What is the difference between insured and custodial tenancy deposit schemes?

In insured schemes, the landlord or agent retains the deposit but pays a fee to an approved scheme provider (DPS, MyDeposits, TDS) who guarantees the funds. The money sits in the landlord's or agent's bank account. In custodial schemes, the full deposit amount is transferred to the scheme provider, who holds it as a neutral third party throughout the tenancy. Custodial schemes are free for landlords but require upfront cashflow to transfer the deposit.

Why is the government abolishing insured tenancy deposit schemes?

Housing minister Matthew Pennycook told MPs the removal of insured schemes is 'based on the objective of ensuring that tenant deposits are as safe as possible.' He cited an inherent power imbalance against tenants under the insured model — landlords and agents hold the money, making it harder for tenants to challenge unfair deductions. He also reported growing evidence that the insured model carries a higher fraud risk, with incidents of exploiting insured registration being reported.

When will the insured deposit scheme ban come into force?

The government has announced its intention to abolish insured schemes but has not yet published a specific implementation timetable. The announcement is part of the ongoing reform of the private rented sector following the Renters' Rights Act. The immediate priority for landlords and agents is to identify existing insured deposits and prepare for transition. Further details on phasing and deadlines are expected as the government progresses its rental reform programme.

How will the deposit scheme change affect landlord cashflow?

The custodial model requires landlords to transfer the full deposit amount to the scheme provider at the start of each tenancy, rather than retaining it in their own account throughout the tenancy. For landlords with multiple properties, this can represent a significant cashflow shift — a portfolio of 10 properties at £1,200 average deposit would require £12,000 transferred to custodial schemes upfront that previously remained in the business bank account. However, custodial schemes are free to use (no insurance fee charged), partially offsetting the cashflow impact. After the tenancy ends, the deposit is returned to the landlord from the scheme, restoring the cash.

What are the penalties for non-compliance with deposit protection rules?

The existing penalty regime remains in place. Landlords who fail to protect a deposit or provide prescribed information face penalties of up to three times the deposit amount. Breaches also restrict the landlord's ability to serve a valid Section 21 notice for possession. Under the proposed changes, these penalties would continue to apply, with compliance risk focused on procedural failure — particularly during the transition period from insured to custodial schemes.

Insured Deposit Schemes Abolished: Landlord Guide 2026

The government has confirmed plans to abolish insured tenancy deposit schemes, forcing all landlords and letting agents to hold tenant deposits in custodial schemes instead. Housing minister Matthew Pennycook told Parliament the move is designed to strengthen tenant protections, eliminate a power imbalance and reduce fraud risk — but it will require significant operational and cashflow adjustments for portfolio landlords.

Under the current system, landlords and agents have a choice. They can pay a deposit into a custodial scheme — where a third-party provider like the Deposit Protection Service (DPS), MyDeposits or the Tenancy Deposit Scheme (TDS) holds the money — or they can retain the deposit in their own bank account under an insured scheme, paying the provider a fee for the guarantee. Since the rules were introduced in 2007, many landlords have chosen the insured model because it allows them to keep the cash within their business throughout the tenancy.

That option is now being removed. Pennycook told MPs that the insured model creates "an inherent power imbalance against tenants" because landlords and agents hold the money, making it harder for tenants to challenge unfair deductions. He also cited "growing evidence that the insured model also carries a higher fraud risk, with incidents of exploiting insured registration being reported."

The abolition of insured deposit schemes is the latest phase of the government's sweeping rental sector reform, following the Renters' Rights Act which abolished Section 21 evictions, introduced the Private Rented Sector Database, and created a new landlord ombudsman. For property investors who manage multiple tenancies, the change represents a real shift in how deposits are handled — and a genuine cashflow consideration that needs to be factored into deal analysis.

This article breaks down what the abolition of insured deposit schemes means in practice, how it affects landlord cashflow and compliance, and what you should do now to prepare.

Insured vs custodial: understanding the two models

Before analysing the impact, it is worth being precise about what is changing. There are currently three government-approved tenancy deposit protection schemes in England and Wales: the Deposit Protection Service (DPS), MyDeposits, and the Tenancy Deposit Scheme (TDS). Each scheme offers both an insured and a custodial option.

Under the custodial model: The landlord or agent transfers the full deposit amount to the scheme provider within 30 days of receiving it. The scheme holds the money for the duration of the tenancy in a ring-fenced account. Neither the landlord nor the tenant can access the funds without the other's agreement or an adjudication decision. The service is free — no fee is charged.

Under the insured model (being abolished): The landlord or agent retains the deposit in their own bank account but pays a fee (typically £20-30 per tenancy) to the scheme provider for the insurance guarantee. If a dispute arises at the end of the tenancy and the landlord refuses to return the disputed portion, the scheme provider steps in and pays the tenant directly from the insurance fund, then pursues the landlord for recovery.

The buy-to-let mortgage guide 2026 covers how these operational costs affect overall portfolio returns, but the core difference for landlords is cashflow timing and administrative burden.

The key numbers are these. According to the latest data from MHCLG, approximately 40% of all tenancy deposits in England and Wales — roughly 2 million deposits — are held under the insured model. That represents several billion pounds of tenant money sitting in landlords' and agents' bank accounts at any one time. The transition to a custodial-only system will move all of that money into third-party accounts.

What housing minister Pennycook actually said

Pennycook's statement to Parliament on 19 June 2026 was the first formal confirmation of the policy direction. His remarks were detailed and signalled the government is in the design phase rather than the implementation phase, meaning there is time for landlords to prepare.

Pennycook said: "The proposed removal of the insured schemes is based on the objective of ensuring that tenant deposits are as safe as possible. Under the custodial system, money is held by the Tenancy Deposit Protection provider as a neutral third party. Under the insured scheme, there is an inherent power imbalance against tenants given the landlords and letting agents hold the deposit."

He added that tenants whose deposits are held in custodial schemes are more likely to challenge deductions made by landlords at the end of a tenancy — which the government views as a feature, not a bug. He told MPs: "There is growing evidence that the insured model also carries a higher fraud risk, with incidents of exploiting insured registration being reported."

The housing minister did not announce a specific implementation date, but the timing of the statement — coming as part of the broader rental reform programme that has already delivered the Renters' Rights Act — suggests the government intends to move relatively quickly. The Renters' Rights Act itself was passed in May 2025 after a multi-year legislative process, and phase two provisions are rolling out through 2026 and into 2027.

Kristine Ng, partner at law firm Morr and Co who specialises in property litigation and dispute resolution, offered a measured view. She said: "While presented as a simplification, the reform primarily shifts when obligations arise rather than fundamentally altering what landlords must do. The key distinction lies in choice: deposits can either be placed in a custodial scheme or retained under an insured model, which many landlords use to manage cash flow, particularly across multiple properties."

Ng's analysis is important because it highlights the real operational impact: the reform changes cashflow timing, not legal obligations. Landlords already have to protect deposits — the question is simply where the money sits while the tenancy runs.

Cashflow impact: the real cost for portfolio landlords

For a landlord with one or two properties, the cashflow impact of moving from insured to custodial schemes is negligible. The deposit for a single tenancy at, say, £1,200 is a relatively modest amount to transfer to a scheme provider at the start of a tenancy. But for portfolio landlords managing 20, 30 or more tenancies, the picture is materially different.

Consider a landlord with 20 rental properties at an average deposit of £1,200 each. Under the insured model, that landlord holds approximately £24,000 of tenant deposits in their business bank account throughout the tenancies. That cash is available for property maintenance, refurbishment, void period coverage, and other operational expenses — subject to the understanding that it must be returned when the tenancy ends.

Under the custodial model, that same £24,000 must be transferred to the scheme provider at the start of each tenancy. The landlord loses access to that working capital. If those tenancies are at different points in their cycle, the shortfall is less acute — deposits are paid out as they come in and returned as tenancies end. But if the landlord is actively growing their portfolio, each new tenancy requires a fresh cash outflow of £1,200+ that previously stayed in the business.

The offset is that custodial schemes are free, saving the £20-30 per tenancy fee charged by insured schemes. For a 20-property portfolio, that is £400-600 per year in fee savings — a meaningful reduction in operating costs, but small relative to the working capital impact.

This cashflow consideration should feed directly into deal analysis. The deal analyser calculator on this site can model the working capital requirements of a growing portfolio under the custodial model, helping investors understand whether their cash reserves are adequate for the deposit shift.

Compliance risk: what happens if you get it wrong

The existing penalty regime for deposit protection breaches remains unchanged. Landlords who fail to protect a deposit — or fail to provide prescribed information about which scheme holds it — face penalties of up to three times the deposit amount. That penalty is awarded by a county court to the tenant, and it is applied regardless of whether the landlord acted in good faith.

The compliance risk is not new, but the transition from insured to custodial creates a specific vulnerability: administrative error during the switchover period. Landlords who have been using insured schemes for years — who have their deposit handling processes embedded, their agent instructions set, and their tenancy documentation standardised — will need to update every part of that system.

Ng highlighted this risk directly: "Compliance risk will remain focused on procedural failure. While the legal position will not materially change, the removal of flexibility may increase the risk of administrative error, particularly during transition. The immediate priority will be transitioning existing insured deposits. Landlords and agents should identify affected tenancies, diarise deadlines and ensure systems are in place for prompt transfer."

There is also a secondary risk: increased dispute frequency. Ng noted: "There is also potential for an increase in disputes in the short term. Tenants may be more willing to challenge deductions where funds are held independently, and landlords will no longer have control of the deposit at the outset." This is a behavioural consequence of the reform, not a legal one, but it is real. Landlords should expect a higher volume of deposit dispute adjudications in the first 12-24 months after the change, simply because the custodial model makes it easier for tenants to initiate challenges.

For a full breakdown of the current compliance requirements, including the Section 21 restriction and prescribed information obligations, see our HHSRS compliance guide which covers the overlapping regulatory landscape landlords now operate in.

How the deposit ban fits into the wider rental reform agenda

The abolition of insured deposit schemes cannot be understood in isolation. It is the latest component of the most significant overhaul of the private rented sector in decades, driven by the Renters' Rights Act 2025 and subsequent secondary legislation.

Landlords who have been following the reform trajectory will recognise the pattern. The Renters' Rights Act abolished Section 21 'no fault' evictions, replacing them with expanded Section 8 grounds. It introduced the Private Rented Sector Database — a compulsory digital register of all landlords and properties. It created a new landlord ombudsman service with binding powers. It extended Awaab's Law — the requirement to address serious hazards within strict timeframes — to the private rented sector. And it introduced civil penalties of up to £40,000 for serious housing offences under the overhauled HHSRS regime, which comes into force on 23 June 2026.

The deposit reform is the next logical step. Having tightened eviction rules, created a landlord register, strengthened enforcement and mandated hazard remediation, the government is now addressing what it sees as the remaining weak point: the financial protection of tenant deposits.

The government's reasoning is consistent across all these reforms: tenants need better protection, the balance of power needs to shift, and the private rented sector needs professionalising — even if that means higher compliance costs for landlords.

For the full timeline of what has changed and what is coming next, see our Renters' Rights Act phase timetable.

Strategic implications for deal sourcers and investors

For deal sourcers and property investors who are evaluating new acquisitions, the deposit reform has specific implications that feed into the numbers.

Working capital requirements increase. When modelling a deal for a buy-to-let purchase, the working capital line item should now include the full deposit amount for each tenancy as an upfront cash outflow. Under the insured model, that cash was only notionally committed — it stayed in the business bank account. Under custodial, it is physically transferred out. For investors using the BRRR strategy, which already requires careful management of working capital through the refurbishment and refinance phases, this additional cash outflow at the tenancy start date needs to be factored in.

Portfolio cashflow modelling changes. For landlords who are scaling up — adding properties faster than existing tenancies end — the cash outflow from deposits will grow faster than in an insured model. A landlord adding 5 new tenancies in a year would have traditionally retained £6,000 of those deposits in their business account. Under the new rules, that £6,000 leaves the account immediately. If the landlord is also financing refurbishments or managing voids, the cashflow pressure compounds.

Property management fees may need renegotiation. Many letting agents charge a separate deposit handling fee tied to the insured model. With custodial-only handling, agents may adjust their fee structures. Landlords should review their management agreements and ask agents what their custodial deposit handling process will look like and what it will cost.

Potential selling opportunity. For investors looking to exit — selling a tenanted property or a portfolio — the transition to custodial schemes creates a point of negotiation with buyers. A buyer who will inherit insured deposits that need to be converted to custodial may seek a price adjustment for the additional cashflow requirement. Conversely, a portfolio that is already fully custodial-compliant may be marginally more attractive to cash-conscious buyers.

For deal sourcers, this is a point to flag in your deal pack when presenting to buyers. Including a line that confirms deposit handling is or will be custodial-compliant under the new rules demonstrates professionalism and reduces due diligence friction.

Looking for your next deal? Our deal sourcing strategies cover the full toolkit, from auction purchases to off-market sourcing and distressed sales.

Practical steps to prepare for the deposit scheme change

The government has not yet announced an implementation deadline, but the direction of travel is clear. Here is a practical checklist for landlords and letting agents.

1. Audit your current deposits. Go through every current tenancy and identify which deposits are held in insured schemes and which are in custodial. The simplest way: check the certificate or confirmation email from your deposit protection provider. Insured scheme certificates will say "Insured" or "Insurance Based". Custodial certificates will say "Custodial" or "Registered".

2. Understand your cashflow gap. Total the deposits currently held under insured schemes across your portfolio. That figure represents the cash that will need to be transferred to custodial providers during the transition. For a 15-property portfolio at £1,300 average deposit, that is £19,500. Plan your cash reserves accordingly.

3. Check your agent's transition plan. If you use a letting agent, ask them directly: "What is your plan for converting insured deposits to custodial? What is the timeline? Will there be any additional admin fees?" Get the answers in writing.

4. Review your tenancy documentation. Your tenancy agreement, prescribed information form and deposit certificate templates all reference whether the deposit is held under an insured or custodial model. These will need updating once the regulations change. Work with your solicitor or use a template provider that updates its documents in line with legislative changes.

5. Factor the change into your acquisition model. From today onwards, model every new buy-to-let acquisition assuming custodial deposit handling. That means the full deposit is an upfront cash outflow that returns at tenancy end, not a retained balance throughout the tenancy. The numbers need to work with that assumption.

6. Set up systems for the transition. The government is likely to provide a transition window — perhaps 6-12 months — during which existing insured deposits must be converted. Do not leave it to the last month. Diarise a conversion date, batch the transfers, and confirm each one with your provider. A system for tracking compliance — a simple spreadsheet with tenancy dates, deposit amounts, scheme type and confirmation — will save you from procedural errors.

7. Budget for the timing mismatch on existing tenancies. Existing tenancies under insured schemes will need to convert when they reach a suitable point — typically at renewal or when a new prescribed information form is served. This means the cashflow impact will arrive in waves, not all at once. Plan for a phased outflow over 6-18 months.

What other commentators are saying

The response to Pennycook's announcement has been mixed across the property industry. Tenant advocacy groups have broadly welcomed the change. Generation Rent described it as "a long overdue step that gives tenants genuine financial protection." The National Residential Landlords Association (NRLA) issued a more cautious statement, acknowledging the government's intent while urging a "practical transition period" and warning that "the cumulative impact of rental reforms is starting to affect landlord confidence and supply."

Some legal commentators have pointed out that the practical effect of the change may be smaller than it appears. As Ng noted, even under the insured model, landlords must transfer the deposit to the scheme provider if a dispute arises. The reform "brings that position forward to the start of the tenancy" rather than creating a fundamentally new obligation. The real difference is cashflow timing and the removal of choice — not a change in the underlying legal requirement to protect deposits.

The British Property Federation has urged the government to confirm the implementation timeline quickly so that landlords and agents can plan. Uncertainty about the transition window is itself creating operational risk, as landlords defer decisions about deposit handling while waiting for clarity.

For a broader perspective on the regulatory environment and its impact on property investment, see our property tax guide for landlords 2026 which covers the interplay between tax policy, mortgage costs and rental reform.

What happens next

The government will now consult on the detail of the deposit reform before legislating. Housing insiders expect primary legislation — likely an amendment to the Housing Act 2004 via a future Renters' Rights Bill amendment or standalone statutory instrument — followed by a transition period of 6-12 months for existing deposits.

Three things to watch in the coming months:

1. The consultation document. MHCLG is expected to publish a formal consultation on the proposed changes, seeking input from landlord associations, tenant groups and the deposit protection schemes themselves. The consultation will clarify the proposed timeline, transition arrangements, and any exemptions (such as for student housing or purpose-built student accommodation).

2. The legislative vehicle. The government could introduce the deposit reform as a standalone statutory instrument under existing powers, or it could require a new bill. The route it chooses will determine how quickly the change can be enacted. A statutory instrument could be laid in late 2026 and come into force in early 2027. A new bill would push implementation to mid-2027 at the earliest.

3. The enforcement approach. How will existing insured deposits be policed during the transition? Will there be a grace period for inadvertent non-compliance? The government's approach to enforcement will determine how much risk landlords actually face during the switchover.

For now, the principle is settled: insured schemes are being abolished, custodial-only is coming. The timing and detail remain to be confirmed. Landlords who act early — auditing their current deposits, planning their cashflow, and updating their documentation — will have a material advantage over those who wait for the deadline to arrive.

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