Incredibly, it is estimated that 40 per cent of all letting agents are totally unregulated, leaving landlords and tenants with little protection and fewer avenues for redress in the event of a dispute (see 'IC Investigates' in part 3 for one case where landlords have lost thousands of pounds). The other 60 per cent are regulated either by Arla, The Royal Institution of Chartered Surveyors (Rics), the National Approved Lettings Scheme (Nals), or the Property Ombudsman. Most of these schemes insist on firms taking out client money protection insurance, which means landlords and tenants have a greater chance of recovering funds if the business goes bust – a growing problem in the cutthroat lettings agency business (see A Letting Agent's Story, in part 3).
Last week, the government's Property Ombudsman, Christopher Hamer, called for Grant Shapps to reconsider the compulsory regulation of letting agents. So far this year, the watchdog tells Investors Chronicle, he has received over 5,000 calls from aggrieved landlords and tenants relating to letting agency disputes, amounting to nearly two-thirds of all calls received by his office. However, he has been powerless to act on a quarter of lettings complaints, as they concern unregulated agents not covered by the Ombudsman's redress scheme. In the third quarter of 2010, complaints about letting agents surged by 27 per cent.
"We think that 40 per cent of all letting agents are totally unregulated and not members of any form of redress scheme," Mr Hamer says. "It's that 40 per cent who are causing most of the problems. Anyone can set up as a letting agent."
The rise in complaints can partly be put down to declining rates of home ownership, leaving renting as the only option for buyers who are priced out of the housing market. The nature of lettings contracts mean large amounts of money are demanded by the agent up front – typically a month's rent for the deposit, and a month's rent in advance. For a modest flat in London, this can easily run into several thousand pounds.
Mr Shapps believes consumers will "vote with their feet" and choose letting agents that have opted to be regulated. "The new government believes that blanket regulation is not a solution," says a spokesman from the Department of Communities and Local Government, adding that this would bring "too much additional red tape". "We are exploring with industry partners how best to counter poor practice by unscrupulous agents without additional regulation, which would harm tenants" interests, by pushing up rents and restricting the availability of housing available to rent."
As our research sadly proves, many landlords and tenants are unaware of the dangers of dealing with an unregulated agent until it is too late. But it won't solve all the industry's problems – even complaints about regulated agents are on the rise.
Rising fraud
"Fraud complaints have gone up in the last 12 months," reveals Ian Potter, operations director of Arla, which boasts 3,500 letting agency members who draw up three-quarters of a million residential tenancies a year. "It's not a huge number of cases, but it's more than it's ever previously been," he says, adding numbers are into "double digits".
"In some cases, client money has been used to pay staff salaries, VAT bills or company bills. In other cases, you can't see what it's been used for." He admits the economic climate may account for the rise in malpractice. "In some cases, agents are desperate to keep their business going and naively don't expect the current situation to last. They expect to be able to repay the funds. But these are client funds and are not to be intermitted in any way."
Arla members are covered by a client money protection insurance scheme, so landlord victims stand a good chance of being compensated. The regulator is currently considering several civil actions against fraudsters. "To be viable, we have to be sure there are assets somewhere to chase," Mr Potter says.
Cases of landlords losing money rarely make it into the papers, but a spate of so-called "let and run" scams have grabbed the headlines recently. In October, the National Fraud Intelligence Bureau issued a rental fraud alert after 95 would-be tenants were tricked into paying upfront fees to rent properties that never existed, or were let to other people. Bogus letting agents in London, the Midlands and the north-east have conned victims out of over £100,000, with many using internet property portals to pick up their victims.
The Ombudsman also agrees that fraud is on the increase. "We do come across cases where agents have collected rents from tenants, and not passed it on to landlords," Mr Hamer says. "To my mind, that's theft or fraud. All I can do is make an award in favour of the landlord, and hope that the firm will pay. If it didn't, my frontline for enforcement is Trading Standards."
Good money after bad
Despite the proliferation of fraud in the rental sector, bringing the culprits to book remains a challenge. Readers who have contacted Trading Standards and the police in relation to letting agency fraud have received a largely negative response, with several being told that Trading Standards don't deal with letting agent complaints.
The Trading Standards press office assures Investors Chronicle that they do – but disputes over misplaced deposits are excluded. "The legal provision covering deposit protection schemes comes under housing legislation, and not consumer protection legislation, and is therefore not a Trading Standards matter," says a spokeswoman.
Their internal bureaucracy does not help. If landlords phone Trading Standards to report a complaint, the first thing they’ll be asked for is their postcode. Even if the fraud concerns a letting agent in Humberside, if you live in Tunbridge Wells, the incident has to be reported there first, then passed along. "If one agent has ripped off 50 landlords, and they live all over the place, this becomes a very bureaucratic exercise for Trading Standards," says Mr Hamer.
However complex getting a fraud conviction may be, there have been several recent examples of cases against letting agents reaching the court room.
Last week, Brandon Weston, a former director of the Premier Places letting agency, admitted four counts of fraud at Worcester Crown Court relating to the misuse of client funds. The incidents occurred between 2007 and 2009, prior to the sale of the business to the firm's accountants. Mr Weston is said to have made a gain for himself by making false representations to the National Approved Lettings Scheme and the Dispute Resolution Service. He denied a further two counts of defrauding the Dispute Service of client's deposits. The case continues.
In September, letting agent David Sole admitted stealing more than £143,000 in cash from clients of the Norwich branch of Belvoir Letting Agents, which he operated as a franchisee. Belvoir head office closed the branch in December last year when the matter first came to light, and sentencing has been adjourned until later this month.
"Rising numbers of prosecutions are an education for the police and Trading Standards," says Isobel Thomson, operations director of the National Approved Lettings Scheme (NALS), which has 1,400 members. "Previously, they treated cases like this as a firm going down. Now, they recognise that it's fraud and are willing to take on prosecutions."
Raising awareness is part of the solution, but Ms Thomson warns that landlords also need to wise up. "A lot of fraud is perpetuated by a lack of knowledge on the landlord's part of knowing what to ask agents," she argues. "Agents seem to have a hypnotic effect on landlords. But in what other area of life would you hand over an asset worth hundreds of thousands of pounds without asking questions?"
Although regulation is off the government's agenda, Nals is campaigning for membership of client money protection schemes to be made law for all letting agents as a minimum. "Firms who don't come under any form of regulation often view clients' money as an overdraft facility," she says. "Landlords seem to accept it when agents say they've got a cashflow problem. But the rent money is theirs! I often hear comments like, 'He seemed such a nice chap, I didn't mind that the rent was late.’ Then one month, it won't turn up at all, and they find the deposit's gone missing. It's not their money. This is fraud."
Protect deposits
Landlords should also note that rental deposit legislation is aimed at protecting the tenant. In April 2007, it became law for all tenant deposits to be registered with a government-approved deposit protection scheme.
Many landlords will entrust their letting agent to do this on their behalf. But what if they don’t register the deposit? "If the deposit is not protected, it's the landlord who will get clobbered," warns Malcolm Harrison, spokesman of the Tenancy Deposit Scheme (TDS), one of three government-approved schemes. "Even if the agent fails to register the deposit, the landlord is legally liable." To make matters worse, if the landlord does not obtain a deposit protection certificate within 14 days of the tenancy being signed, the tenant is entitled to compensation of three times the value of the deposit.
It may be tempting to cut costs by using an unregulated agent offering cheaper services. But cutting costs often means cutting corners, and in the world of residential property investment, these are pretty big corners to cut.
