Decisions about ATOL reform are still under deliberation; and specifics like the lead time into any mandatory segregation and the detail of the segregation options are still a long way off. That leaves many ATOL holders unable to plan or forecast the future for their businesses. Exacerbating that uncertainty is the possibility that fundamental change may be imposed as soon as April 2024. To alleviate these concerns, ATOL reform should be dealt with slowly and incrementally.
One thing that that can be construed as a positive, and is clear from the CAA’s most recent missive, is that because the canvas on the detail is blank, travel companies have an opportunity to paint it as they would like. One advantage that segregation has over bonding or insurance is its flexibility. The ‘hybrid’ options that the CAA have alluded to in the consultation are just that and so they should be favoured by the industry, and demanded of the CAA as part of it approach to reform.
One such ‘hybrid’ model of segregation is the option of putting a percentage of client money into an ‘escrow’ account. The CAA’s existing escrow account model is a simplified version of its standard ‘full trust’ arrangement. It was introduced during 2020 to encourage the larger ATOL holders to embrace the segregation of consumer money paid for flight inclusive travel arrangements. It works by prescribing that the balance held in an independently held and controlled escrow account – the ‘Agreed Protected Funds’ (APF) – must be equal to or greater than a CAA mandated percentage of overall funds paid by consumers for flight inclusive travel arrangements. The ATOL Holder prepares and sends to the CAA and an independent trustee, a weekly ‘Compliance Certificate’ which details the calculation it has used to find the value of the APF. Any surplus funds in the trust/escrow account that are above the APF amount are released from the trust account; or the ATOL Holder must pay into the account any shortfall between the amount of APF and the balance in the bank account.
This structure is simple. In most cases, it doesn’t rely on any specialist or additional IT – the information required to assess an APF is not too dissimilar to what all ATOL holders are required to have as their ‘business systems’ under the standard terms of their ATOL.
Because the system doesn’t require customer payments to settle directly into the trust account, it avoids the pitfalls that exist with the ‘full trust’ associated with the need to analyse price paid versus supplier liability on a booking. It also avoids inadequate merchant settlements and the challenges posed to segregation by mixed ATOL and non-ATOL sales structures. The comparatively ‘light’ touch that escrow structures represent thus makes them less expensive for a business in terms of their in-house administration.
Gradually increasing the APF in an escrow over time would mean that companies do not have to face a sudden cash flow shock to their system. Indeed, those operating client accounts now could move almost seamlessly into such an arrangement and see reductions in APC as soon as April 2024. The approach could be based around an assessment of the level of client money that an ATOL Holder has – or will have – available at the anticipated live date of April 2024, such that the available client money could at that time be converted into a more formal – and secure – trust fund via the workings of an escrow account.
The structure does have some shortcomings though: the ‘lighter’ touch inevitably means reduced independent monitoring; and a weekly balance adjustment means that an account will be either overfunded or underfunded for 85% of the time. On balance though, compensation for those shortcomings could be provided for by assessing APC contributions and/or setting the APF level to reflect additional risk of and to make good the underfunding; and where cashflow capabilities don’t lend themselves to a high APF, bonds or insurance could be used to supplement.
Of most benefit is that there is no end to the flexibility that this kind of model offers to the wide variety of ATOL holders looking to transition into segregating their customer’s money. The consultation itself states that ‘in this context [of risk] trust accounts or escrow accounts are considered to achieve the same objective’ and so the opportunity that these models present to ease the industry into transition – both on a practical level and in terms of the all-important change in mindset – should not be overlooked.
