The CAA’s request for further information as it continues with its consideration of ATOL Reform makes a number of references to ‘simple client account segregation’. But is any form of client money segregation simple, whether presided over by a professional trustee or otherwise? Having had over ten years’ experience in designing and running trust, client and escrow account arrangements for the travel industry, sadly, I have found no simple route to achieving that objective.
The reality is that client money segregation is difficult, painful; and requires a real commitment both to the theory and the practice of keeping consumer’s money away from the business’s money. This is not a commitment that the travel industry in the UK has to date been required to have. Some have already shown a brave commitment to the principal; but for the balance – and the majority – changing the financial habits (and beliefs) of a lifetime will be long and difficult.
In order for any segregation to be effective in meeting the CAA’s aim of providing the majority of the financial security for consumers buying licensable products, it needs to meet these basic requirements, all of which have their challenges:-
Timely – consumer funds should clear into the segregated or trust account as soon as possible after the consumer has paid them. This means having a merchant services provider that does not defer payment. It also means that companies selling both licensable and non-licensable products must have sufficient cash reserves to keep funds relating to non-licensable products segregated until identified and physically transferred into ‘free’ accounts.
Accurate – consumer funds that relate to licensable sales need to be identified and quantified in order to keep the segregated or trust account sufficiently (but not over) funded. This implies – at least in cases where free cash is short and needs to be moved quickly – a daily reconciliation of the account to booking level; followed by an analysis and valuation of licensable vs non-licensable bookings. This is a task which many companies do not carry out daily as a matter of course – and may need significant investment in order to implement.
Without set-off or deduction – the consumer is entitled to have the full amount of its payment protected. Merchant acquirers that defer settlement, take refund and chargeback payments by direct debit from the segregated account; and deduct fees before settlement are not consistent with this requirement. Despite acquirers’ increasing preference for merchants to use trust arrangements as security, educating them on these issues is slow going.
Accessible – the Air Travel Trustees require a clear, quick and enforceable route to claim segregated consumer funds in the event of an insolvency. Currently, they ensure this – amongst other things – by prohibiting the mixing in one account of licensable and non-licensable funds; prohibiting segregated funds being put on treasury deposit and by seeking undertakings from the banks holding the accounts. Meeting these requirements prejudices account holders and puts disproportionate obstruction in place in the current segregation infrastructure – and so narrows the scope of many businesses to structure segregation to fit their business model.
Independent verification– the cost of appointing an independent trustee over a segregated account can be disproportionate for some businesses; but is appointing an ATOL reporting accountant to audit a segregated account much less expensive? In order for verification to act as an effective deterrent to a business that is tempted to dip into protected funds; or an effective tool to provide security to an underwriter or merchant acquirer, verification would need to take place at least quarterly.
Independent control – the 2018 package Travel Regulations specifically addressed the shortcoming created by directors acting as trustees over their own companies’ trust account. Source legislation thus requires that segregated funds are held and managed independently. A trust or escrow arrangement would be consistent with that position but simple client accounts (where a director has ultimate control over funds in the account) is both inconsistent with the PTRs as well as a step backwards for the consumer’s protection.
Availability of bonds and insurance products – the consultation document acknowledges that the market is not currently robust enough to support the industry’s financial protection requirements. The fact also remains that the bond and insurance markets do not sufficiently recognise (or understand) the security that trust and escrow arrangements represent. This prevents them rolling out the hybrid solution that is proffered by the CAA without effectively doubling the cost of protection. And critically, it’s hard to see how any insurance or bond provider will ever recognise a simple client account as security enough to provide supplementary cover at any reasonable cost.
Having said all that, the above are not insurmountable issues. There are ways to make segregation simpler – but segregation is not simple. It will require flexibility by the CAA; and an understanding and commitment from banks, merchant acquirers, insurance and bond underwriters. Above all, it requires an appreciation by all, of the huge change and challenge that segregation represents to the travel companies it primarily affects.
