Tenancy deposit reforms proposed as government plans move to custodial-only protection scheme

Landlords could soon be required to place all tenancy deposits into an independent custodial protection scheme under government proposals aimed at strengthening tenant protections across the private rented sector.

Currently, deposits in England and Wales can be protected through either a custodial scheme, where the money is held by an approved third-party provider, or an insured scheme, which allows landlords or letting agents to retain the funds themselves while paying a fee to protect the deposit.

However, the government is considering the removal of insured schemes, meaning landlords would no longer be permitted to hold tenant deposits in their own bank accounts. Instead, deposits would be transferred to an approved custodial provider for the duration of the tenancy.

The proposed changes form part of the wider programme of rental reform following the introduction of the Renters’ Rights Act and are intended to increase transparency and provide greater protection for tenants’ money.

According to the government, a custodial-only model offers stronger safeguards because deposits are held by an independent third party rather than by landlords or agents. Ministers also believe the approach could help reduce disputes and provide greater confidence for tenants when challenging deposit deductions at the end of a tenancy.

The move may also address concerns around fraud and improve oversight of how tenancy deposits are managed. In addition, policymakers are exploring ways to improve data collection and administration across the deposit protection system.

It is understood that the reforms could be introduced from April 2027, although full details have yet to be confirmed.

What could this mean for landlords?

For many landlords and letting agents, particularly those currently using insured deposit schemes, the changes would require adjustments to existing processes and cash management arrangements.

Key considerations may include:

• Reviewing current tenancy deposit protection arrangements.
• Ensuring administrative procedures can accommodate a custodial-only system.
• Understanding any changes to timescales for deposit registration and repayment.
• Monitoring further government announcements regarding implementation and compliance requirements.

The government is also examining wider reforms to tenancy deposits, including the possibility of “deposit passporting”, which would allow tenants to transfer deposit funds between tenancies more easily, reducing the need to provide multiple deposits when moving home.

Preparing for change

While the proposals are still being developed, they signal a continuing trend towards increased regulation and oversight within the private rented sector. Together with the Renters’ Rights Act, the reforms demonstrate the government’s focus on strengthening tenant protections and improving transparency in the rental market.

Landlords should keep developments under review and seek advice where necessary to ensure they are prepared for any future changes to tenancy deposit requirements.

If you have any questions about tenancy deposit reforms please get in touch with Tom Young by using the details below.