Letting Agent Fee Consultation Response June 2017 <QUESTIONS FOR ALL> Question 1: Do you think that the transparency measures introduced in the Consumer Rights Act 2015 have helped drive up standards and improve competition? There appears to be little, if any, empirical evidence to support or refute the suggestion that the measures contained in the 2015 Act have helped to drive up standards. Upon the announcement of the transparency requirements DCLG committed, the government will review the requirements for greater transparency after 12 months of operation to confirm it is delivering the expected benefits, and review whether any further steps are needed. Then Housing Minister, Kris Hopkins, went on to support the transparency agenda stating, Shortterm gimmicks like trying to ban any fee to tenants means higher rents by the back door. Excessive state regulation and waging war on the private rented sector would also destroy investment in new housing, push up prices and make it far harder for people to find a flat or house to rent 1. The NLA would like the Government to pause its current programme to review the efficacy of existing requirements, before deciding on further intervention. Only following a thorough review of the 2015 measures will the next government be in a position to propose legislation appropriate to the needs of consumers and businesses in the PRS. This would also allow a more co-ordinated approach to the regulation of the letting agency sector, taking into account previous commitments to mandate the insurance of client money. Question 2: Do you agree that the ban on letting fees should also include a ban on letting fees charged to tenants by landlords and third parties? 1 Department for Communities and Local Government, https://www.gov.uk/government/news/feestransparency-to-ensure-a-fair-deal-for-landlords-and-tenants, 13 May 2014. 1
The NLA does not believe that a blanket ban is an appropriate way to tackle the perceived issues connected to the financial barriers of accessing private rented property. As a consequence, we would not support the complete ban of charges to prospective tenants by landlords and third parties. The NLA believes that, while landlords should be responsible for the majority of the costs of administration and establishing a tenancy, there are a small number of limited costs that tenants should be able to share. These are largely limited to fees associated with the verification of an applicant s identify and suitability for a property, based on the information that they supply. This serves the dual purpose of safeguarding the veracity of any personal information provided and preventing poor practice in relation to falsely or speculatively securing properties without a reasonable likelihood of wishing to take forward a tenancy. These fees should be clearly and transparently communicated and should not be excessive. At present, the minority of landlords, who operate such charges, do so on a cost-recovery basis. This argument extends to those fees charged by letting agents for similar gatekeeping services. Question 3: Do you agree that all letting fees, premiums and charges to tenants that meet the general definition of facilitating the granting, renewal or continuance of a tenancy should be banned with the exception of: - The rent; - A refundable deposit; - A holding deposit to take the property off the market whilst reference checks are undertaken; and - In-tenancy property management service charges that directly relate to an action or service carried out at the request of the tenant or as a result of the tenant s actions? If no, please list any fees, charges or premiums aside from those listed above that you think an agent, landlord or third party should be permitted to charge. The NLA does not believe that a blanket ban will achieve the benefits desired by this policy. They would favour a wholesale review of the regulation of letting agents with a view to introduce a broader, overarching regime of regulation, which would be based on existing industry best practice. Should a ban be introduced, we believe that, in addition to the listed exceptions, referencing fees should be excluded in line with our response to question 2. Question 4: Do you think that refundable deposits, payable at the outset of a tenancy, should be capped? If yes, please indicate the level of the cap. No. There is, already existing in law, a de-facto cap of one sixth the annual rent, if landlords wishes to avoid the potential sum being declared a premium. The NLA believes that this is sufficient to avoid abuse. Furthermore, we are not aware of any significant incidence of landlords employing excessive deposits (relative to rent levels), as it acts as a deterrent to attracting tenants. 2
Question 5: How can Government best support the sector to expand or develop new approaches to minimise the financial burden on a tenant at the outset of a tenancy? For example, enabling tenants to pay their deposit in instalments over the first few months of the tenancy or using a line of credit approach where an agreed deposit amount is blocked on a tenant s credit card. At present, it is not unheard of for landlords and tenants to negotiate the payment of deposits in instalments. However, it presents a genuine risk for landlords, which can be amplified by the requirement to protect such deposits. To comply with tenancy deposit protection legislation, deposits must be protected within 14 days of receipt. Were a landlord to accept instalments, this would require protection following receipt of the first instalment. This would mean that, depending on the scheme chosen, the landlord may need to register and protect funds which have not yet been received. Irrespective of the circumstances surrounding the protection of deposits, landlords need to be comfortable with the risk posed by allowing new tenants to occupy a property without paying the (full) agreed security deposit. In light of these difficulties, the NLA supports homelessness charity s, called Crisis, call for the government to establish and underwrite a national rent deposit guarantee to improve access to the PRS for those in the greatest need. Proposals to freeze a line of credit in lieu of a traditional deposit, whilst appearing laudable, are likely to present difficulties given the length of time such credit would need to remain viable. Other transactions, which rely on such a model, for example, car hire, tend to operate on a short-term basis where the seller can be relatively confident that their risk is adequately covered. Question 6: Do you think holding deposits, to ensure that a property is taken off the market, should be capped? If yes, please indicate the level of the cap. The NLA is not aware of any evidence of excessive holding deposits, which could justify such an intervention. As such, this deposit must be returned or redeemed against move-in costs. Thus, it is not clear what purpose capping the required sum would serve. Question 7: Agents may occasionally provide bespoke, non-standard services to tenants at the top end of the market, for example, when arranging a property for someone currently living aboard who is relocating to the UK. Do you think there are premium parts of the market where a different approach to handling letting fees may be warranted? Yes. Notwithstanding the NLA s objection to the blanket ban, there are niche services provided by an agent in some circumstances, which do not represent any detriment to the market or consumer protection. In particular, premium sourcing, or home-find services, relocation services and corporate letting services could be severely limited by inclusion in a fee ban. Question 8: What do you think will be the main impacts of the ban on letting fees paid by tenants? Please include any unintended consequences that you believe may arise. 3
The most highly visible impact of such a ban is likely to be an increase in headline rents as agents recover 100 per cent of their costs and achievable margins from landlords, who, in turn, increase rents to recoup as much of the marginal cost as possible. The NLA estimates that it is unlikely that landlords will be able to recover all their increased expenses, given the fiscal backdrop and increase in running costs that landlords are to face as a result over the coming years. As a result, we forecast that landlords margins will reduce, driving changes to portfolio structure and the risk profile of tenants that they are willing to accept. This is likely to manifest itself in the landlords who currently accept tenants on the fringe of affordability being forced to change tack. This may result in a focus on mid-to-upper market rents and areas where yields are stronger at the expense of markets and there is a high reliance on state assistance (Local Housing Allowance and Universal Credit). In addition, it is likely that agents will find landlords resistant to significant fee or commission hikes, meaning that they are compelled to absorb some of the increased business costs. As it is estimated that approximately one fifth of letting agent revenue is generated by tenant fee income 2, it is likely that any erosion, if not compensated for by a change of service or efficiency savings, will have significant consequences. In overall financial terms, it has been estimated that typical rents could increase by between 103 and 275 to recover a proportion of the increased costs, with landlords losing an aggregated 300 million in non-recoupable expenses 3. Aside from the direct financial impacts, it is anticipated that a fee ban would remove a practical barrier to poor and potentially fraudulent practices on the part of applicants. The NLA is concerned that the ban could remove a barrier to prospective tenants: (a) Reserving multiple properties on the basis that they will negotiate and decide later, wasting time and money on the part of landlords and letting agents who will both suspend marketing and carry out referencing in ignorance. (b) Providing incomplete or false information concerning identity, credit history or references on the basis that they have nothing to lose. Again, this would increase landlord and agents costs. Question 9: Do you agree that the ban on letting fees should be enforced by Trading Standards? If not, how do you believe the ban should be enforced? Trading standards appears the most logical case, without any overarching regulator in the sector. However, without increased resources, it is far from clear how effective this would be. Question 10: Would you support greater data sharing on rogue agents and landlords across organisations in the letting sector? Yes. Provided proper data security, definitions and confidentiality were guaranteed. 2 Letting the Market Down, Capital Economics/ARLA, 2017 3 Ibid 4
Question 11: Would you support the introduction of a lead enforcement authority for letting agents to develop advice, standards and guidance and to share information? Please include reasons. Yes. Provided this was undertaken in a cost-effective manner, with the co-operation and agreement of stakeholders. Question 12: Do you think that the penalty for non-compliance with the ban on letting fees for tenants should be (please tick all that apply): a) a civil penalty of up to 5,000 in line with the penalty for non-compliance, with the requirement to belong to a Government-approved redress scheme or noncompliance with the transparency requirements of the Consumer Rights Act 2015; b) a civil penalty of up to 30,000 in line with the civil penalty for committing a banning order offence; c) a banning order offence under the Housing and Planning Act; or d) other (please list)? Penalties should be calculated in line with an offender s ability to pay, balancing the need to provide a proper deterrent. Question 13: Do you think further action is needed to regulate the letting and management agent sector in addition to the ban on letting fees paid by tenants? What additional action do you think should be taken to regulate the sector? The NLA believes that the various piecemeal interventions, which have been introduced over recent years and are proposed for the near future, should be replaced with a broad over-arching framework of regulation, which stays in line with the various licensing and best practice approaches in the marketplace. The Association believes every letting agent should be legally obliged to affiliate with a recognised licensing body, which requires: - An approved education/training programme - Client money and appropriate indemnity insurance - Independent redress - A comprehensive and binding code of practice covering business practice, which could include measures to ensure proper, fair charging. This could be implemented relatively simply by using the existing bodies in the lettings market, such as UKALA, ARLA, NALS and RICS. <QUESTIONS FOR LANDLORDS> Question 18: Do you consider letting agent fees charged to landlords to be clearly and transparently displayed? 5
The transparency and clarity of display varies between service providers. This would benefit from a thorough review in terms of compliance and enforcement, before further steps are taken. Question 19: What fees does your agent (if you use one) charge you for letting or management services, in addition to commission charged? As a representative body, the NLA has canvassed its membership for typical figures. Landlords who use an agent typically pay for those services via commission, which is based on between 10 and 15 per cent of the annual rent (depending on the service level agreement). According to a survey of NLA members, the most common additional charges (over and above the headline commission) and typical amounts charged to landlords are: Inventory: 103 Tenancy agreement (provision and set-up): 202 Check-in: 142 Referencing: 97 Credit checks: 81 Check-out: 87 Protection insurance: 131 Guarantor agreements: 48 Other: 350 Question 20: Do you know how much your agent (if you use one) charges to your tenants in letting fees? In response to survey questions, 75 per cent of NLA members, who use an agent are aware that fees are charged. Only 10 per cent were confident that no fees were charged and 15 per cent were unsure. Question 21: If you are a self-managing landlord, what letting fees do you charge to your tenants? Where possible, please give a breakdown of the fees charged. It is relatively uncommon for landlords to charge significant fees. Taking your specific point about charges that self-managing landlords may levy on applicants/tenants, there is little empirical evidence of the practice. The move in money required by the majority of landlords will consist of the first month s rent and a deposit of no more than 2 months rent (typically between 4-6 weeks). If additional charges are made, they tend to fall into the following categories: Tenancy deposit fee dependent on the scheme used. Reference fees usually the cost of a credit check. 6
Inventory fees if charged, the cost of a professional inventory is usually split. Guarantor arrangement/application fees usually the cost of additional referencing of a guarantor. Pets disclaimer fees/additional pet deposit usually linked to the cost of additional cleaning post-pet. Most of which are to cover the cost of a specified (and usually outsourced) service. Of these, I would suggest the most common is the vetting/referencing fee, which is a relatively small fee. For example, landlords using NLA s credit checking service would pay between 8.95 (for a basic credit check) and 24.50 (for a full referencing report) per tenant. Depending on the property, I would suggest an inventory/check-in report should cost in the region of 100-150 for a typical house obviously less or more depending on size, complexity etc. Question 22: Would increasing letting agent fees affect your decision to use an agent in the future? Please include reasons. For the majority of landlords, this will depend on a number of factors and the practicality of selfmanagement. However, we expect that the combination of this ban and the implementation of recent tax changes will drive significant numbers of landlords towards self-management on costsaving grounds. 7