The Difference Between Custodial and Insured Deposits
There are two kinds of scheme that landlords can use to register a rental security deposit: custodial and insured.
The main difference between them is simple. Under a custodial scheme, the money is held by the scheme provider; under an insured scheme, the landlord can keep the money in their own bank account during the tenancy.
What is a Custodial Deposit Protection Scheme?
Under custodial schemes, the landlord (or their agent) collects the security deposit money from the tenant, and then registers the money with a government-approved deposit protection scheme.
Once registered, the scheme provider takes custody of the money. They hold it for the duration of the tenancy, not releasing until either:
- Both parties agree on the amount to release to each party
- A tenancy dispute has been resolved
Either the landlord or the lead tenant can initiate a request to repay the deposit, but they must both agree on the deductions to be made. In most cases, the landlord and tenant will agree to the deductions, and then both confirm the repayment arrangement to the provider.
This can now be done online, via a portal to which both the landlord/agent and lead tenant are given logins.
Disputes
All government-approved providers of tenancy deposit protection schemes offer a free, impartial dispute resolution service.
This service is an alternative to using the courts, and is therefore an Alternative Dispute Resolution service (ADR). You can refer your dispute to the scheme and their adjudicators will make a decision based on the evidence provided by the tenant and the landlord.
The adjudicator’s decision is final. If you don’t want to use you scheme’s ADR service, you can also take the dispute to court, although this is usually not recommended due to the time and expense this can require.
What is an Insured Deposit Protection Scheme?
Insured schemes work differently both before and after repaying the deposit.
Under insured schemes, the landlord (or their agent) collects the security deposit money from the tenant. Instead of paying this money to the scheme provider, however, they can keep it in their bank account, and simply register that they have taken the money with the provider.
This allows the landlord to accrue interest on the money for the duration of the tenant. This makes insured schemes an attractive proposition for landlords with expensive properties, large portfolios or long contract terms.
The trade-off is that landlords have to pay a small premium to the scheme provider.
The repayment process is also different, since the landlord already has the security deposit in their accounts at the end of the tenancy. With insured schemes, landlords are free confer with the tenant, agree deductions and then return the deposit to the tenant without involving their provider.
Disputes
If there is a dispute, then the landlord needs to involve the scheme. They must pay the disputed amount to the scheme provider – not the whole deposit. An example to illustrate:
A landlords wants to deduct £200 from a £1,000 deposit registered with an insured scheme. The tenant disputes £100 of the deductions. In this case, the landlord should repay the tenant the undisputed £800, then pay £200 to the scheme. The scheme will then arbitrate and determine the appropriate repayment of the remaining £200.
The dispute then proceeds in the same manner as that described for custodial deposits. The tenancy deposit protection provider will offer both parties their free ADR service. An adjudicator will assess the evidence and determine the appropriate repayment of the disputed sum.
Custodial vs Insured Schemes Comparison Table
| Custodial | Insured | |
| Deposit held by | Scheme provider | Landlord |
| Cost | Free | Small fee |
| Landlord/Agent must provide prescribed information | Yes | Yes |
| Can return agreed deposit without involved scheme | No | Yes |
| Must involve scheme with disputes | Yes | Yes |
| Free alternative dispute resolution | Yes | Yes |
| Dispute decision is final | Yes | Yes |
A Note about Prescribed Information
In both kinds of scheme, the landlord/agent must supply the tenants with legally prescribed information about their deposit and how it is being protected. You get access to the information pack, and instructions on how to serve it to your tenants, when you register your deposit.
You will have 30 days from when the tenants pay the deposit to register it and provide them with the prescribed information. Both parties must sign the information and you should keep a copy.
In OpenRent’s Rent Now tenancy creation service, we do all of this for you, making sure you set up your tenancy on a sound legal footing!
Which Deposit Scheme Does OpenRent Use in Rent Now?
In Rent Now we protect your deposit in the mydeposits custodial scheme well within the 30-day time period. We send the tenants the prescribed information for them to sign, helping the tenancy start off on a sound legal footing.
Why a Tenancy Deposit Must Be Five Weeks’ Rent or Less
The Tenant Fees Act 2019 has capped tenancy deposits at a 5 weeks’ rent maximum. Any deposit payments made over 5 weeks’ rent while setting up a new tenancy will be considered ‘prohibited payments’, which can incur a large punative fine for the landlord.
Click here for a full guide to the Tenant Fees Act.
If you are renewing a tenancy that has a deposit over five weeks’ rent, then the landlord will need to refund the deposit amount over five weeks’ rent. E.g. if the weekly rent is £100, and the deposit was £700, then the landlord would need to refund £200 before renewing the tenancy to ensure the deposit does not exceed five weeks’ rent.
Landlords can learn how to make a partial deposit refund here.
Government-Approved Deposit Protection Schemes in the UK
There are three different government-approved providers for each area of the UK.
England & Wales
Scotland
Northern Ireland
What Counts as Evidence in a Tenancy Deposit Dispute?
Landlords can require deductions for a range of reasons, so a range of evidence can be accepted by ADR process. Some common forms of evidence accepted include: the terms of the contract, bank statements, utility & council tax bills, inventory reports, photographs/videos of the property, email correspondences, cleaning charges, witness statements.
Why You Need to Perform an Inventory
An inventory is when you assess the condition and contents of the property at the start and end of a tenancy, and make a record accompanied by photos. It is usually agreed upon and signed by both the landlord and the tenant at the start of the tenancy.
The inventory is the landlord’s key piece of evidence in subtracting deductions from a tenant’s deposit. Without it, it is very hard to prove that any damage was caused by the tenant during their tenancy, or that any items that were present at the start of the tenancy have gone missing.
Start the discussion at community.openrent.co.uk