ABTA plans crunch talks with bed banks to determine who should be liable following a travel agency failure.

The move follows an open letter from On Holiday Group founder Steve Endacott, criticising ABTA for directing consumers to bed banks to recoup money when a travel agency fails.

The recent failures of Freedom Direct and Harvey World Travel highlighted the confusion on liability, with ABTA and bed banks at loggerheads. Many bed banks have refused to pay back customers, forcing holidaymakers to turn to credit card companies to recoup their money.

ABTA chairman John McEwan said various options are being considered. He added: “We have to find a way of resolving this issue. My concern is we are not satisfying customers.”

Bed banks are considering demanding payment by agents eight weeks in advance in line with tour operators, or requiring customers’ money be held in a trust fund. Either option could create cash-flow problems, and force some agencies out of business.

Endacott, whose business is not an ABTA member, suggested ABTA introduce a compulsory insurance scheme to cover agency collapses and pipeline monies. He insists bed banks acting as agents for accommodation providers should not be liable if they have not been paid by an agency.

In his letter he said: “…bed banks’ terms and conditions are designed to protect them from the collapse of an agency. They state very clearly that reservations only become bookings when agents pay over the customer’s money.”

However, ABTA head of legal services Simon Bunce said bed banks acting as agents, such as On Holiday Group’s Holiday Brokers and Thomas Cook-owned hotels4u.com are responsible under agency law – even if they have not received a customer’s money.

Bunce said: “If bed banks appoint someone to collect money on their behalf, they are responsible if something happens.”

He added: “The amount of business done with bed banks through retailers means the bed banks are exposed to big losses when a large agency goes bust, and they are not prepared to take responsibility for those monies.”

Bed banks acting as principals have also raised concerns. Paul Riches, sales and marketing director of youtravel.com, said no supplier should have to pay back money not received from customers. He added: “The whole issue is so confusing.”