Covid-era refund issues spurred push for Atol funds segregation

The Covid-era difficulties some Atol holders had accounting for customer payments and refunds led the CAA to identify segregation of client money as its preferred option for Atol reform.

CAA head of Atol Michael Budge confirmed the regulator’s thinking on a Travel Weekly Future of Travel webcast, saying: “It came to light during the pandemic that [some] businesses couldn’t point to how much money they had collected from customers and how much they owed in refunds.”

But the webcast also highlighted a possible pathway to segregating funds through client accounts and escrow arrangements.

Escrow sees funds held by a third-party ‘escrow agent’ and could involve just a portion of customer payments. The CAA has outlined trust, escrow and client accounts as options for Atol reform.

Budge explained: “If an operator doesn’t understand their potential liability, how do they understand their cashflow? Businesses which understand this have a grasp of their underlying cashflow and liquidity. That gives us an understanding of cashflows and how money is being used.”

He said a client account “isn’t going to provide hard security against a failure. That is not what it’s about. It’s about better understanding the cashflow of a business and the risks a business poses.

“The purpose of suggesting client accounts was to suggest something which would provide the information we need – better knowledge of the underlying liquidity, free cash position and obligations to consumers.”

Sarah Lacy, director of Serenity Travel Trusts, suggested “client accounts could work” while noting they would add “a cost implication”.

However, she said: “The mindset in the industry would need to change. You don’t touch client money. That is the mindset you need.”

She argued escrow supported by a bond could offer a means to transition to segregation, saying: “The beauty of escrow is it’s flexible. The percentage of funds in escrow can be increased over time.

“It’s quite a simple model. You could start a business on a small percentage of escrow with a bigger bond and increase the escrow and reduce the bond over time. That wouldn’t be such a shock to the system.”

Lacy added: “There are probably more businesses in escrow than you realise, and there is a fairly large proportion running client accounts that could go into escrow.”

She suggested businesses operating client accounts could be ready for the CAA’s proposed start date for a new regime of April 2024.

But she argued businesses not used to segregating money “are going to need four to five years” to transition. Lacy said: “It has to be a slow, incremental approach.”

Budge declined to give details on what might be required from the start or the length of transition, saying: “The extent of any change will determine the length of the transition.

“This is about engagement to help shape the proposals, then we work out how they can be implemented. [But] we’re not going to expect every business to transition on the first day.”

He promised a consultation on proposed changes “this year”.

Responses to the CAA’s current ‘Request for further information’ on Atol reform need to be submitted by March 24.

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