Q. My letting agent has failed to protect the tenancy deposit and my tenant is threatening to sue me for the penalty. Surely he has to sue the agent not me, as it was not my fault?
A. I am afraid you are also liable. Under agency law an agent is not normally liable to third parties (such as tenants) for the work he does for his principal, but an exception was made especially by the legislation for the case of tenancy deposits.
But a principal is always liable for the acts or omissions of his agent (unless it was obviously something outside his authority which is not the case here) so I am afraid the tenant can sue you for the penalty. Even though, as you say, it was not your fault.
However, you can require the agent to pay this, and if the tenant sues you, you can in turn claim against him requiring him to reimburse you.