private rented sector in Scotland has just under 9 per cent of all houses in Scotland, it is nevertheless not an insignificant business. We reckon that it has a turnover of £100 million or so a year. I will ask Stephen White to give you more detail, but I will give you the overall picture.
Even at today’s rates of interest, the scheme’s income over time—we must remember that it will be an accumulation—will be very substantial indeed and will, we believe, be enough for the scheme to be self-financing. However, we also have powers in the regulations whereby, if necessary, the Scottish Government can provide public subsidy to the scheme. We do not want to do that so, when we get the bids in, one of the key criteria for deciding which bids to approve will be whether they require any significant Government subsidy. In other words, although the private rented sector in Scotland is much smaller both in absolute and relative terms than that south of the border, it is still a significant business and we believe that the revenue stream from the interest on the deposits—the principal—will be enough to cover the costs. Once the scheme is set up, the administrative costs should be minimal because there is a standard procedure.
A nine-month transition period is built into the regulations. We will continually review how we go about things and consult the representatives of the landlords and tenants, and so on. However, we believe that there is a need for a transition period. We hope to have the scheme up and running pretty fully by the end of this calendar year; we will do it as soon as possible once the regulations are approved. However, we are happy to review the nine-month period if we think that it is either too long or too short. Some people might take a different point of view on whether it is the appropriate timescale.
John Wilson made the point that there will be some cost for the Scottish Government because we will advertise the scheme, mainly through the information packs that tenants will get. It will not be a big advertising campaign on the telly; it will be direct information to the tenants primarily via the information pack that they will be obliged to get. That is the best way of reaching the tenants and ensuring that they know their rights.
Mary Mulligan asked why we do not have an insurance-backed scheme instead of a custodial scheme. The answer is that, based on the experience south of the border and the submissions that we received from north of the border, there is a risk element in the insurance scheme, particularly given how insurance industry premiums are going at the present time. It was felt that that could add a risk and cost element that was unnecessary and undesirable. There was uniformity among representatives of landlords and tenants in that regard although, obviously, the landlords would have preferred to have no scheme. However, they clearly said to us, “If you’re going to have a scheme, please make it a custodial scheme, because it takes a lot of the risk out and it’s a more sensible approach.” The experience down south shows that to be the case.
I hope that that has given a broad overview. Stephen White will spell out the detail on costs.
Stephen White (Scottish Government Directorate for Housing, Regeneration and Commonwealth Games)
I will deal with the points that have been raised. The nine-month transition period will begin for all existing tenancies that are linked to the landlord registration scheme after the first approved scheme becomes operational, so it will not be nine months after the commencement of the regulations. If the scheme commences at the end of this calendar year, it will be September 2012 before the last of the landlords has to comply with it. I suppose that that answers some of the questions about extricating from current business arrangements to respond to the new system.
The minister answered the question on the insurance schemes well. The other dimension to that is part 4 of the 2006 act, which has the framework for the regulations. We considered whether insurance schemes truly safeguarded deposits in the way that the legislation intended. We concluded that custodial schemes are a more appropriate match for the legislation.
On Mr Wilson’s question about the cost to the taxpayer, we expect that all the costs of setting up offices and so on will be part of the business plan or business explanation that is presented in any approaches to the Scottish ministers for approval of a scheme. The Scottish Government will not be operating the scheme, so we expect to see that information in black and white for us to consider as part of the overall business case. Decisions on feasibility will be made by the organisation approaching the Scottish ministers for approved status.
On the question about whether schemes will be self-financing and whether having one scheme is supportable but having more than one is not, we need to wait to see the different parties who seek a conversation with us. We have already had interest from a number of bodies and will continue early discussions with them. There may be a strong element of truth in the view that having more than one scheme is not supportable, but we are at an early stage of discussion, so it is too early to reach a conclusion on that.
The minister covered the question of timescale. If I have missed anything, please draw it to my attention.
Do members have any other questions?
The minister indicated that, if a landlord does not pay the deposit to the administrator of the scheme, they will be in breach of the agreement and will be taken to court. Who would take the landlord to court and who would pay the costs of doing so? My second question relates to the surpluses that are expected to be generated by the administration of the scheme. What will happen to such surpluses? If there continues to be the current 1.5 to 2 per cent return on money deposited, there will be surpluses. Where will they lie? For what benefit will they be used?
It is clear that the tenant could take the landlord to court. The local authority could withdraw the landlord’s registration because the landlord would not be abiding by the terms and conditions of the registration scheme. Indeed, depending on the proposals that are introduced as a result of the bids that are made, the independent party or parties might want to be able to take the landlord to court.
There would be no shortage of people who could take the landlord to court. However, I hope that that would happen only in extreme cases, and we want to put controls in place to avoid getting as far as that before any problem is resolved.
What happens to the surpluses also relates to what will be proposed in the bids. Any organisation is free to make a bid to run the scheme—we may end up with more than one scheme. Public sector organisations such as councils can make bids. Social sector—third sector—organisations can also make bids, and I know of one such organisation that is seriously thinking of doing so. Private companies can also make bids—I think that Mr Doris referred to the one that operates the scheme south of the border.
We will see what comes in when we issue the invitation to bid. Part of the consideration will be what will happen if there are significant surpluses. We do not want the scheme to generate such huge surpluses that somebody makes a killing. If huge surpluses were generated, we would want the money to be reinvested in the sector in some way, but it would be up to the bidders to give us their ideas on that.
Although I am sure that the sector is robust enough to allow the scheme to be self-sufficient, I do not anticipate that huge surpluses will be achievable in the foreseeable future, certainly not with interest rates being at the low level at which they are at present.
The point of the scheme is to ensure that people who rent do not unfairly lose their deposits, but it is difficult to imagine that people who handed over a deposit to a landlord and then found that the landlord had not dealt with it correctly would go to court. They may have lost any spare money that they had. That strikes me as being slightly anomalous.
Who will make the decision about how the deposit is dealt with when the tenancy comes to an end and how will the money be disbursed? The purpose of its being there is, I presume, for the landlord to have money to replace a rug that has had cigarette burns made on it, for example, the notional cost of which will be deducted from the deposit. Who will adjudicate on such issues?
On the tenant’s ability to take the landlord to court, tenants in the situation that you describe would qualify for legal aid. Anyone with an income of less than £25,000 has, under certain conditions, access to legal aid.
I do not know why you are shaking your head.
I am sorry, convener, but this is not how we usually do things. My understanding is that people would not get civil legal aid for something like that.
The rules were changed last year. When the Home Owner and Debtor Protection (Scotland) Act 2010 was going through the Parliament, many changes were made to the legal aid rules. We can double-check and get back to you, but my understanding—I may stand corrected—is that tenants would qualify.
I anticipate that the first thing that the tenant would do on realising that their money had not been lodged would be to inform the independent organisation. In the tenant information pack, there should be a clear steer to the tenant to ensure, within a reasonable period after handing over their deposit, that it had been handed over to the independent organisation.
I have a point of clarification. Under the regulations, the receiving body should inform the tenant by way of a receipt that the deposit has been lodged with it. The tenant has a failsafe mechanism and will know whether or not the deposit has been lodged.
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I would also expect that there will be a way for people to check, if they so wish. For example, if they have not received notification within, say, a month they should immediately follow up the issue. There are various ways in which they will be alerted to what is going on.
As for the point about administration at the termination of a lease, in principle the process should not be all that different from what happens at the moment. Where there is no dispute, which will be in the vast majority of cases, the money will be paid over, less any jointly agreed deductions for fag burns or whatever. However, problems arise where there is a dispute, and a dispute resolution service must form a clear part of the bidding process. The landlord might say, “Look, you’ve damaged this or that, so I’m not giving 100 per cent of your deposit”—in some cases, the costs of repairing the damage might be such that they refuse to give back any of it—and the tenant might argue that it was not their fault, that the damage was there to begin with and so on. In such disputes, the dispute resolution service should become involved. Although an extra player—in this case, the independent organisation—will be involved, the process should in principle be no different from what happens just now.
If there are no other questions, we move to consideration of motion S3M-7781.
Motion moved,
That the Local Government and Communities Committee recommends that the Tenancy Deposit Schemes (Scotland) Regulations 2011 be approved.—[Alex Neil.]
Motion agreed to.
I thank the minister and his team for their attendance this morning.
Control of Dogs (Scotland) Act 2010 (Prescribed Form of Notice) Order 2011 (SSI 2011/39)
Home Energy Assistance Scheme (Scotland) Amendment Regulations 2011 (SSI 2011/56)
Local Authority Accounts (Scotland) Amendment Regulations 2011 (SSI 2011/64)
Item 5 is consideration of three Scottish statutory instruments, all of which are subject to the negative procedure. Members will have received an electronic copy of the instruments. No concerns have been raised and no motions to annul have been lodged. Do members agree that the committee has no recommendations to make to Parliament on these instruments?
Members indicated agreement.
Meeting closed at 12:47.