Draft Housing (Tenancy Deposit Schemes) Order 2026
(2 days, 3 hours ago)
General CommitteesRead Full debate Read Hansard Text Read Debate Ministerial Extracts
The Committee divided: - Ayes: 11 / Noes: 4 - Question accordingly agreed to.
The Minister for Housing and Planning (Matthew Pennycook)
I beg to move,
That the Committee has considered the draft Housing (Tenancy Deposit Schemes) Order 2026.
It is a pleasure to serve with you in the Chair, Sir Desmond. The draft order was laid before the House on 8 September 2026. This Government promised in our manifesto to transform the experience of private renting. In addition to the greater security, rights and protections that we have given private tenants through our transformative Renters’ Rights Act 2025, improving how tenancy deposit schemes work is a way that we can further deliver on that promise.
As things stand, when tenants provide a deposit as a security for any breach of tenancy terms, the landlord is required to protect it through a Government-approved tenancy deposit scheme. That means that renters can feel confident that their deposit is safe and secure, and that at the end of the tenancy, it is returned to the tenant and/or landlord in accordance with the appropriate outcome under the scheme. When tenants and landlords disagree over the amount due to each party, the schemes also offer free and independent dispute resolution.
Custodial tenancy deposit schemes are delivered via concessionary contracts, whereby administrators fund the service from interest earned on deposits, rather than receiving payment from Government. Custodial schemes hold more than £2.5 billion-worth of tenants’ money on which they accrue interest. The interest is retained by the scheme administrators as revenue, unless arrangements are in place for part of it to be paid to the tenant. As part of improving the tenancy deposit system, the Government want to unlock the value generated by the schemes and expand the ways in which it can benefit tenants in the private rented sector. Ultimately, that will mean better value for both tenants and the taxpayer.
The draft order will enable the Secretary of State for Housing, Communities and Local Government to receive part of the interest accrued on tenancy deposits protected under a custodial tenancy deposit scheme. Currently, the legislation allows interest to be retained by the scheme administrator, subject to scheme arrangements, providing for part of it to be paid to tenants and/or landlords. I want to be clear that the order does not remove those options. It adds flexibility by introducing a new power that may be used in combination with one or both of the existing options, for example where high interest rates mean that the interest generated by the scheme as a whole considerably exceeds the costs of running the scheme, after allowing reasonable returns to scheme administrators.
The draft order does not itself require any payment to be made to the Secretary of State, nor does it prescribe how such amounts must be determined. Those matters will be determined through future scheme arrangements established via procurement and contractual processes. What the measures do is to allow the Secretary of State to take account of market conditions, scheme performance, operating costs, value for money and the need to maintain an effective, free service for tenants and landlords, while avoiding disproportionately high profits being made by scheme administrators.
The draft statutory instrument is intended to provide flexibility for future arrangements with administrators of custodial schemes. The Secretary of State’s intention is that, if the new power is exercised, the Secretary of State would use any funds received towards programmes or activities that benefit tenants in the private rented sector. The Secretary of State will be transparent in publishing the amount received from the scheme, the programme or programmes funded, and any metrics demonstrating the value delivered. Any arrangement for interest to be paid directly to the Secretary of State will be subject to agreement from His Majesty’s Treasury.
Future arrangements will continue to allow scheme administrators to keep part of the accrued interest to cover the cost of the free service that they provide to tenants and landlords. That amount should be sufficient to enable the scheme to provide a safe and effective service that safeguards tenants’ deposits, to meet its key performance indicators and to make a reasonable profit if it is a private sector entity. Future arrangements may also provide for part of the accrued interest to be paid directly to tenants, where it is decided that that is appropriate. To conclude, the draft order will give the Government additional flexibility to determine how the interest accrued by custodial tenancy deposit schemes is distributed, so as to ensure a fit-for-purpose scheme that will ultimately benefit tenants in the private rented sector and the taxpayer.
Gareth Bacon (Orpington) (Con)
It is always a pleasure to serve under your chairmanship, Sir Desmond. I welcome the opportunity to sit opposite the Minister again, whom I have seen more often in the past few days than my own wife. I appreciate the remarks that he has made, and I welcome the opportunity on behalf of His Majesty’s Opposition to address this measure, but I must be frank: we do not like the draft order very much, because it appears to be little more than an act of state-sponsored thievery. In this Halloween season, lurking in the shadows is not a vampire or a monster, but the larcenous light fingers of Marsham Street.
The draft order seeks to give the Secretary of State the power to hive off a portion of the interest accrued on someone else’s money and pocket it on behalf of the Government. As a Conservative—as a believer in private property—I am astounded to find the Government pushing through yet another stealth tax just days after the Budget. I know I should not be—after all, it is not the first, and I doubt it will be the last stealth tax we see in this Parliament—but the brazen lack of respect for other people’s money beggars belief. That is why the Opposition will seek to divide the Committee and will vote against the draft order today.
As the Deposit Protection Service has stated, at present interest goes towards the effective running of the scheme, back to tenants or landlords, or in some cases to charity. In siphoning off funds to pay for the Ministry of Housing, Communities and Local Government’s litany of costly policies, the Government’s action raises a number of questions—some of which, to be fair, the Minister may have just answered. For example, will the draft order leave the deposit protection schemes financially exposed? What assessment has been made of the funding needed to keep these schemes running so that tenants and landlords are protected with certainty, along with the jobs that these companies provide?
The draft instrument has no clear purpose, outlines no formula and sets no clear cap. We are being asked to approve a power without knowing how much money the Government are seeking to take, nor what limit the Secretary of State will impose on herself in a scheme that lets the Government profit from other people’s money.
I also want to raise concerns about the relationship between this policy and the planned abolition of insured tenancy deposit schemes. Taken together, hiving off the interest on deposits for the Government’s benefit and moving all deposits into the custodial schemes will create a perverse incentive. If the Government take income from the same custodial deposits that they are forcing the whole market towards, how can they demonstrate that profiting from interest on other people’s money has played no part in their decision-making process?
That is a very serious concern and it deserves far greater parliamentary scrutiny than hon. Members have been afforded today. We believe that there is a convincing argument that these changes should be made not through a statutory instrument, but in primary legislation. We can make no amendments today, we have little time to probe the details and we are being asked to approve a new tax outside the place best suited constitutionally to scrutinise financial legislation. The draft order lets the Secretary of State, on behalf of the Government, take a share of the interest earned on tenants’ deposits. It does not say how much, it does not say what the money is for, and it sets no cap and no formula. The Government are asking the House for a blank cheque to draw down on other people’s money. That money does not belong to the Government.
By changing the system a week after a tax hike on landlords, the Government are creating another stealth tax. That comes on top of a new database fee and a rewritten tenancy system, in a sector in which landlords are already considering the viability of their portfolios. Every cost eventually lands on renters. The Opposition’s tests are simple. Is this a stealth tax? Yes, it is. Is it the Government’s money? No, it is not. Does it deliver for renters? Clearly not. For all those reasons, we will divide the Committee and vote against this instrument.
Sarah Edwards (Tamworth) (Lab)
It is an honour to serve under your chairship, Sir Desmond. This is one of those occasions when a piece of legislation seems rather niche, but is completely obvious once we examine its purpose. The private rental sector has been broken for decades. In Tamworth and around the whole country we have seen skyrocketing rents for poor-quality and substandard housing. Tenants have been living in houses or flats that feel neglected by their landlords, in areas that often say that they feel neglected by Westminster. Community spaces have vanished and been left neglected. Where people cannot own their own home, areas are left without strong advocacy for change.
The Government’s Renters’ Rights Act has overhauled the entire sector, restoring fairness between tenants and landlords by giving over 5,000 tenants in Tamworth alone, and over 11 million renters across the country, greater security, rights and protections. The new rules mean that renters no longer have to fear last-minute no-fault evictions. Future rules brought forward by the Act mean that rented homes will have to meet higher standards, especially when it comes to tackling damp and mould. Renters have certainty that they can stay for longer in safe, good-quality homes and are no longer locked into contracts and unable to move for years.
People with greater housing security can be further empowered to start building lives in the communities they live in. With that comes the need for serious investment in their local areas. The draft order means that the interest accruing on the estimated £5.5 billion already in the tenancy deposit schemes will not just go into the pockets of those administering that scheme, which is meant to be non-profit, but could instead be invested into local projects that align with what renters want to see in their areas. After all, that interest is generated from the tenants’ own money. It is only right that the renters and their communities can see the benefit. We estimate that the interest earned on a pot would be around £550 million. That is a lot of money that could help to restore libraries, reopen community centres, improve local facilities and create places where people want to live, not places where they have to live. Renters deserve more than just a secure roof over their heads. They deserve thriving communities, decent local facilities and a stake in the place they call home.
We can already see the trajectory that the Government are plotting with the Renters’ Rights Act, and we can already see the difference they are making to communities such as Glascote Heath and Stonydelph through their £20 million Pride in Place programme. I urge the Minister to consider this opportunity to boost funds that communities can spend.
Mr Andrew Snowden (Fylde) (Con)
The hon. Member highlighted the statistic that around £550 million will be potentially raised in interest. How much of that interest does she think would be appropriate to go into the investments that she has outlined, given that we do not have any numbers for what we are supposed to be approving? As the shadow Minister, my hon. Friend the Member for Orpington, said, this is in effect a blank cheque.
Sarah Edwards
The purpose here is to outline the possibility for its use. That is not to negate the fact that tenants can also still claim against the scheme if they need to, but there is money here that is not currently doing anything for our communities. We need to look at what is needed to administer the scheme and support the ebb and flow of what it does; what I am asking from the Minister is to define how we can use the rest of the money more creatively. I would like him to be creative with it, and would urge that those living in these communities who have bold ideas should be involved in that problem solving. It is quite a lot of money, and although it may be undefined, it has been underutilised to date, and it could offer a lot for communities. I therefore support the order. I hope that the money will be reinvested into communities’ big ideas and boost hope, play, knowledge, safety and joy.
Gideon Amos (Taunton and Wellington) (LD)
It is a pleasure to serve the Committee with you in the Chair, Sir Desmond, and to continue the almost daily tradition of meeting the Minister and the shadow Minister, the hon. Member for Orpington, in these Committee Rooms.
The Liberal Democrats support the principle of directing interest payments towards tenants and the schemes that they want to see for their communities. The 9,000 private tenants in Taunton and Wellington would very much like to see the proceeds of these profits being directed in that way, although we do not see any guarantee in the order that the funds will be ringfenced for the use of private tenants. Paragraph 5.6 of the draft explanatory memorandum says it is an “expectation” that
“The Secretary of State would use the funds received towards programmes or activities that benefit tenants in the private rented sector”.
Paragraph 5.8 says, as an example, that the Secretary of State could require funds to be
“used to fund a programme supporting vulnerable tenants.”
We would like to these funds to be ringfenced, so that they are used for the benefit of tenants and do not disappear into some Treasury coffer. At this stage, without that guarantee, we have difficulty supporting the order.
Matthew Pennycook
I thank the shadow Minister, the Liberal Democrat spokesman and my hon. Friend the Member for Tamworth for their contributions. I will clear up a few misconceptions on a couple of points, and then I will respond to the other discrete points that have been put to me.
First, it is worth pointing out that the Government have already improved the value that tenancy deposit schemes deliver for tenants and landlords. The current administrators of custodial schemes are already expected to pay part of the interests accrued, in addition to the original value of the deposits, to tenants. The allocation mechanism is different for each of the three current schemes, but requiring administrators to pay interest to tenants and landlords will continue to be an option for future arrangements.
As I tried to make clear in my opening speech, the order is not intended to enable Government to profit from tenants’ deposits. It enables future scheme arrangements to provide for part of the interests accrued on protected deposits to be paid to the Secretary of State. That additional flexibility, as I said, will be particularly relevant where high interest rates mean that scheme returns on the deposits held considerably exceed the administrators’ costs of providing the scheme and wider ancillary services. The shadow Minister, the hon. Member for Orpington, is perfectly at liberty to take issue with the principle of that and to take the view that administrators should benefit from the entirety of the interest accrued on the deposits. We take a different view. We think we should have the flexibility to provide for other uses.
I hope I can provide the Liberal Democrat spokesperson, the hon. Member for Taunton and Wellington, with some assurances on that point. Our intention is that the funds received would be used towards programmes or activities that benefit tenants in the private rented sector. They would not be, as he asserted, siphoned off into some Treasury fund that does not deliver on that purpose.
Gareth Bacon
If that is so, why not simply put that into this statutory instrument? I share the suspicion of the hon. Member for Taunton and Wellington—he and I seem to be agreeing a lot these days, which I am sure makes us both feel uncomfortable. The Minister has used this phrase again, “the Government expect”, which we have heard so many times over the years. An expectation is not the same thing as something actually happening. It needs to be put into the law. Why not simply put it into the SI?
Matthew Pennycook
Simply because—I was coming on to make this point—this order is enabling in nature. It does not require any payment to be made to the Secretary of State, nor does it prescribe how any payment amounts would be determined. Those matters would be determined through future scheme arrangements established via procurement and contractual processes. I have said it before, and I will say it again for reassurance: the Department will publish information about any amounts received, the programmes funded and any metrics demonstrating the value delivered, so there will be full transparency on the use of funds.
Lewis Cocking (Broxbourne) (Con)
I thank the Minister for giving way; he is always very generous with his time. Could he provide us with some examples of what MHCLG could use this money for to support renters? He has not listed any yet, and obviously there are none in the SI. I am a bit concerned about where this money is going to be used.
Matthew Pennycook
Forgive me, I think I did give an example in my opening remarks, but I do not want to stand here and speculate on the precise programmes that might be funded through those interest payments, if we make a decision to take a portion of them in future. I am being very clear that they would be directed to support private rented sector tenants; they could not be siphoned off for other Government activities. Any payments made to MHCLG would be subject to future agreement via contractual and procurement processes.
Gareth Snell (Stoke-on-Trent Central) (Lab/Co-op)
I thank the Minister for giving way and for his explanation. Can he at this stage give any indication of the thresholds at which this mechanism would kick in and allow the Department to make those directions? It is perfectly right that a windfall on interest can be put to good public use, but I am interested in where the Department currently considers the threshold for that windfall to start, so that we can know when those schemes might start making a contribution.
Matthew Pennycook
My hon. Friend helpfully brings me on to the two further points I wanted to respond to, which the shadow Minister, the hon. Member for Orpington, rightly probed: essentially, how will the amounts due to the Secretary of State be determined, and what specifically do we intend to spend them on? I cannot confirm to my hon. Friend today what the amounts due to the Secretary of State will be. As I have said, the order allows for the distribution mechanism to vary, taking into account market conditions such as interest rates. Specific arrangements would depend on commercial negotiations with prospective scheme administrators.
I can commit that, first and foremost, the distribution mechanism will prioritise ensuring that the deposit protection and dispute resolution services offered to tenants and landlords continue to be free and effective. I assume we would all agree that that is particularly important. My Department will set key performance indicators and cost-efficiency metrics to monitor the scheme administrators’ delivery. If the interest accrued exceeds the minimum cost of meeting the key performance indicators, the additional amount of interest will be distributed between the administrator of the scheme, tenants and/or landlords, and the Secretary of State. When setting the distribution mechanism, the Secretary of State intends to allow the scheme administrator to keep a reasonable amount of profit as a reward for the service delivered. It is not the Secretary of State’s intention to exploit the tenancy deposit system and agree to arrangements that leave tenants and landlords worse off.
As for what we intend to spend any money received on, the Government have demonstrated their commitment to improve conditions for tenants in the private rented sector. Although a specific programme or programmes cannot be confirmed at this stage, it is our intention to use any receipts to fund Government programmes to benefit tenants in the sector. It is important to say that it will take time for interest to accumulate and be paid to the Secretary of State under future arrangements, if we decide to make use of the power. Those arrangements will depend on market conditions and priorities for the private rented sector, and will be subject to agreement from the Treasury.
Mr Snowden
Going back to the threshold point, can the Minister give any indication of what level interest rates would have to reach to trigger this, based on the Department’s calculations in crafting this statutory instrument? If it is a windfall from high interest rates generating additional revenue, what general ballpark does the Minister think interest rates would have to be at to trigger this?
Matthew Pennycook
I commend the hon. Gentleman for the attempt, but I am not going to stand here and give him a general ballpark estimate of what interest rates might be. As I said, any payments to MHCLG will be subject to future agreement via contractual and procurement processes.
I want to clear up one specific point that the shadow Minister made about insured schemes. No final decision has been made in that regard. The Department is assessing the benefits and risks of both insured and custodial models.
To conclude, the Government continue to deliver improvements for tenants in the private rented sector. This order will provide additional flexibility in how interest accrued on deposits held under custodial tenancy deposit schemes may be distributed, so that excess returns that may be generated by the schemes are used effectively. It will enable my Department to deliver an improved tenancy deposit scheme that is fit for purpose and that will, as I have said, deliver better value for money for tenants in the private rented sector and the general taxpayer. Notwithstanding the shadow Minister’s very clear intention to push for a Division, I hope the rest of the Committee will welcome this amendment to the Housing Act 2004.
Question put.