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Seven good reasons why travel trust accounts should be a favoured form of financial protection: Sarah’s submissions to the CAA following the ATOL Call for Evidence

In May 2013 the Department for Transport called for evidence from the travel industry as part of the government’s ongoing programme of reform of Air Travel Organisers’ Licensing (ATOL). It invited evidence and views from all interested parties on the current ATOL system and on possible alternative arrangements to ATOL Bonds.

Our decades of experience and knowledge of the travel industry (and specifically the experience we have gained in running travel specific trust accounts) enabled us to identify the pitfalls and benefits of trust accounts as a means of providing financial protection. We tendered our views to the DfT and this document summarises those views.

The DfT’s key objectives were stated in its consultation document to be:-

  • to put the financial protection arrangements for the travel industry on a robust basis;
  • to deregulate and have the industry take more responsibility for protecting its own customers’ money;
  • to reduce the Government’s financial exposure;

Changes would produce a better, more cost-effective way for industry to meet the refund and repatriation objectives of the Package Travel Directive and the ATOL scheme.

Travel trust accounts meet those objectives pretty squarely in our view. These are the reasons why:-

1) Reduced risk of over-trading on a bank or other guarantee.

For obvious reasons, trust accounts represent a low risk in terms of consumers’ money. Quite simply, ALL consumer money is ring-fenced until it is ‘safe’ to release it. Therefore there is no need for the CAA to assess likely turnover for the purposes of setting levels of a bond or insurance premium.

2) Capable of being a single type of financial protection for all and any combination of travel services.

Trust accounts are a simple and cost effective means of complying with statutory financial protection requirements, for new entrants to the industry and established businesses alike.

Having one trust account in place for all arrangements requiring protection avoids confusion for both the consumer and the travel company and also reduces the risk of a travel company failing without having the required protection in place.

3) Security

If correctly set up and administered, trust accounts are a more secure and reliable means of providing protection than an insurance policy or a bond.

Insurance policies can be subject to onerous conditions which may mean cover isn’t as reliable as it might appear. A bond is only as reliable as the assessment of turnover it is to protect and the risk of overtrading is constantly present.

All Serenity’s trusts comply fully (and indeed go beyond) the requirements of the PTRs in terms of safety and security. However, trust structures that are over complicated can put an undue administrative burden on both trustees and travel companies, making them less cost effective to run. A careful balance between security and feasibility is required.

4) The drawbacks of the current legislative framework as it relates to travel trust accounts

As far as we are aware, Regulation 20 of the Package Travel, Package Holidays and Package Tours Regulations 1992 (PTRs) is the only statutory guidance that is available to help the travel industry assess the system, structure and parameters within which a travel trust should be run.

But this wording creates a potentially very significant problem for travel companies wanting to employ this as a means of complying with their financial protection obligations as cash is tied up until after arrangements have been fully performed, yet suppliers require payment well before that. This creates an impossible cash flow position for any company without the capital to fund the shortfall.

We have argued in our submission to the DfT that release prior to travel should be allowed as long as an appropriate Supplier Failure Insurance policy is in place.

The PTRs wording also leaves it open to travel companies to run trust accounts that (whilst they comply with the letter of the law), don’t offer much security to the consumer.  For example:-

  • Any person can act as a trustee over the account, even a director of the company itself. This allows huge scope for abuse of the trust account as a means of providing  financial protection as a director of the company could misapply trust funds with little or no independent checks and balances.
  • The wording doesn’t stipulate what professional indemnity insurance arrangements trustees must have in place, or the checks and balances that should be applied by trustees of the account to ensure that the right funds are being paid into the account and released at the right time.
  • The wording doesn’t stipulate that funds must be held in a separate trust account, or how that account and its transactions should be controlled so as to ensure its security.

We have called for more detailed and specific guidance on the way that trust accounts should be run. Alternatively, that only centrally approved trust schemes be permitted to be used as a form of financial protection.

Further, PTRs Regulation 20(7) leaves significant scope for insufficient funds to be available for distribution on failure. It is a loophole for lay and non-independent trustees to refund only part of the price that a consumer has paid for a holiday on the basis that the money simply isn’t in the account when the failure comes to happen. We have called for the closing of this loop.

5) Ease of Administration following failure

In a correctly run trust structure, consumers’ money will be securely held in a separate designated account until the arrangements it relates to have been fully performed or until suppliers have been paid (where appropriate Supplier Failure Insurance is in place) and can be transferred to a fulfilment body immediately. So in the event of an account holder’s insolvency, customers will not experience lengthy delays in getting their money, and will not need to jump through administrative hoops to get it.

6) Expense of alternative arrangements

The cost of ATOL bonds are on the up as are the CAA’s minimum bond requirements. This option is prohibitive for a start-up or low turnover business.

7) Merchant Services

Merchant suppliers favour the use of trust accounts as they are transparent and greatly reduce the risk to consumer monies. Encouraging  their use will  also encourage  merchant services suppliers to relax their currently quite onerous terms for travel companies. Such savings could be passed on to consumers.

In order to bolster that process, merchant services suppliers, the CAA and fulfilment partners would need to have clearly defined agreements regarding priority of payments to consumers.

Need we say more? We are confident that trust accounts will continue to feature in future legislation governing the financial protection of consumer’s forward payments made for travel services. And we at Serenity will continue to be at the forefront in forming the way that those trust accounts should be run and administered.

October 2013