Reports of fraud by letting agents have risen to an all-time high, as tenants who cannot afford to buy flood the market and increasing numbers of homeowners become “accidental landlords”.

Authorities say rogue letting agents are defrauding buy-to-let landlords and tenants of hundreds of thousands of pounds of misplaced rent and deposits.

Unlike estate agents, letting agents do not have to be regulated – in spite of handling large amounts of cash. According to an investigation by Financial Times publication the Investors Chronicle, 40 per cent of letting agents are unregulated.

The UK’s main property watchdog, the Property Ombudsman, has received 5,000 complaints about letting agents so far this year. It has been unable to investigate a quarter of these as they concern unregulated agents. In the third quarter of 2010, reports of disputes with letting agents rose 27 per cent.

The Association of Residential Lettings Agents (Arla), which regulates around 3,500 agents, said that fraud complaints had risen in the last 12 months to their highest-ever level.

“In some cases, client money has been used to pay staff salaries, VAT bills or company bills,” said operations director Ian Potter. “In other cases, you can’t see what it’s been used for.”

Last month, the National Fraud Intelligence Bureau issued a rental fraud alert after 95 tenants were hit by “let and run” scams. Bogus letting agents tricked renters into paying more than £100,000 in cash deposits for properties that in some cases never existed.

This week, Savills forecast that increased rental demand from those priced off the property ladder would place “big upward pressure on rental levels”. It believes the UK will become like Germany, where most under-40s rent property.

The housing minister, Grant Shapps, scrapped plans to regulate letting agents in June.

“The new government believes blanket regulation is not a solution,” said a spokesman from the Communities and Local Government department. He said additional regulation would harm tenants’ interests by pushing up rents and restricting the availability of housing available to rent.

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