Comment: There is no reason to fear trust accounts

PT Trustees director Sudheer Sharma says objections to CAA plans to segregate client money are unfounded

Travel trusts pre-date 2001 when I became a travel trustee and started implementing trustee management systems. Since then, we have acted as trustee for an estimated 2,000 businesses and overseen the disposition of billions of pounds in travel and non-travel funds.

The Atol reform consultation has led to much commentary showing how little is understood about trusts – and their value in providing protection for consumer funds collected weeks and months ahead of travel – and how trustees operate, with advanced data management and reporting.

Objections emanate from those who appear to oppose trusts regardless of evidence of their unqualified success. During the Covid-19 pandemic, our trust clients could reassure customers their monies were safe and protected.

Those who oppose travel trusts because they are concerned about the cashflow consequences require reassurance, but that must be via accurate information.

The CAA and Air Travel Trust are correct in their attempt to mitigate their risk and protect the travel sector. Bonds have not proved adequate and it is well known that insurers are reluctant to return to the ‘old days’ of bond provision, while merchant acquirers are reluctant to support travel without security.

We accept others should be brought within consumer financial protection, such as airlines and pipeline monies held by agents, but these are not the subject of this reform.

Working capital and hybrid trusts

A move to trusts requires a judicious mix of building working capital while moving to trusts over a sensible transition period of two to three years. It’s accepted there may be an impact on cashflow.

The reason insurers and merchant acquirers see travel as high-risk is down to the fact that consumer monies are collected well in advance and used for non-travel-related services and unsecured payments to suppliers.

We support hybrid trusts which require a proportion of travel funds be held in trust and the balance released before travel to cover advance payments to airlines, accommodation suppliers etc. Such releases would be secured via readily available, approved insurance products.

Merchant acquirers rarely go beyond the transaction date plus one or two days in paying monies into trust accounts.

Segregation of funds

Segregation of consumer funds is relatively simple and, if properly managed, poses few challenges. There are three ways funds are paid into trust by travel companies:

  • 100% of a company’s transactions are licensable and paid directly into a trust account, with monies received via merchant acquirers.
  • Where larger businesses have both licensable and non-licensable transactions, the CAA requires all travel funds be paid into an interim account operated by the travel business. Sophisticated systems then compute the licensable funds and these are paid into the trust account.
  • Escrow arrangements require a travel business ensures a percentage of funds – generally 70% – be held in trust and reconciled weekly.

The UK Companies Act requires all firms maintain adequate accounting records to demonstrate control of transactions and record liabilities. The question then is how professional trustees access and use this essential data (booking by booking) without overloading a travel company’s resources.

We’ve invested significantly in systems to source, record, store and manage data. Our systems reconcile trust monies on a regular (daily, weekly) basis, booking by booking.

Each week during Covid-19, we provided fully reconciled trust data to clients and supported them when it came to refunds, cancellations or monies being allocated to different bookings. Our systems are designed to process vast volumes of data at speed.

Cost of operating travel trusts

Trust operating costs are significantly less expensive, and less onerous from a reporting standpoint, than has been suggested.
Bonding levels are set by the CAA as a percentage of licensable turnover. The CAA has agreed bonds as low as 10% of licensable turnover for highly rated Atol holders, but new Atol applicants require a bond of 15% or more during their first four years of holding an Atol.

Underwriters generally set bond premiums at 4% to 5% of the bond amount, or 3.5% for ‘blue chip’ companies.
Trustee fees are based on a combination of time, booking volumes and any special factors, and are generally significantly below the costs of bonding. Also, trust fees are stable from year to year, while bonding requires annual applications subject to risk assessment by the CAA and insurers – and both bond levels and premiums are reset each year and open to vacillations in the bond market.

In addition, bond premiums are payable annually in advance whereas trust fees are paid monthly.
Finally, the 2018 Package Travel Regulations require trust monies be held and managed independently. Operating a trust leads to a system of stewardship and oversight that does not exist in any other model.

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