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Client Money Protection, ‘CMP’ is now a legal requirement for letting agents in England. In Wales the same situation effectively exists through the requirement of the Rent Smart Wales licensing  scheme. A brief definition of ‘client money’ is any money received and retained by a company that is not the legal property of that company. Such funds would include any monies which are not fees due to the agency under a contract, even if the contract is a verbal contract.

Client Money Protection, ‘CMP’ is now a legal requirement for letting agents in England. In Wales the same situation effectively exists through the requirement of the Rent Smart Wales licensing  scheme. A brief definition of ‘client money’ is any money received and retained by a company that is not the legal property of that company. Such funds would include any monies which are not fees due to the agency under a contract, even if the contract is a verbal contract. The term ‘company’ is used in its widest possible sense and may mean a sole trader, a partnership, a public limited company (PLC), a limited liability company, a trust, a charity or, indeed any corporate organisation, including, of course, a straightforward limited company. Most letting agencies will usually be either limited companies or sole traders using a trading name. An example of this would be John Smith trading as ABC Lettings. Of course this name would only be used for “paperwork purposes” and not for advertising or marketing purposes. Potential clients, rightly or wrongly, are often put off by sole traders preferring to deal with an organisation which presents itself with a more ‘corporate image’. Partnerships are also fairly frequently used.

The best way to think of CMP schemes is similar to ABTA, which is the travel association for the holiday industry. By law, all licensed holiday firms have to lodge bonds with the Civil Aviation Authority (‘CAA’) which operates the Air Travel Organisations Licence (‘ATOL’). The regulations provide protection for all client monies and will even insure against flying customers home should the travel company go bankrupt while holidaymakers are abroad. This legislation was brought in by the government to protect consumers in the wake of a number of holiday firm bankruptcies during the recession of the early nineties.

On 23^rd October 2008 Professor Julie Rugg of the University of York published a report on the Private Rented Sector. One of the recommendations was for a scheme to be set up to provide effective regulation and accreditation for letting and managing agents. A further recommendation was to set up a proper bonding scheme for monies held similar to the ATOL where all client monies are safely protected, or at the very least to make it a condition for agents to have a CMP scheme in place. This recommendation was introduced throught the Housing and Planning Act 2016 starting in April 2019.

Unfortunately, it is not uncommon for agencies, in common with all other businesses, to experience financial difficulties, particularly in the current economic climate. Should an agency cease trading and not have CMP to protect their clients’ money then both landlords and tenants may suffer severe difficulties in attempting to recover any outstanding funds.

Unfortunately, it is not uncommon for agencies, in common with all other businesses, to experience financial difficulties, particularly in the current economic climate. Should an agency cease trading and not have CMP to protect their clients’ money then both landlords and tenants may suffer severe difficulties in attempting to recover any outstanding funds.

There have also been a string of incidences reported in the national press and online media of unscrupulous letting agents simply disappearing with large sums of money representing both tenant deposits and rent owed to client landlords which was taken and not passed on. Naturally, in such cases the police will be informed and they will attempt to trace the culprits who will have committed a criminal offence and face a probable prison sentence in the event of a successful prosecution. In the meantime, if the deposits were not protected, the landlord will be liable to return the monies taken by the agent even if they never received the deposit as in the case of non-housing act tenancies mentioned above.

Dubious or crooked letting agents are a very small minority. In most cases of complaint, it will transpire that an agent has been acting incompetently rather than dishonestly. They are trying their best but do not understand the law or how to perform with due diligence or how to exercise a competent duty of care and skill regarding the matter complained about. When a client landlord is asked in such a situation whether the agent at fault is a member of a trade body such as UKALA, PropertyMark or RICS the answer is almost always in the negative.

Unfortunately, this has been the real-life experience of many unfortunate landlords. One of the reasons that corrupt and dishonest agents can get away with this, and why there is some amount of incompetency around, is that there is no regulatory authority for letting agencies as a whole. Anyone can lease a shopfront and set themselves up as a letting agent. No qualifications are required. That said, there are many reputable and highly competent agents and number of very worthy trade associations and bodies within the industry who have their own rules for membership and supply training courses (including the UKALA).

CMP insurance is now a legal requirement for letting agents. Whilst this may not solve criminality or incompetence as listed above, it should at least reduce the risk for landlord. Reduce but not eliminate as many of the agents losing the money may not be following the rules.

A letting agency acting with due diligence will have protected tenants’ deposits with one of the three statutory providers of the tenancy deposit schemes.

A letting agency acting with due diligence will have protected tenants’ deposits with one of the three statutory providers of the tenancy deposit schemes.

In such cases a deposit taken in connection with an assured shorthold tenancy will be safeguarded in accordance with the relevant legislation. However, should a deposit not have been protected, or taken in connection with a non- housing act tenancy, such as a company let or a high rent tenancy (where with both of these there is no legal requirement to protect the deposit), the landlord will be legally liable to return the deposit in the event that the agency goes into liquidation even if the landlord never received the deposit.

If a letting agent has received rent, as opposed to a deposit, which has not been passed on to a landlord, in the event of either bankruptcy or the agent fleeing with such monies, the landlord will have no recourse to approach the tenant. If, for example, a tenant pays rent for three months to a letting agent who then absconds with the money without paying the landlord, and the tenant can show proof that the money was paid to the agent, then the legal position is that the rent has been paid in full.

If a letting agent has received rent, as opposed to a deposit, which has not been passed on to a landlord, in the event of either bankruptcy or the agent fleeing with such monies, the landlord will have no recourse to approach the tenant. If, for example, a tenant pays rent for three months to a letting agent who then absconds with the money without paying the landlord, and the tenant can show proof that the money was paid to the agent, then the legal position is that the rent has been paid in full. To add insult to injury, a landlord may also have to pay back the deposit to the tenant as well as having lost three months rental income which will legally deemed to have been paid even if the landlord never received a penny.

There are a number of client money protection schemes on the market and as they operate in a similar fashion to insurance policies it is suggested that it would be prudent to compare several quotes and read the small print carefully particularly with reference to possible exclusion clauses. To provided the cover needed by law they must be approved by the government. The following points should be considered:

There are a number of client money protection schemes on the market and as they operate in a similar fashion to insurance policies it is suggested that it would be prudent to compare several quotes and read the small print carefully particularly with reference to possible exclusion clauses. To provided the cover needed by law they must be approved by the government. The following points should be considered:

* Client money will usually include: rents, deposits, holding deposits, funds held on behalf of landlords to be paid to contractors, float money (some agents agree with landlords to keep an agreed “float fund” in case repairs become necessary similar to a “sinking fund” in leasehold law), monies held if an agency if appointed as a receiver by a mortgagee under the Law of Property Act 1925 and any other funds that do not belong to the agency.

* All such funds have to be kept in a separate designated client account. Monies kept in such an account cannot be touched or used for any other purpose than the purpose for which such assets were originally taken.

* It is not permitted to “dip in” to such an account to use for other reasons such as purchasing stationery, paying the cleaner, general petty cash purposes or any other expenditure to do with the day to day running of the agency.

* The words “Client Account” must be clearly on the account to distinguish it from the day to day account of the agency.

* If the account is with the same bank as the everyday bank account of the agency ensure in writing that this will be a separate stand-alone ring fenced bank account and that the bank itself cannot join, mix, offset or touch this account in the event that the agency suffers a financial challenge such as exceeding its overdraft facility. This is not to suggest that a bank would ever consider such a tactic!

* For the avoidance of doubt, once this has been achieved, the funds in the account are completely untouchable and even in the event of the agency going bankrupt even HMRC will be unable to lay claim to such monies.

* Once the account is up and running appropriate management systems should be put in place to ensure the smooth running of the account allied with a suitable software package.

* A member of staff should be designated to look after the account preferably someone with bookkeeping and accounting experience.

* Before money is released for non standard payments it is prudent to obtain permission in writing from the landlord, tenant or any other third party.

* A suitable referencing system should be set up to identify all incoming payments specifying the source of the funds, the reason they have been taken, the use to which the funds will be put any other relevant information.

* Steps should be taken to ensure that sufficient funds are in the account to make any and all payments as they fall due.

* Many agencies have more than one designated client money account. For example, agencies that use a tenancy deposit scheme that allows them to keep funds received from tenants as a deposit on a property may have a separate account for deposits alone. Although a good idea and fairly common practice, it is a matter for an individual agency to make a commercial decision on this point.

* It is suggested that all funds received are banked at the earliest possible opportunity.

* Where cash is taken as a deposit or rent the financial transaction document should reflect the fact that cash has been taken. With regard to the above point about banking all monies as soon as possible after funds are received, this is particularly important with cash transactions because some insurance policies only cover up to a small amount of cash kept on the premises in the event of a break- in, sometimes as little as £300.00. Beyond that figure the agency will not be covered and will have to make good any shortfall should a large sum be stolen. If it is difficult logistically, or because of staff shortages, to bank on a daily basis or every two days it is further suggested to purchase a small safe which can even be secured to a supporting wall. The safe should be kept in the back office out of sight of visitors to the office. For security reasons, the staff should be told not to mention to anyone outside of the agency that there is a safe on the premises as this in itself may attract unwanted attention.

* It goes without saying that an agency should have an effective software package to enable all funds to tracked and managed efficiently. Several key members of staff should be trained in how to use the system competently in case of staff absence duty to holiday or illness or any other reason. This is also important for reasons of customer relations and being able to provide a seamless service, despite employee absences.

Several industry bodies, notably ARLA, PropertyMark, The Law Society, NALS (“The National Approved Letting Scheme”) and RICS operated the Safe Agent Scheme. It was to show the agent had client money protection insurance. This has now been superseded by the legal requirement to have client money insurance brought in for England via the Housing and Planning Act 2016. The SafeAgent brand has now been taken over by what used to be NALS.

Several industry bodies, notably ARLA, PropertyMark, The Law Society, NALS (“The National Approved Letting Scheme”) and RICS operated the Safe Agent Scheme. It was to show the agent had client money protection insurance. This has now been superseded by the legal requirement to have client money insurance brought in for England via the Housing and Planning Act 2016. The SafeAgent brand has now been taken over by what used to be NALS.