Myth Busting: Six Compliance Myths Investors and Sourcers NEED to Know to Protect Their Capital
After working in the property sourcing sector for over 12 years, I know and often see or hear of examples daily where the advice provided in courses, via social media, WhatsApp, Facebook groups, as well as in blogs and articles, is often at best poor, but at worst just wrong!
You could argue that those people who post the comments and write the blogs and articles believe what they write is accurate, and they think they are providing useful information—or at least you would hope they are. The problem arises when that advice, guidance, or comment is inaccurate or completely wrong and relates to legislation, regulation, or the standards required to be met by professional supervisory bodies. Then, those who receive that information and believe it are in danger of not just failing to meet standards but breaking the law and risking fines as a result.
So, let's bust some myths together and spread the word! Here are my top six myths:
Sourcing Agents are not Estate Agents.
Sourcing agents are considered to carry out what is known as ‘Estate Agency Work’ and as such are ‘regulated’ by everything that high street estate agencies are. It may be useful to have to hand what is considered to be the definition of ‘Estate Agency Work,’ as updated recently by the National Trading Standards Estate and Letting Agency Team (NTSELAT), who describe estate agency work as being…
You are legally considered an estate agent if you:
Have a business that deals with people who buy or sell freehold or leasehold properties in the UK, including commercial and agricultural properties.
Send out property details and arrange viewings.
Offer advice to potential sellers or buyers.
Get enquiries from potential sellers or buyers, which you pass on to clients.
Have a business that introduces buyers or investors to a ‘property deal’; also known as property sourcing.
With the recent amendments made to this definition, and now with the direct mention of ‘property sourcing,’ there can be no argument that the sourcing and deal packaging sectors are covered!
But wait a minute; what if I am just an ‘Introducer’ and not a deal packager or sourcing agent?
Well, yes, you guessed it, that is covered in the guidance too, but it is referred to as an ‘intermediary.’ You can only be an intermediary if you:
Only pass on the seller’s information to a prospective buyer (or in reverse, of course).
Only provide a way for the seller and buyer to contact one another directly, for example, online.
Don’t offer any advice to a seller or buyer, such as preparing property details, photographs, or an EPC.
If you do anything that an estate agent would do, you cannot claim to be an ‘introducer/intermediary!’
Here is where to find the NTSELAT guide on What is Estate Agency Work:
There Are No Specific Regulations or Legislation for Sourcing Agents and Deal Packagers
As we established in Myth One, sourcing agents and deal packagers are carrying out ‘estate agency work’ and therefore must adhere to regulations and legislation.
There are several pieces of legislation and regulations that affect the estate agency sector, and therefore sourcing and deal packaging. You must have a good working knowledge of these regulations, including what they are, how they may affect your business daily, and what measures you need to put in place to ensure compliance.
Here is a list of the main ones to pay attention to:
Estate Agents Act 1979
Consumer Protection from Unfair Trading Regulations 2008 (CPRs)
Business Protection from Misleading Marketing Regulations 2008 (BPRs)
Estate Agents (Accounts) Regulations 1981
Consumers, Estate Agents and Redress Act 2007
Consumer Rights Act 2015
Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013
Companies Act 2006
The Company, Limited Liability Partnership and Business (Names and Trading Disclosures) Regulations 2015
Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017
Data Privacy Act 2018
The Energy Performance of Buildings Regulations
Here is where to find the NTSELAT guide on Estate Agency legislation:
You Can Legally Co-Source with Another Agent Until You Can Afford to Be Compliant
The major issue with this piece of advice is that both agents involved in a property sale/purchase transaction MUST BE FULLY COMPLIANT—there is no exception, exemption, or ‘halfway house’ option.
So, why is this the case?
If you think about it logically, a sourcing agent or deal packaging company’s insurance, redress, Information Commissioner’s Office (ICO) and HM Revenue and Customs (HMRC) registrations are for that company and its employees (if a sole trader, just that person). The term employee means the definition by HMRC, where times of work, hours of work, and results are heavily controlled. If you run your own company and take responsibility for its success or failure, you’re NOT employed!
To make this even more dangerous, the vast majority of property sourcing and deal packaging agents in the UK operate at best partially compliant, at worst, completely illegally. Due to poor advice and training, most of them are completely unaware.
We are now also seeing the development of platforms that claim to sort out your compliance for you or allow you to join their platform so that you don’t need to have any compliance in place.
These ‘platforms’ available to sourcing agents claim that you can join them and sell your deals—some of which claim that their ‘compliance’ covers you, or they set it all up for you, while others claim that you don’t need any compliance when working with them. Of the cases that have been brought to the attention of the National Association of Property Sourcing Agents (NAPSA) and its enquiries with the supervisory bodies, including HMRC’s Anti Money Laundering (AML) Team, that is NOT the case!
Please see the screenshot below of a response to a sourcing agent, registered with one of these platforms, directly from the HMRC AML team in response to their enquiry regarding whether the promised AML cover for their company was in place:
(We have full permission from the company that received this email to share it in our marketing materials to raise awareness)
Sadly, any sourcing company or deal packager that has joined such a platform, even if you have never sold a deal through it, is at serious risk of being fined should HMRC or any of the other supervisory bodies investigate.
Myth: If You Don’t Handle Cash, You Don’t Have to Register with HMRC for AML Supervision
The money laundering regulations cover a large variety of sectors, from estate agents, solicitors, accountants, art dealers, and auction houses to gambling businesses. Not all of them handle cash as a business but are still required to register for supervision.
It makes no difference that you don’t take a deposit or reservation fee upfront, or that the solicitor handles those fees for you. The handling of cash is not a prerequisite for the requirement of money laundering supervision registration.
Failure to understand and follow this could lead to a heavy fine being issued by HMRC.
Myth: You Can Take a Reservation Fee or Deposit and Keep It in Your Business Account
There are very strict rules about what are known as ‘fees upfront,’ when that fee is taken by an agent prior to the exchange of contracts and is stated to be ‘refundable.’ When it is stated that it is refundable, it does not belong to the agent, even after payment, as it could be refunded to the client who paid it.
It is often stated that you can simply set up a standard second business account and use that as a client account. However, you guessed it: No, you can’t!
If the reservation fee or deposit is in part or in full refundable, it must be held in a ‘Client Account.’ The Client Account must have appropriate Client Account Insurance in place.
A lot of agents are turning to those newer banks that only operate online, such as Starling or Monzo. I can tell you now that, as far as we are aware, none of these banks offer client accounts and, in fact, state clearly that their accounts are not to be used for that purpose.
Sourcers and deal packagers need to think of other ways of working, rather than taking refundable fees upfront!
Here is a link to the NTSELAT guide on Estate Agency: How to Handle Client's Money:
Myth: Property Sourcing or Deal Packaging are Low-Knowledge, Low-Cost, Easy-Entry Strategies to the Property Investment Sector
Property sourcing or deal packaging are often advertised as low-knowledge, low-cost, easy-to-set-up, and quick-cash courses. But those of us who have been ‘around the block’ a few times know how unrealistic those statements are.
Whichever option you choose, sourcing or packaging, the cost of setup and running will NOT be zero. You will not have cash in the bank in a couple of months (unless perhaps sourcing rent-to-rent deals), and there are definitely knowledge requirements if you want to have a successful business.
Your insurance and registrations will cost, and you must have professional indemnity and public liability insurance. You will need your Anti Money Laundering supervision registration, plus possibly Data Protection registration (to be on the safe side). You will need your clients’ contracts, and if you sell ‘off-market’ properties, your own compliance and process will need to be reviewed and updated regularly.
You will need to stay updated on any changes in legislation, including new legal requirements or adjustments to existing regulations. Not to mention, ongoing professional development and networking will ensure that your business stays ahead of industry trends and compliant with all rules and regulations.
Property sourcing and deal packaging are far from being easy, low-cost, or low-knowledge strategies. They require hard work, careful planning, and a strong understanding of the legal and regulatory frameworks surrounding them. But with the right approach, compliance, and business acumen, they can offer rewarding opportunities for those willing to invest in their education and the proper setup of their business.
Final Thoughts
Understanding the legal landscape of property sourcing and deal packaging is crucial for protecting your business, your reputation, and your capital. These myths—whether it’s about how sourcing agents are regulated, how to handle deposits, or what insurance you need—are often perpetuated due to ignorance or misinformation.
As property professionals, it’s important to seek out reliable, accurate guidance, and keep yourself informed about the latest regulations and best practices. The consequences of non-compliance can be severe, but with the right knowledge and resources, you can build a successful and compliant property sourcing business that thrives in the long term.
Let’s work together to challenge these myths, share knowledge, and make the property sourcing industry a safer, more transparent place for everyone.
W: https://napsa.org.uk/
