1. 1 ST Market Engagement Session 3 rd October 2014 RE-PROCUREMENT OF CUSTODIAL TENANT DEPOSIT PROTECTION SCHEME Presentation by Ruth Hayes

2. 2 Introduction Purpose of meeting: Understand market views on potential options for re-procurement of the tenancy deposit custodial scheme Provisional timeline for re-procurement: November 2014 – Decision on proposed approach November 2014 – 2 nd market engagement session January 2015 – Open tender process March 2015 – Tender process closes April 2015 – evaluation of bids starts Summer 2015 – announce winner(s) April 2016 – new contract in force Intention is to discuss the tender process in detail at the November session.

3. 3 Key Considerations Objectives: o Value for money and o Appropriate level of risk For example: o Whether deposits, or the interest generated, can be used for other purposes beyond funding the running costs of the scheme; o we create competition and avoid creating a “too big to fail” situation; o there is potential to do something quite different e.g savings account for tenants. We have developed five potential options for the custodial scheme. No final decisions have been taken and the final approach selected may be an option not considered among the five options Tenancy deposit schemes data - new contract may include provisions about sharing data with both central and local government.

4. 4 Option 1: Engaging one contractor with the existing end users transferred to the winning tenderer This approach would mirror the existing arrangement. It maximises the interest earned from investment of the deposit. It has the potential to create good economies of scale or minimise duplications. Maximise the opportunity to pay some of the interest back to tenants. It can also reduce the opportunity for competition Increases the impact if there is failure.

5. Option 1 Questions Questions: 1.What are the advantages and disadvantages of this option? 2.How long should the new contract be for? 3.How should we minimise the risk of failure? 4.What investments should we allow / restrict? 5

6. 6 Option 2: A limited number of contractors with existing end users remaining with the incumbent (if a successful tenderer). Incumbent to retain existing deposit pool, if successful. (Existing deposits be shared out equally between the successful bidders, if the incumbent unsuccessful.) This option could be attractive to providers who currently operate ADR or companies already operating deposit protection. Retaining the existing large deposit pool still offers the opportunity to pass some of the interest earned to tenants, but it also retains the risk of a single point of failure. Additional providers will introduce choice for landlords and competition between providers. New entrants may struggle to compete if successful incumbent is allowed to keep its existing market share.

7. Option 2 Questions Questions: 1.What are the advantages and disadvantages of this option? 2.How long should the new contracts be for? 3.Do you have a view on the maximum number of custodial scheme operators there should be and if so why? 4.Should there be constraints to ensure that any scheme is not too big to fail, if so, what kind of constrains would be appropriate (cap on financial value of deposits)? 5.What investments should we allow / restrict? 7

8. 8 Option 3: A limited number of contractors with existing end users shared amongst all the winning tenderers Sharing out the existing pool of deposits amongst all the successful tenderers creates a fairer market and makes its easier for new entrants. It reduces the impact if there is a failure. It reduces the likely amount of interest that could be paid back to tenants. Has the potential to create uncertainty and concern amongst existing users who may not want their deposit to be passed to a different provider (although if the incumbent were unsuccessful, this would happen).

9. 9 Option 3 contd: options for dividing existing pot Divide the existing deposits into a number of pools at a cut off point date, for example the 1 st November 2014. These could be roughly equal or of varied size to provide opportunity for smaller companies. Ensure that landlords and agents who have a single account with multiple deposits, are treated as a single account. Provide full details of the deposits within the pools with the bid details. Enable tenderers to bid for one or more of the pools. All new deposits after the cut off date would go into a new pot which was not bid for. If the incumbent was successful they would keep the new pot. If unsuccessful they would be spread equally between the successful tenderers. Other approaches could include pools structured by location, total value of deposits per landlord, total number of deposits per landlord, scale/ nature of landlord (e.g. national commercial landlords separate from landlords owning small numbers of properties).

10. Option 3 Questions Questions: 1.What are the advantages and disadvantages of this option? 2.How long should the new contracts be for? 3.Do you have a view on the maximum number of custodial scheme operators there should be and if so why? 4.Which approach do you favour for splitting the pool and why? 5.Should we aim for different sized pools? 6.Should there be constraints to ensure that any scheme is not too big to fail, if so, what kind of constrains would be appropriate (cap on financial value of deposits)? 7.What investments should we allow / restrict? 10

11. 11 Option 4: A limited or single number of contractors who are paid a flat fee for providing the service and Alternative Dispute Resolution (ADR) DCLG to take the interest generated from investment of the deposits Potential delivery partners will be in charge of day to day management of the service including putting in place a robust IT infrastructure, data storage and ADR service. DCLG will use profits generated through interest to pay flat fees ensuring value for money and monitoring risk. Variants of this option include DCLG investing the money itself or using the same or different delivery partner to invest the money on DCLG’s behalf with perhaps payment being a percentage of the interest generated.

12. Option 4 Questions Questions: 1.What are the advantages and disadvantages of this option? 2.How long should the new contract be for? 3.Is being paid a flat fee for providing the service an attractive option? 4.Should we split the roles of providing the service and investing the money or procure for a partner to do both? 12

13. 13 Option 5: A flat fee paid to a single provider to provide service, ADR, and savings account. Interest generated from the investment of the deposits will be used to pay the delivery partner as in Option 4. Tenants will be actively encouraged to save (up to, for example an ISA style limit). Additional interest will then be paid back to tenants. On average, the service may provide a greater return than a normal savings account.

14. Option 5 Questions Questions: 1.What are the advantages and disadvantages of this option? 2.How long should the new contract be for? 3.What is your view about going beyond the TDP legislation by allowing additional saving? 4.How difficult would it be to separate deposits from savings? 14

15. 15 Additional Questions for discussion Which is the most attractive option and why? Are there any options or variants on options which are not listed above which you think we should consider? If Government decided to phase out the insurance based schemes when their contract comes to an end in 2018 would this change your views about the different options? Are there any advantages or disadvantages of having custodial-only schemes in the future? Subject to the usual data protection issues, should we share data on rent levels, addresses of landlords and location of rented properties with local authorities? Should DCLG limit the types of investment that providers can use for the deposits and if so how? If the deposit pools are smaller, should DCLG allow providers to take greater risks with the investment in order to generate potentially greater returns?