Regulatory possibilities for private renting

Alex Marsh School for Policy Studies University of Bristol

July 2013

Regulatory possibilities for private renting1 It has long been recognised that the private rented sector poses a regulatory challenge. Indeed, the relevant academic literature has referred to governing the ungovernable. A key issue is the profound difficulty in making the target of regulation visible. That is, if we are seeking to change landlord behaviour then the first task is to identify those whose behaviour we want to change. However, as Ill note again later, perhaps our thinking on this issue needs to evolve alongside the evolution of the sector itself. The private rented sector is not an area in which the potential of new thinking, typically located under the heading of behaviour change or nudge, has been explored in any detail. Yet it is arguably an area which is ripe for regulatory innovation. And it is an area in which, I suspect, some of this new thinking has interesting things to offer. We know plenty about some of the problems facing the private rented sector. There is a complex legal framework. There is limited enforcement. There is a relatively high incidence of poor quality accommodation, and not just in those parts of the sector widely recognised as problematic. Because landlords tend to be small and relatively anonymous, while many tenants have traditionally been relatively transitory, this is a sector in which reputation effects are relatively weak. But this is a sector in which the old saying the absence of evidence isnt evidence of absence is highly pertinent. We have only fragmentary information about some of the problems argued to afflict the sector. We have very little systematic evidence about harassment and unlawful eviction. We know only bits and pieces about the incidence of retaliatory evictions. Importantly when we move to talking about regulation and effective regulatory mechanisms, we know very little about the distribution of landlord motivations towards legal compliance. There is a policy presumption that much, if not most, illegality is a product of inadvertence. But that is not a position particularly well-grounded in evidence. During research I was involved in more than a decade ago we interviewed landlords of many stripes, including those recommended by local landlord associations as exemplary. Almost without exception these landlords providing information that indicated theyd engaged in acts usually eviction that were technically unlawful. No doubt some of this was the result of inadvertence. Yet, several landlords could offer rationales for why that unlawful act was the best strategy, not just for themselves but for others. Several of the landlords who transgressed knew exactly where the boundaries were and knew exactly how close they could sail to the wind without triggering an action against them. Simple

This text accompanies a brief presentation made to an invitation-only seminar on Alternatives to Regulation on 16/07/13.
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assumptions about good and bad practice, or that all the problematic behaviour is concentrated in particular parts of the sector, could not readily be sustained. The private rented sector very clearly faces the perennial regulatory challenge. We might summarise this crudely as rogues dont engage. We can set up a variety of regulatory mechanisms such as accreditation or licensing schemes but it is people of goodwill who participate. Those who most need to raise the standard of their management and behaviour usually stay below the radar. Traditionally we have seen the private rented sector of comprising a fluid population of both landlords and tenants. Most landlords are small scale and amateur. A proportion of landlords arrive in the sector by accident via inheritance, for example and only see their landlord role as temporary. Tenants were mobile, with many using the sector for easy access temporary accommodation, including as a stepping stone into owner occupation. Information on rights and obligations was low on both sides, as is legal competence. Hence a consumerist or contract-based view of regulation is inadequate. However, as the CLG landlord survey in 2010 indicated, something like half the properties have been in the sector for a decade. Many landlords are purchasing properties to rent; in some cases seeing property as an alternative to a pension. On the demand side the growth of the sector has been accompanied by change in its composition. Households are entering the sector expecting to spend longer renting, or indeed with no clear expectation of moving into owner occupation. The sector is now providing accommodation for a large number of young families with children. Policy is rightly concerned that such families should have access to good quality, stable accommodation. This changing profile suggests that there are more people involved in the sector for sustained periods of time. This implies scope for better informed and educated participants on both the supply and demand side. It would therefore be tempting to think that much of the sector is moving closer to the consumerist ideal. However, the demand pressures in many parts of the sector mean that tenants are not necessarily well-placed to enforce rights. One of the challenges for thinking about the regulatory architecture of the private rented sector is that institutional structures beyond the state are relatively weak. Only 2% or so of landlords belong to landlord organisations like the RLA or the NLA. In contrast, some 50% of lettings are made through letting agents. However, we know that the involvement of a letting agent is by no means necessarily a guarantee of quality. If we were looking for regulatory leverage beyond the state then the performance of letting agents is likely to be a more effective route in to the issue in the short term. For ten years now policy has be wrestling with state-centred approaches to regulation. We have been discussing targeted or more general licensing/registration proposals. Scotland has

gone for a national scheme. Wales appears to be on the way to one. Something similar was proposed for England during the dying days of the previous Labour administration. It would appear it could be back on the agenda if Labour form the next government. My feeling is, however, that this discussion has not grappled sufficiently with thinking on the limits to the regulatory capacity of the state. The way the discussion is framed is also important. While policy has been couched in terms of the professionalization of the sector, I have a strong sense that the debate hasnt really escaped the construction of regulation as a burden to landlords, rather than as a potential benefit. This is a harder sell. It doesnt frame the issue of a change of practice that will be beneficial to landlords themselves. For example, new regulatory mechanisms are not being proposed in a way that suggests compliance is a means of signalling or differentiating quality. So what might we do, thinking particularly in terms of some of the concepts introduced through the behaviour change and related literature? One question is whether we can capitalise more effectively on some of the issues associated with mis-estimation of probabilities. If we couple this with the observation that social actors respond to salient information (the S in the MINDSPACE acronym) then we might suggest that there is merit in publicising enforcement against landlords much more widely. This increases its salience in the minds of landlords and potentially leads them to overestimate the small probability of detection and enforcement. The effectiveness of enforcement as a deterrent-based disciplinary technique is thereby enhanced. That is just a way of trying to increase the effectiveness of existing command and control regulatory approaches by taking account of a known cognitive bias. A focus on infringement through inadvertence leads to a concern for greater information transmission. Fluid populations of landlords and tenants would tend to imply that information transmission needs to be a regular, rather than a one-off, activity. Information transmission is fine as far as it goes, but we might ask who the appropriate messenger is (the M in the MINDSPACE acronym). Is the state either centrally or locally the right vehicle for trying to spread the word? My feeling is weve tried that although perhaps not as extensively or intensively as we might. It would be worth considering alternatives. In particular, behavioural economics would suggest that we should look to reference levels and peer group effects. We should think in terms of social norms, their establishment and reshaping. And leverage over norms is unlikely to be achieved directly through exhortation by the state. 3

The first challenge to this line of argument is the question: what is the peer group? Do landlords have a common identity? While so few landlords are part of organisations then the answer would have to be that this is unlikely. But that doesnt mean that connections cannot be made. And connections would need to be made before information or norms can be transmitted. One opportunity we may be presented with is the increase in institutional investment. This has been sought without great success for decades. However, it appears that institutional investment in private renting, helped by the Build to Rent scheme, is gathering a bit of momentum. This brings organisations into the sector who will, we might assume, have some concern for their reputation. They are big enough for negative experiences of their property management to become more broadly known, with implications for their reputation more broadly. We might assume that such landlords therefore are likely to a stronger incentive to demonstrate good practice and illustrate what is possible in property management. The question then becomes how to transmit that information to the rest of the sector. We need to think more systematically about decentralised processes of information transmission and social learning. A similar logic underpinned the Law Commissions proposals in Encouraging responsible letting around the benefits of enforced self-regulation.2 Placing primary regulatory responsibility in the hands of umbrella bodies and trade bodies was a way of recognising the limits to the regulatory reach of the state. It also simplified the regulatory task for the state to ensuring that a relatively small number of self-regulatory organisations enforced standards on their members. It would be possible to meet with all the subjects of regulation in one room, rather than trying to communicate with a shifting population of 700,000 individual landlords. One foundational issue that it would be beneficial to address is the tensions over ownership of a property. Many small landlords no doubt appreciate the concept of quiet enjoyment and that for the period of a tenancy they are, in a very real sense, handing over a property to someone else. But there is a proportion who continue to think of a property as theirs and treat it as such by, for example, failing to give sufficient (or any) notice when visiting the property. This can lead to unnecessary conflict between landlord and tenant. More effectively embedding messages about the nature of the relationship of a landlord to the property while a tenancy is valid would considerably enhance to quality of landlord tenant relations. Prevailing norms need to be reshaped.

I declare an interest here. I was a member of the Law Commission team who developed these proposals.

When thinking about regulatory mechanisms from a behavioural economics perspective, we might frame the issue in terms of loss aversion. That would suggest that we should start from the presumption that landlords are fit and proper persons and should be allowed to trade, but then ramp up the costs of non-compliance with relevant norms - up to and including prohibition from letting property. That would give landlords something significant to lose. Behavioural economics might be taken to suggest that this would be more effective than expecting people to jump through a lot of hoops in order to achieve the status of being an acceptable (by whatever standard) landlord. Regulatory debates around private renting have spent a limited amount of time and energy seriously considering the options for creating regulatory mechanisms that might allow landlords to differentiate themselves and hence acquire a competitive advantage. The smart regulation approach would suggest the desirability of seeking such win-win approaches to regulation. Of course, in high demand housing market contexts where landlords can let just about anything to suitably desperate tenants the need for a competitive advantage may be debatable. But well leave that to one side. Local accreditation schemes can be constructed as an indicator of quality, but when the options are restricted to member or non-member then membership on its own does not act as a very effective signalling device, particularly if the scheme is successful in recruiting members within an area. There has been some discussion of the possibilities for using star ratings or establishing tripadvisor-type websites that allow letting agents, landlords and/or tenants to be rated. Indeed, there have been attempts to set such sites up. There would be challenges in setting up such sites. Most obviously, for most small landlords letting properties on six month tenancies it would take a considerable period of time before a sufficiently large body of data were be established to make the site informative. The issue of the veracity of the comments supplied is more important in this situation than in most of the services rated on other types of consumer site. And comments would be much more difficult to challenge. Existing site offering landlords a tenant referencing service have attracted criticism for effectively being a means of blacklisting tenants without giving tenants any very effective appeal route. In such cases it would be more than a nice evening out that would be spoilt. Homelessness may result. For a star rating-type system to be effective landlords would have be under some sort of obligation to make their rating public, in the same way that food hygiene ratings are exhibited outside restaurants. Otherwise the chances that they affect potential tenants decisions are significantly reduced.

One question that arises here is whether it is necessary for the state to organize this type of system at all. Could the market do so without the need for government action? Clearly there have already been private sector attempts to do so. One notable current attempt, directed at letting agents, is the scheme run by The Tenants Voice.3 It is notable inasmuch as it is explicitly trying to cultivate a sense of exclusivity through screening criteria for admission and capping membership numbers. Hence the pitch is that membership allows differentiation from other providers. The additional incentive for letting agents to register is the possibility of targetted advertising to rent ready and educated tenants. It will be interesting to see how this sort of scheme develops, and what sort of impact if any it has on standards. The big question faced by all such regulatory scheme, and schemes under which the government seeks to use trade bodies to deliver regulatory discipline, is whether they reach the most problematic segments of the market. We know that local accreditation schemes or landlord forums tend to be populated by landlords of goodwill who are, or want to be, conscientious. They have limited leverage over those who consciously wish to sail close to the wind legally. The thinking behind moves like selective or HMO licensing was that most of the sector could be regulated privately or through softer tools like accreditation, while local authorities focused enforcement resources on those segments of the sector that are known to be most problematic. There is certainly scope for further exploration of more effective ways of bringing the recalcitrant under the regulatory gaze. It is fairly clear that the characteristics of private renting, as it has traditionally been configured, militate against the successful application of conventional command and control type regulation. Yet, the sector is changing in ways that give social actors on both the supply and demand side greater incentive to come to grips with their rights and responsibilities. There remains a role of policy in making those right and responsibilities more legible. While we might be moving in the direction of a sector that conforms more closely to a consumerist model, there is little chance of that the changing profile of the sector removing the sources of regulatory concern entirely. The interesting question in regulating private renting is the extent to which novel regulatory mechanisms, drawing in a more diverse range of regulatory actors and resources, can overcome some of the well-known problems of relying on state-centred and relatively inflexible systems of command and control regulation.

http://thetenantsvoice.co.uk/information-for-letting-agents

There is plenty more thinking to be done around that question. Most likely further potentially promising approaches will be identified. Such approaches will need to be tested and appropriately calibrated. Given this is relatively unexplored territory, there is going to be plenty of justification for policy pilots to explore effectiveness.

About the author Alex Marsh is Professor of Public Policy at the University of Bristol. He has been Head of the School for Policy Studies since 2007. Alexs research and writing has encompassed a wide range of topics in the fields of housing studies, public policy and regulation. Between 2005 and 2009 Alex has been managing editor of Housing Studies, the leading international academic journal in the field. He continues as a member of the journals Management Board. Alex worked part-time as a Visiting Academic Consultant to the Public Law team at the Law Commission between 2006 and 2010. His work with the Commission addressed compliance issues in the private rented sector and systems of redress against public bodies. From 2004 until 2012 Alex was a trustee of Brunelcare, a Bristol-based charity providing housing, care and support for older people. For six years he chaired Brunelcare's Audit and Scrutiny Committee.

www.alex-marsh.net

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