A rental deposit scheme is a system where the deposit a tenant pays at the start of a tenancy agreement is protected. This involves taking steps to guarantee the landlord will follow the legal requirement to return the deposit if there is no damage to the property. Different options for a rental deposit scheme enforce this protection in different ways.
One of the most prominent examples of a rental deposit scheme is in the United Kingdom. There are three government-backed private tenancy deposit schemes operating: Deposit Protection Service, Tenancy Deposit Solutions, or MyDeposits, and Tenancy Deposit Scheme. Since 6 April 2007, most landlords are legally required to protect deposits in one of these three schemes.
There are two main types of rental deposit scheme, known as custodial and insurance-based. In the UK, Deposit Protection Service offers the only custodial scheme. MyDeposits and Tenancy Deposit Scheme both offer insurance-based schemes. The Tenancy Deposit Scheme only accepts deposits from landlords who are members of an approved professional association, such as the Association of Residential Letting Agents.
With a custodial scheme, the landlord hands over the deposit at the start of the tenancy to the organization running the scheme. At the end of the tenancy, the scheme releases the money to the landlord, tenant, or both, depending on what, if any, damage there has been to the property. In the UK set up, there is no charge for using a custodial scheme; the organization running the scheme makes its money from the interest it earns while holding the deposit.
With an insurance-based scheme, the landlord holds on to the deposit during the tenancy rather than hand it over to the scheme. Instead, the landlord pays an insurance fee to the scheme, which protects against the landlord failing to return the deposit. If this does happen, the scheme pays the appropriate fee to the tenant, then pursues the landlord to get the money back.
Both types of rental deposit scheme have a system for dealing with disputes. In all cases, any amount that is not in dispute goes to the tenant, while the disputed amount either remains with the scheme, or is paid by the landlord to the scheme, depending on the set up. The schemes operate a process known as alternative dispute resolution, which is designed to informally hear the arguments and make a decision. Either the landlord or the tenant can refuse to use this process, and instead may take the matter to court, but if both parties agree to use the process, they are legally bound by the decision.