Concerns have been mounting among consumer groups over the rise of alternative deposit schemes, which offer tenants the chance to reduce the upfront costs of starting a new rental contract.

Citizens Advice is the latest to question whether renters fully understand the risks of some of the new “deposit replacement” or “no deposit” models when compared to traditional government-backed tenancy deposit schemes.

The charity’s warnings follow similar concerns raised by campaign group Generation Rent.

There are a wide array of alternative deposit schemes in the market, each of which have slightly different business models and therefore the costs and protections for tenants vary.

Some have been actively marketed to lettings agents as a way to boost their earnings following the Tenant Fees Act which banned many of the administrative charges firms previously relied on for their income.

In a blog post, Citizens Advice housing expert Amy Hughes says: “We have seen a number of cases recently of tenants being offered the option of paying a monthly fee in addition to their rent as an alternative to paying a lump sum deposit at the beginning of their tenancy.”

She says the schemes are marketed to tenants as a way of reducing the high upfront costs of renting.

Instead of having to put down a deposit of up to six weeks rent, tenants typically only need to put down the equivalent of around a week’s rent either as a one-off fee, an annual fee or alternatively they might pay an ongoing monthly fee.

Hughes says: “While such schemes appear to operate as ‘insurance policies’ which can be relied on in the event that any money (usually unpaid rent or repairs for damage to the property) becomes due from the tenant, they in fact benefit only the landlord (typically allowing the landlord to claim 6–12 weeks worth of rent from the scheme) in such circumstances. 

“They offer no protection against liabilities or losses to the tenant — and so cannot for example be offset against any damage to the property which the landlord claims the tenant has caused. 

“A landlord can make a claim from the deposit replacement scheme for any unpaid rent or damage, but the agent operating the scheme will then pursue the tenant for reimbursement of that sum with no account taken of the payments made by the tenant under the scheme, which are retained in full by the agent.

“If no money becomes due from the tenant, then the fees are simply retained by the agent as profit, with no refund available to the tenant as in the case of a traditional deposit.”

She also notes that some schemes charge a fee for the arbitration service where there is a dispute over a deposit, whereas with the government-backed schemes there is no charge for dispute resolution.

The Property Ombudsman is also keeping a close eye on the situation.

Property ombudsman Katrine Sporle says: “We are concerned that consumers are being mis-sold ‘too good to be true’ deposit replacement schemes and, as a potential area for consumer detriment, we have raised the topic at both our Industry and Consumer Forums.

“To date, we have received nine enquiries relating to the subject of ‘zero-deposit schemes’ and one which has progressed to formal review. “We know from Generation Rent that they are advising consumers to contact TPO direct where they feel that the product was not explained to them sufficiently.  

“Enquiries relating to this subject tend to be from tenants who believe they have bought an insurance policy that will cover any damage.  

“What they do not realise is that, although the landlord makes the claim, the policy pursues the tenant for the cost.”

Sporle adds that it is important that consumers check that they fully understand the schemes before using them.

But she says: “If proposing a deposit replacement product (e.g. such as insurance) in place of a traditional deposit, under the TPO’s code of practice, agents have an obligation to explain the potential advantages and disadvantages of the product in clear terms to the tenant and the landlord, and both party’s agreement must be sought before proceeding.”

Generation Rent policy and public affairs manager Caitlin Wilkinson says: “Zero deposit schemes should be approached with extreme caution by renters.

“Whilst some schemes are above board and secure, renters have been bitten by expensive and non-refundable options often managed by estate agents looking to recoup their losses after the tenant fee ban.

“It might seem tempting to opt into a ‘zero deposit scheme’ if you are struggling with moving costs but once you’ve signed a contract you could be locked in to paying a high monthly fee which doesn’t cover you against any deposit claims when you move out.”

Residential Landlords Association policy director David Smith says: “Innovation in the market is always welcome to offer choice and the alternatives to a traditional deposit may meet the needs of some renters. 

“It is crucial though that letting agents ensure that tenants have fully understood the terms before anything is signed.”