Summary
The Government is committed to ensuring that where a tenant pays a deposit to their landlord in good faith that it will be returned at the end of the tenancy, providing the tenant does not cause any damage or theft to the property. Where private sector landlords or their agents require tenancy deposits they should be safeguarded by a tenancy deposit scheme.
Therefore, provisions were introduced to the Housing Act at Lord's Committee stage to ensure tenancy deposit protection for the majority of private sector tenancies.

Background
Deposits are taken by landlords to secure a financial commitment from the tenant to prevent loss or damage arising from the tenant's negligence or breach of the tenancy agreement. In the event of any damage (but not fair wear and tear), unpaid rent at the end of a tenancy and other losses consequent of the actions of the tenant, part of or the full deposit may be withheld. Where such losses do not arise, the deposit should be returned to the tenant promptly and in full. Evidence suggests, however, that deposits are being withheld by landlords and agents without justification damaging the image of the private rented sector.
Tenants frequently report that poor practice on the part of their landlord/agent in the course of the tenancy leads them to withhold their final month's rent in the belief that their deposits would otherwise be unreasonably retained. Some tenants who default on their last month's rent will have caused damage, sometimes extensive, which the landlord will then have to cover in full.

Q Why should the Government protect tenants' deposits?
A  So that, when a tenant pays a deposit, and he or she is entitled to get all or part of it back, the tenant can be assured that this will happen.

Q What sort of tenancies will deposit protection apply to?
A   All deposits taken by landlords in relation to assured shorthold tenancies ("AST") - the most common form of new tenancy - in England and Wales.
Q How will deposit protection work in practice?
A  There will be two types of scheme: a custodial scheme and one or more insurance-based schemes. To avoid disputes having to go to the courts, both schemes will be supported by an alternative dispute resolution (ADR) service - although the use of  this will not be compulsory.  The tenant will not have the option of choosing the custodial or insurance-based scheme.  That will be for the landlord to decide. 

Q When will the schemes come into effect?
A  A press notice published by DCLG on 23 June 2006 said that the Government is reviewing the commencement date for tenancy deposit protection (TDP) in England   and Wales, and that it will confirm the new commencement date before Parliament   rises in the summer.  

Q Who will be running the schemes?
A  A competitive tendering exercise, under European Union procurement rules, is underway to select suppliers to run the schemes.

Q What stage is the procurement exercise at?
A  Detailed negotiations are underway with short-listed suppliers.  The Government expects to be in a position to award contracts for a custodial scheme, and one or more insurance-based schemes, later this year.

Q  How will the insurance-based scheme work?
A  The tenant will pay the deposit to the landlord as now. The landlord will retain the deposit and pay a premium to a designated third party. This will assure the return of the deposit (or part of it) to the tenant when he or she is entitled to it. Refer to Q.18 for what happens in the event of a dispute.

Q Will a landlord pay for the deposit to be covered by an insurance-based  scheme.
A  Yes. Landlords will pay a fee to belong to an insurance-based scheme. This will safeguard the deposit, should it be misappropriated.

Q How much will the fee be?
A  That will be for the scheme administrator to decide.

Q How will the custodial scheme work?
A  The tenant will pay the deposit to the landlord as now. But - and here's the difference with the insurance-based scheme - the landlord will then pay the deposit into the custodial scheme. At the end of the tenancy, if the landlord and tenant agree how the deposit should be apportioned, they will tell the scheme, which will pay out the money as agreed. Refer to Q. 19 for what happens in the event of a dispute.

Q Will landlords have to pay to transfer the deposit to the custodial scheme?
A  No. The custodial scheme will be free to use by landlords and tenants.

Q How, then, will the custodial scheme be paid for?
A  By the interest generated by the deposits held in the scheme. Part of this pool will go to the contractor to pay for the running of the scheme; the remainder will be used to pay interest to the tenant/landlord. Where the deposit, or part of it, is apportioned between the two parties (i.e. following a dispute), the interest will be apportioned pro-rata.

Q How many landlords are there in England and Wales, and how many of them are    members of professional organisations?
A  There are estimated to be about 700,000 landlords, of which some 15,000 are members of professional organisations. A further 175,000 are estimated to use agents. There are approximately 12,000 letting agents in England and Wales, of which some 4,000 are members of professional bodies. 
Q Will the proposed insurance-based scheme be open only to landlords who are members of a trade body or professional organisation?
A  No. The use of any scheme will not be dependent on membership of any trade body or professional organisation.

Q Aren't these provisions unfair on good landlords?
A  No. Most landlords deal fairly with tenancy deposits. However, these provisions need to be put into place to force the minority of bad landlords to act responsibly by safeguarding tenancy deposits. Good landlords are already acting responsibly by safeguarding tenancy deposits. The provisions put into place a simple process for   all landlords to go through to ensure tenancy deposits are safeguarded. This is in the interests of both landlords and tenants.