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What we can learn from the tenant fee ban in Scotland?

On 1 November 2017 a new draft bill was introduced to Parliament to ban letting fees.
The Goodlord team
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On 1 November 2017 a new draft bill was introduced to Parliament to ban letting fees.

When Chancellor Philip Hammond first addressed the plan back in 2016, many became concerned with the repercussions this would have on the business prospects of the lettings industry. In truth, it is hard to determine the exact implications of the ban, but understanding the bill is integral to helping lettings agents think ahead to how they can generate new revenue streams once the legislations takes effect.

Another way we can try to make sense of the bill, is to examine and reflect on the aftermath of the ban in Scotland. Letting fees were initially made illegal in Scotland in the 1980s, but the law had to be reinforced in 2012 because agents were found to be charging fees irrespective of the law. Before we establish what happened in Scotland following the ban, we first need to look at some of the main distinctions between the ban in Scotland, and the ban that is going to transpire in England by 2018.

Below are some of the key differences:

  1. Having been in place since 1984, the ban in Scotland in 2012 was based more around clarifying the existing law, in which many agents found a loophole that allowed them to continue disregarding the rules.

  2. According to the English Housing Survey (2014/2015), the average value of the fee was £223, whilst Shelter said fees were much higher at £500.With no concrete statistics illustrating how much fees increased between 2016 to 2017, or even what they truly were between 2014-2015, it may be best to ascertain somewhere in the region of £412-a median quoted by lettingfees.co.uk. No matter which of the above figures comes closest to being accurate, by comparison, the fees in Scotland were much lower, averaging around £80 (Shelter, 2013).

  3. In England, the Tenancy Deposit Scheme (TDS) came into practice on April 6 2007, but in Scotland, the Tenancy Deposit Scheme was introduced at the same time as the tenancy fee ban. News of the TDS eclipsed the ban on tenancy fees, because it now meant that agents could no longer retain large deposits from their tenants in their bank accounts.

In light of the above, we have to be aware that the direct consequences of the ban in Scotland won’t necessarily be the same that hit England; they will, however, help us diagnose the possible side-effects of the legislation. Scotland eradicating tenancy fees in 2012 resulted in an increase in rental costs, but it is vital to understand that this increase could not be tied exclusively to the ban, as the elevation in costs correlated with the rental rates across the rest of the UK. In addition to this, it is essential to know that the increase was both marginal and short-lived.

According to a report conducted by Shelter, the impact of the 2012 clarification in Scotland was not as critical as many anticipated it would be. Speaking with 50 different letting agent managers, only 24% reported a negative effect on their overall business, whilst 17% actually reported a positive outcome, and the remaining 59% reported no changes at all. In addition to this, YouGov surveyed 120 landlords, out of which only one claimed that they had noticed an increase in agency fees.

Small margins, little impact

With as little as only 24% of agencies reporting a negative effect, the ban clearly didn’t cause any serious changes to be made by agencies. Charging fees around £80 meant that the margin was significantly smaller than it will be when the ban takes effect in England. Much higher fees means that it will be harder to replenish this loss of revenue, but not impossible if agents approach the ban with a proactive strategy.

Whilst quick fixes such as raising rental and landlord fees may initially seem like the best option, actions such as these will only bring the profession into disrepute. If fees are passed on to landlords this will ultimately result in increased rent, creating a negative impression of agents, which would consequently cause them to leave. This would see agencies shrink in size due a rapid loss of income. By diversifying their revenue streams and reducing operational costs effectively, agencies will future-proof their businesses.

By looking at these stats, it is difficult to conclude what the exact outcome of the tenant fee ban will be in England. Instead of approaching the ban with anxiety, it is better for agents to be pragmatic and re-evaluate their existing business by examining any inefficiencies, and thinking of ways to better improve their services to stay ahead of competitors. It is evident that the way forward is to generate new revenue streams, as the businesses that sought to improve themselves in Scotland were the ones that prospered.

Whilst we may not be able to ascertain what will happen in the wake of the ban, we can be sure that this time should be used valuably by agents to future-proof their businesses by thinking beyond fees and diversifying their product offering to close the gap of any potential loss of profit.

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