Serenity Travel Trusts’ Sarah Lacy explains how Atol holders might move towards segregating funds if the CAA requires it
The deadline for responding to the CAA’s ‘Request for further information’ on Atol reform has passed and decisions, let alone specifics on any scheme involving mandatory segregation of funds, are still some way off.
That leaves many Atol holders unable to plan or forecast the future for their businesses. Exacerbating the uncertainty is the possibility that change may be imposed as soon as April 2024.
To alleviate these concerns, Atol reform should be dealt with slowly and incrementally.
One advantage that segregation has over bonds or insurance is its flexibility.
The ‘hybrid’ options the CAA referred to in its consultation should be demanded of the regulator as part of its 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. This was introduced during 2020 to encourage larger Atol holders to embrace the segregation of consumer money.
It works by prescribing that the balance 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 for flight-inclusive travel arrangements.
The Atol holder prepares and sends a weekly ‘Compliance Certificate’ to the CAA and independent trustee which details the calculation it has used to find the value of the APF.
Any surplus funds in the account above the APF amount are released. But the Atol holder must pay into the account to cover any shortfall between the APF amount and the balance.
This structure is simple. In most cases, it doesn’t rely on any specialist or additional technology. The information required to assess an APF is not too dissimilar to the ‘business systems’ all Atol holders are required to have under the standard terms of their Atol.
Because the system doesn’t require customer payments to settle directly into a trust account, it avoids the pitfalls that exist with a ‘full trust’ associated with the need to analyse the price paid versus supplier liability on a booking.
It also avoids inadequate merchant settlements (when payments are delayed) and the challenges posed to segregation by mixed Atol and non-Atol sales.
The comparatively ‘light’ touch escrow structure makes it less expensive for a business.
Gradually increasing the APF in escrow over time would mean companies do not face a sudden cashflow shock to their system. Indeed, those already operating client accounts could move almost seamlessly into such an arrangement and potentially see a reduction in Atol Protection Contributions (APCs) as soon as April 2024.
The approach could be based around an assessment of the level of client money an Atol holder will have available at the anticipated start date, and that money be converted into a more formal and secure fund via an escrow account.
The structure does have some shortcomings. The ‘lighter’ touch inevitably means reduced independent monitoring, and a weekly balance adjustment means an account will be overfunded or underfunded about 85% of the time.
This could be balanced by assessing the APC rate and/or setting the APF level to reflect the additional risk and make good the underfunding. Where cashflow capabilities don’t lend themselves to a higher APF, bonds or insurance could be used.
The biggest benefit is that there is no end to the flexibility this kind of model offers to a variety of Atol holders looking to transition to segregating customer money.
The CAA consultation states that, in the context of risk, “trust accounts or escrow accounts are considered to achieve the same objective”. These models present an opportunity to ease the industry into transition – both on a practical level and in terms of a change in mindset.
Sarah Lacy is director of Serenity Travel Trusts