The Deposit Protection Service has received a 12.7m payment from taxpayers it has emerged.

The revelation about the bail out was confirmed by Housing Minister Grant Shapps in a reply to a question in Parliament, asked by Chris Kelly, Conservative MP for Dudley South.

The DPS make their money by using interest earned from deposited monies. However, with interest rates at 0.5% (a situation which would have never been envisaged at the time of making the original agreement) and an agreement which contained a guarantee that the Government would meet any shortfall arising if approved fees were not covered by the interest on deposits held meant that the taxpayer may have been liable for an estimated amount of over £30m by the end of 2012. By paying the £12.7m to the DPS, the new contract removes these guarantees. The revised agreement also extended the original agreement by four years.

Kevin Firth, director of the DPS, said:

“There’s nothing further to add. The DPS continues to successfully deliver the custodial scheme with 200 new landlords registering every day and in excess of 750,000 deposits currently protected.”

It is worthy of note that although the guarantees and liabilities have been removed by the revised contract, even now money is safe with the DPS because section 212(4) Housing Act 2004 states:

(4) The appropriate national authority may—

(a) give financial assistance to the scheme administrator;

(b) make payments to the scheme administrator (otherwise than as financial assistance) in pursuance of arrangements under subsection (1).

The bail out may come as a shock to the Scottish government, which is introducing compulsory tenancy deposit protection and has only favoured custodial schemes as opposed to insurance based schemes such as Mydeposits or TDS.

The full exchange in the House of Commons is below:

Chris Kelly: To ask the Secretary of State for Communities and Local Government –
(1) pursuant to the answer to the Hon. Member for Selby and Ainsty of 5 April 2011, Official Report, column 855W, on tenancy deposit schemes, what financial payments were made or underwritten by his Department as part of the revised agreement negotiated in August 2010;
(2) what the estimated shortfall arising from low interest rates was that resulted in the revised agreement negotiated in August 2010;
(3) if he will place in the Library a copy of the revised agreement of August 2010, redacting any commercially confidential elements to facilitate disclosure.

Grant Shapps: A service concession agreement that was originally agreed by the previous Administration with the custodial tenancy deposit protection scheme contained a guarantee that the Government would meet any shortfall arising if approved fees were not covered by the interest on deposits held.

As a result of the low interest rates that emerged due to the financial turmoil in 2008 and 2009, this agreement left the Government – i.e. taxpayers – liable for a shortfall under that guarantee which was estimated to reach over £30m by the end of the contract in 2012.

In May 2010, the Coalition Government inherited this unacceptable situation and looming liabilities. Following extensive negotiations in summer 2010, the guarantee and all associated liabilities were removed as part of a revised agreement which also incorporated a payment of £12.7m and a four-year extension of the original agreement.

The new agreement has been designed not only to remove future and current liabilities for Government and secure the best deal for taxpayers, but also to safeguard the ongoing viability of the custodial model of tenancy deposit protection and safeguard the interests of tenants.

Hon. Members and the broader public will rightly wish to scrutinise the poor decisions of the last Administration. The new agreement was made in the form of a letter amending the original, flawed agreement. Redacted copies of both documents will be deposited in the Library of the House in due course.