Client Money Protection for Property Agents (Approval and Designation of Schemes) (Amendment) Regulations 2020

Now that mandatory client money protection has been in place for several months, there is some evidence of UK banks being reluctant to offer pooled client accounts to agents. This issue requires attention because one of the requirements of the client money protection regulations is that letting agents must hold their client money in a client account. For the majority of letting agents, the only workable model is to hold this money in a pooled client account, thus avoiding the need for thousands of individual client accounts. However, this presents money laundering risks because funds from multiple different sources can be co-mingled and move rapidly through the account, presenting challenges in identifying the true owners of the funds in the account. To address these risks, anti-money laundering regulations place specific requirements on non-regulated firms, which includes the large majority of letting agents. These requirements include that banks should conduct due diligence on the customer holding the pooled account, the lettings agent and the customer’s clients.

This enhanced consumer due diligence has made it difficult for some letting agents to obtain a pooled client account. We are aware that certain banks are reluctant to offer them, driven by a concern to ensure compliance with money laundering regulations as well as commercial factors. We continue to monitor on a quarterly basis the number of agents on whom this has an impact. I am happy to report that the number of agents reporting such difficulties to the client money protection schemes remains low. In the last quarter for which we have data, October to December 2019, 251 letting agents reported difficulties in obtaining a client account. This amounts to around 2.5% of agents who belong to a client money protection scheme.

Forthcoming guidance for banks from the Joint Money Laundering Steering Group on their obligations under the money laundering regulations will help address the need for proportionality when assessing the risk associated with non-regulated firms such as letting agents. We had expected final guidance to be published before the end of the grace period, but, due to its unexpected complexity, a draft of the consultation is not now expected till spring this year.

We have considered the case for ending or extending the grace period in consultation with the client money protection schemes. We have concluded that there is a strong case for offering a further 12-month extension. This will guard against the risk that some agents will be unable to comply with the regulations through no fault of their own, with attendant sanctions of up to £30,000 for non-compliance. This further extension allows the time needed for Joint Money Laundering Steering Group guidance to be published and to inform commercial decisions made by banks. We will also encourage the client money protection schemes to encourage those agents who report that they are struggling to secure a client money account to make exhaustive efforts to do so. The fact remains that most agents hold such accounts with banks. Agents must not assume that the grace period will be extended again beyond April 2021.

Mandatory client money protection is an important part of the Government’s suite of existing and proposed policies to drive up standards in the private rented sector and give landlords and tenants the confidence they need when using an agent. I beg to move.

We pass the law here, but the banks are thwarting that law in how they are allowing these accounts to be set up. I have the figure of 251 agents saying that they are struggling to set up pooled clients’ accounts. In a sense, it is a great achievement that only 251 or 253, whichever the figure is, are doing this—it is a great improvement in providing security for people’s money that is left with letting agents—but it means that 250-odd people want to do this but cannot seem to because of the banks’ attitude.

As a chartered accountant, I used to audit solicitors’ accounts. They always had to have clients’ accounts. They had a pooled clients’ account and, within their ledgers, you separated out that account. There is no need for a separate client’s account for each landlord or letting agent. It is possible to do that within the ledgers. I remember one solicitor who, sadly, I had to report to the Law Society and who was struck off, because he did not operate the system properly, but it exists—you can tie it down in solicitors’ accounts. If they can do it, I do not see why banks are not being more helpful in this instance.

We need from the Minster not only this extra year, which I regret has had to happen—we have the extra year for the reasons explained, which is to be fair to people who would otherwise lose their livings—but some effort to make the banks understand what is necessary. The banks have to be assured that their worries about money laundering can be covered. The Government need to speak to the banks about why they are not co-operating in something that is a great benefit to the housing industry.