A Guide to Custodial and Insured Deposit Protection Schemes

Tenancy deposit protection (TDP) schemes were brought in to make sure deposits are handled fairly, giving both landlords and tenants peace of mind.

When it comes to protecting a deposit, you’ve got two main options to choose from: custodial or insured schemes. Each option comes with its own pros and cons, so it’s important to know how they work and what’s expected of you as a landlord.

This guide will break down how each scheme works and what’s required of you as a landlord.

Remember, the tenancy deposit is legally capped at five weeks’ rent for most tenancies. You can easily calculate the correct amount using our handy calculator.

1. What is a custodial deposit protection scheme?
2. What is an insured deposit protection scheme?
3. Custodial vs insured schemes comparison table
4. Which deposit scheme does OpenRent use in Rent Now?
5. Three frequently asked questions about deposits

What is a custodial deposit protection scheme?

With a custodial deposit protection scheme, you (or your letting agent) collect the tenant’s deposit as usual, but instead of holding onto it yourself, you register it with a government-approved scheme.

The scheme then ‘takes custody’ of the money, keeping it safe until the tenancy ends. The deposit won’t be released until either:

• Both landlord and tenant agree on how the deposit should be divided
• Any disputes over the deposit are resolved

Either the landlord or the lead tenant can start the repayment process, but both parties need to agree on any deductions before the money can be returned.

In most cases, landlords and tenants come to an agreement on deductions, and both confirm the repayment details to the scheme provider.

These days, this is all done online through a portal, with login details provided to you (or your agent) and the tenant.

What happens when there’s a dispute?

All government-approved tenancy deposit protection schemes provide a free, impartial dispute resolution service. This service, known as Alternative Dispute Resolution (ADR), offers a straightforward alternative to going through the courts.

If there’s a disagreement over the deposit, you can refer the issue to the scheme, where trained adjudicators will review the evidence submitted by both you and your tenant. They’ll then make a fair decision based on the information provided.

The adjudicator’s decision is final and binding. While you’re not required to use the ADR service, taking the dispute to court instead is generally not advised, as it can be both time-consuming and costly.

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What is an insured deposit protection scheme?

Insured schemes handle deposits differently both during and after the tenancy.

With an insured scheme, you (or the letting agent) collect the tenant’s deposit as usual. However, instead of transferring the money to the scheme provider, the deposit is held in the landlord or agent’s account during the tenancy, with the deposit scheme ensuring the money is protected and the tenant can dispute any claims that they feel are unfair.

One advantage of this approach is that you can hold onto the deposit and earn any interest it generates during the tenancy. This can make insured schemes particularly appealing for landlords with high-value properties, large portfolios, or long-term contracts.

The trade-off is that a small premium must be paid to the scheme provider for the protection it offers.

When the tenancy ends, the repayment process works differently compared to custodial schemes. Since you already have the deposit in your account, you can work directly with the tenant to agree on any deductions and return the remaining amount to them – without involving the scheme provider.

What happens when there’s a dispute?

If a dispute occurs with an insured scheme, the landlord must involve the scheme provider. However, it’s important to note that only the disputed portion of the deposit – not the entire amount – needs to be sent to the scheme.

Here’s an example to make it clearer:

Let’s say you’re holding a £1,000 deposit and want to deduct £200 for damages, but the tenant only agrees to £100 of the deduction. In this case, you should return the undisputed £800 to the tenant and transfer the £200 disputed amount to the scheme provider.

From there, the process works much like it does with custodial schemes. The tenancy deposit protection provider will offer their free Alternative Dispute Resolution (ADR) service, where an impartial adjudicator reviews evidence from both sides and decides how the disputed amount should be repaid.

Custodial vs insured schemes comparison table

	Custodial scheme	Insured scheme
Who holds the deposit	The scheme provider	The landlord/ letting agent
Cost	Free	Small fee
Landlord/ letting agent must provide prescribed information	Yes	Yes
Can return the deposit without involving the scheme	No	Yes
Must involve the scheme in case of a dispute	Yes	Yes
Free alternative dispute resolution	Yes	Yes
The dispute decision is final	Yes	Yes

For both custodial and insured schemes, you are required to provide tenants with legally prescribed information about their deposit and how it’s being protected. When you register the deposit, you’ll receive an information pack and clear instructions on how to share it with your tenants.

You have 30 days from the date the tenant pays the deposit to register it and provide them with the prescribed information. You must sign the document, and it’s important that you keep a copy for your records.

If you’re using our Rent Now tenancy creation service to set up your tenancy, we’ll handle all of this for you, making sure your tenancy is set up correctly and legally from the start.

Which deposit scheme does OpenRent use in Rent Now?

Any deposit paid through OpenRent will be held by us and protected with mydeposits, one of the three government-approved deposit protection providers.

At the moment, our Rent Now service only supports mydeposits, so landlords are unable to choose from the other available providers. However, if eligible, you can offer tenants a deposit replacement option through Reposit.

When using Rent Now, OpenRent will register the deposit and hold the funds under mydeposits’ insured scheme on your behalf.

We send the prescribed information to the tenants on your behalf once the deposit has been protected. This covers details of the deposit amount, where it will be protected, and how it will be managed as required by Section 213 Housing Act 2004.

We also send a copy of our partner Deposit agency’s terms and conditions.

Three frequently asked questions about deposits

1. What are the government-approved deposit protection schemes in the UK?

Region	Deposit protection schemes
England and Wales	1) mydeposits 2) The Deposit Protection Service (DPS) 3) Tenancy Deposit Scheme (TDS)
Scotland	1) SafeDeposits Scotland 2) mydeposits Scotland 3) Letting Protection Service Scotland
Northern Ireland	1) Tenancy Deposit Scheme Northern Ireland 2) mydeposits Northern Ireland

2. What counts as evidence in a tenancy deposit dispute?

In a tenancy deposit dispute, landlords can make deductions for various reasons, and the Alternative Dispute Resolution (ADR) process accepts a wide range of evidence to support these claims.

Common types of evidence include the terms of the tenancy agreement, which outline the responsibilities of both the landlord and tenant, as well as bank statements, utility bills, and council tax bills that show any unpaid amounts.

Inventory reports, which should ideally be signed by both parties, are important for documenting the property’s condition at the start and end of the tenancy. 

Photographs and videos of the property provide visual proof of any damage or issues, while email correspondence can show communication between the landlord and tenant about the dispute.

Receipts for cleaning or repairs, as well as witness statements, can also be useful. The more clear, relevant, and well-documented your evidence is, the better your chances of a fair resolution through the ADR process.

3. Do you really need to have an inventory?

While an inventory isn’t a legal requirement, it’s a very useful tool for landlords. An inventory is a detailed record of the property’s condition and contents, made at the start and end of a tenancy, with photos to back it up.

It’s typically agreed upon and signed by both the landlord and the tenant at the beginning of the tenancy. 

Having an inventory in place helps protect both parties, making it much easier to resolve any disputes that may arise later on. If there’s any damage or missing items, the inventory serves as the key piece of evidence for making deductions from the tenant’s deposit.

Without it, it becomes much harder to prove that the tenant caused the damage or that items went missing.

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