Segregation of client money is one of the central tenets of the UK’s Regulatory framework for licensed professionals. Solicitors, investment agents and advisors, accountants, architects, letting agents, insurance brokers and insolvency practitioners are all subject to strict codes and regulations about how client money should be handled and segregated.
How then, did the travel profession escape?
To find the answer, one must look at the history and evolution of the ATOL scheme and travel financial protection under the Package Travel Regulations.
The earliest form of financial protection for the travelling consumer (in the 1960s) was voluntary. ABTA and TOSG members were required to hold bonds equivalent to a stated percentage of their turnover. Indeed, the first ever ATOL Scheme did not aim to provide a comprehensive consumer protection scheme. It had just two principal aims: one (the ‘fitness’ test) was to prevent fraudulent operators engaged in the growing charter market from taking money for non-existent flights; and the second was to introduce a compulsory bonding scheme to ensure that people were not stranded abroad after the failure of a tour operator.
It was only in 1974 when the county’s then second largest tour operator (Clarksons) collapsed, holding a bond sufficient only to effect the repatriation – but crucially – not the refund exercise, that the Air Travel Reserve Fund (later to evolve into the Air Travel Trust Fund) was born. This fund was intended as a ‘back up’ to cover the refund requirement where the repatriation bond fell short.
With the introduction of that fund, the government, no doubt in its eagerness to appease voters, inadvertently sanctioned (indeed encouraged) the mixing of customer money with business funds. The Air Travel Reserve Fund would pay the refund in the event of an insolvency; and as long a travel company’s contribution to the fund had been paid, it was free to use the customer’s money as it pleased.
A recognition at that time that segregation of a travel company’s consumer money would promote its financial resilience by default might have meant that the consumer protection intervention measures required since then could have taken a completely different path. That path, had it been the segregation one that the CAA are now seeking to encourage, would no doubt have been far less interventionist, dictatorial and would have probably resulted in less overall impact on the public purse.
As it was, the missed opportunity to bring the travel profession in line with other professions that do segregate customer money became a self-fulfilling prophecy; with increasing numbers of larger failures occurring through the 1990s. This in turn resulted in increased desirability for consumer protection that ultimately resulted in the enactment of the 1992 Package Travel Regulations and the extension of the ATOL Scheme. By 1996, the Air Travel Reserve Fund was exhausted; and the reality struck that the breadth of consumer protection requirements for the travel sector would need to continue to grow.
Once on the course of ‘cure being better than prevention’, it was clearly going to be very difficult for the legislators to divert away from that course without pushing the industry into a cashflow crisis. It was no surprise then that the 1992 Package Travel Regulations paid only lip service to the use of trust accounts; and that bonds and later financial failure insurance was re-inforced as the staple cure for the ills of a travel company’s financial failure.
The emergence of OTAs and dynamic packaging by travel agents in the early 2000s resulted in the outlawing of ‘split contracting’ in 2004, bringing many smaller travel businesses into the ATOL scheme. Later, the development of UK case law such as ABTA v CAA (2006) and CAA v Travel Republic (2010) established that holidays sold in a broken down way were not packages. This triggered the introduction in 2012 of the concept of Flight-Plus, and the extension of the ATOL regime yet further; ultimately being consumed by the passing of the 2015 Package Travel Directive, and the significant broadening of the definition of a ‘package’ in EU law.
All this was reactive legislative activity. The consumer protection focus was on repairing the consequences of financial failure by extending the types of holiday bookings that benefit from the ever-more-complex regulation that surrounds them. Measures for prevention of the financial failure itself – by encouraging healthy financial management processes and practices across the industry in line with other regulated industries – were lacking. However, we are – as they say – where we are – and forcing dramatic and fundamental change over half a century of established, accepted – and indeed encouraged – courses of dealing will not happen overnight. Client money segregation is difficult. and in some cases not even possible without causing the ill it is intended to cure. But that doesn’t mean that it’s not the right thing to aim to do and – to coin another phrase – it’s better late than never.
