Property industry groups have written to the government after banks once again closed undesignated client accounts held by letting agents.
Undesignated client accounts are used by businesses, including letting agencies, to pool client money into a single account. Many letting agencies use an undesignated account to hold rental payments and deposits.
However, banks are increasingly cracking down on the long-standing practice, requiring agents to open designated accounts for each individual landlord client. According to reports, several more letting agencies have recently had their undesignated client accounts closed at short notice.
What happens next?
According to banks, undesignated client accounts are a risk for their Anti Money Laundering compliance. Lloyds Bank, which has previously shut down letting agents’ accounts, restricts undesignated accounts to “clients regulated with professional bodies recognised by the Bank for enforcing the highest standards in Anti Money Laundering management”. The snag? Most letting agencies do not have to register for AML supervision.
The common alternative, to open designated client accounts instead, potentially means opening and maintaining hundreds of bank accounts per single office. In addition, banks will also perform customer due diligence checks on the agency’s clients before opening a designated client account.
In its letter to the government, Propertymark argued that banks are misapplying AML rules. Letting agents only have to register with HMRC for AML supervision if they manage at least one property with a monthly rental income of €10,000 (£8,600) per month. The organisation called on the government to remind banks of the AML rules for letting agents, and added it would even be preferable to require all agencies to register for supervision, as it had previously proposed, to give banks greater clarity and assurance.
The government has not yet responded, and changing AML policies is unlikely to be a political priority: banks have been closing down agencies’ undesignated accounts for several years, and have also been reluctant to open new accounts for agencies.
For agents, having an undesignated client account shut down is an administrative nightmare, as it will cost them their Client Money Protection (CMP) membership. (CMP membership is a requirement for all agencies in England, Wales and Scotland, and requires in turn that the agency must hold all client money with a bank or building society authorised by the Financial Conduct Authority.) And without CMP membership, the agency cannot legally trade.
Agents who don’t want to take that risk or undergo the expense and administrative hassle of opening designated client accounts for all of their clients, have an excellent third option: to work with a third-party payment provider that, crucially, holds its accounts with a bank authorised by the FCA.
For example, all money held in a PayProp client account is held exclusively with PayProp’s FCA-authorised banking partner, NatWest. All account holders additionally benefit from Financial Service Compensation Scheme protection, and PayProp also holds separate professional indemnity insurance.
To find out more about how PayProp keeps your client money safe, speak to one of our experts.
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