Matthew Pennycook has confirmed that the government wants to remove insured tenancy deposit schemes, a move that would stop landlords and letting agents from holding tenants’ money in their own accounts and push all deposits into custodial protection instead.
The shift was set out after written parliamentary answers on the evidence behind the reform. Pennycook said ministers believe tenant deposits are safer when held by a neutral third party and argued the insured model creates a power imbalance because landlords or agents keep control of the money until a dispute arises.
For landlords, the change matters now because it would remove a long-standing cashflow option and force changes to deposit handling, administration and possession paperwork. It also lands just days after ministers said the next deposit scheme retender must prove value for landlords as well as tenants.
Why ministers want a custodial-only model
At present, landlords can either lodge a deposit in a custodial scheme or use an insured model that lets them retain the funds while paying to protect them. Pennycook told MPs that custodial protection gives tenants more confidence to challenge deductions and use dispute resolution, while the insured route carries a higher fraud risk where insurance or client money protection arrangements fail.
This follows Residential Landlord’s recent coverage of the government’s value test for the 2028 deposit scheme retender, which signalled that ministers were already looking more closely at how protection schemes work in practice. The latest comments go further by pointing to structural change rather than a simple retender debate.
Landlords will still be asking what happens to existing insured deposits if the change goes ahead. A forced transfer of live deposits into custodial schemes would create an admin exercise across portfolios and could expose weaker letting agency processes very quickly.
Deposit disputes and possession compliance stay in focus
The political case for reform is tied to tenant confidence, but the landlord risk is procedural. If insured schemes are removed, owners and agents will need tighter systems for registering deposits, serving prescribed information and keeping audit trails in place. Those rules already matter because deposit errors can trigger financial penalties and restrict possession routes.
Residential Landlord has also reported on deposit dispute trends, with cleaning deductions still a major friction point. A custodial-only model may encourage more tenants to contest deductions if they know the money is already outside a landlord’s control.
External reporting of the parliamentary answers said Pennycook argued the insured route leaves tenants exposed where fraud or insurance failures delay reimbursement. PropertyWire’s report on the minister’s comments summarised the case being made for abolition.
Matthew Pennycook, housing minister, said the proposed removal of insured schemes is intended to ensure tenant deposits are “as safe as possible” and to reduce the power imbalance created when landlords or agents hold the money.
The unanswered question is whether the government will balance tenant protection against the extra operational burden on compliant landlords. A simpler system on paper can still produce messy transitions in the real world if ministers move too quickly.
Opinion
There is a fair case for tighter protection where deposit money is concerned, but abolishing insured schemes would remove flexibility that many compliant landlords use without problems. If ministers want a custodial-only model, they will need a credible transition plan rather than another reform that dumps cost and admin on the private rented sector.
