Deposit-free options allow renters to pay a less at the beginning, usually one week's rent or a monthly fee.
Deposit-free renting is being mis-sold to tenants who do not fully understand the costs involved, according to a report by BBC News.
Campaign groups and the ombudsman has reportedly warned that those providing deposit-free options are not making it clear it could cost renters more over time.
Deposit-free options allow renters to pay a less at the beginning, usually one week's rent or a monthly fee.
However this is non-refundable and cannot be used to pay for damages.
Recent government guidance states that a landlord or agent must only offer an alternative to the traditional deposit as an option.
David Cox, chief executive of ARLA Propertymark, told the BBC that they welcomes anything which helps renters struggling to pay a new deposit, however it is important tenants understand the fees for these schemes are "generally non-refundable".
There are reportedly at least eight products offering this service on the market.
Some charge tenants as much as £100 to dispute a damage claim from their landlord.
This comes as Prime Minister Boris Johnson announced plans to introduce a "lifetime deposit" in his Queen's Speech in December 2019 so tenants do not need to find a new deposit every time they move and instead can transfer their deposit balance from one tenancy to the next.
Flatfair, which describes itself as the "home of deposit-free renting" responded to the BBC article.
A spokesperson from flatfair said: "It is key that consumers need to be able to make informed choices, especially in an industry which is still in its infancy.
"What needs to be made crystal clear is that there is a key difference between insurance solutions charging tenants excessive or recurring fees and payment technology companies like ourselves who offer tenants a transparent one-off fee without hidden costs.
“From the outset, we offer a clear sign-up process where tenants have to agree to statements making it clear of our offering, including the fact that the membership is non-refundable and is an optional alternative to a traditional deposit.“
"The BBC article refers to insurance solutions, which despite being FCA regulated are being mis-sold.
"Some insurance solutions count estate agents among their investors, which removes any sense of independence.
"Rather than being an insurance product, flatfair is independent and built upon the latest payment technology which means tenants can rent their home through just their debit card - in much the same way as you would checking into a hotel.
"Although flatfair was not the subject of the piece - and was not used by the customer featured - this highlights the importance of our mission to drive a fairer, more transparent and accessible rental market that everybody trusts.”
Jude Greer, co-founder and chief executive at deposit alternative service Reposit, is concerned about the latest report of mis-selling.
Greer said: "This latest news on mis-selling of deposit alternatives is worrisome.
"When we founded Reposit in 2016 as the first deposit alternative offering in the UK, we believed that FCA regulation, security and transparency had to be at the core of our business.
"This is ingrained to the very core of how our company does business. Because we are FCA regulated we are audited regularly to ensure that we treat our customers fairly and clearly communicate our product.
"We consistently endeavour to provide the highest standards of training to our partner agents to minimise any misinformation or mis-selling.
"Tenants are provided with detailed marketing materials and our full set of T&C’s is publicly available.
"To maintain our high standards, Reposit has cut off partners from using our product when it has been mis-sold or when tenants have been pressured into choosing Reposit.
"However, we can only speak for ourselves. Whilst most providers look similar there’s a huge variation in the levels of regulation and transparency which, is not only a threat to the entire industry but can be very confusing to tenants and agents alike.
"We therefore ask agents to do their due diligence in order to make an informed decision for their customers."
Eddie Hooker, group chief executive of Hamilton Fraser, added: “As a supplier in the industry of both traditional tenancy deposit protection through mydeposits and one of the new, deposit replacement scheme alternatives, we consider it important to ensure that tenants have full choice as to whether to find a traditional upfront deposit or to manage their cash flow by opting for a deposit replacement product.
"However, tenants must always be fully aware of the terms and conditions of whatever choice they make.
"With a traditional deposit, this means reading the tenancy agreement to understand when a landlord can deduct monies from their deposit, and for a deposit replacement they understand that they will always be responsible for deductions at the end of the tenancy even though they will have paid a fee for the product.”
“My issue has never been with the replacement products themselves, rather how they are sold and by whom.
"I’m not sure that all products put the tenant at the heart of the decision-making process even though the law states that tenants must be offered a choice of both a traditional deposit and a replacement product.
“But I believe the deposit replacement space has a real opportunity to not only push the changing face of the rental sector towards a tenant first mentality but to do so with a proper set of industry guidelines that hold everyone accountable to the same standards.”
