Serenity Travel Trusts’ Sarah Lacy outlines the challenges of keeping consumers’ money away from a business’s
The CAA’s ‘Request for further information’ on 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 designed and run trust, client and escrow account arrangements for the travel industry for over 10 years, I’ve found no simple route to achieving that objective.
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The reality is that client money segregation is difficult and painful. It requires a real commitment both to the theory and the practice of keeping consumers’ money away from a business’s money. This is not a commitment the UK travel industry has to date been required to have. Some have shown a brave commitment to the principle, but for the majority changing the financial habits of a lifetime will be long and difficult.
Segregation challenges
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 several basic requirements, all of which have challenges. These are:
Timing: Consumer funds should clear into the segregated or trust account as soon as possible after the consumer has paid. This means having a merchant services provider which does not defer payment. It also means 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.
Accuracy: Consumer funds that relate to licensable sales need to be identified and quantified to keep the segregated or trust account sufficiently, but not over, funded. This implies a daily reconciliation of the account to bookings – at least in cases where free cash is short and needs to be moved quickly – followed by an analysis and valuation of licensable versus non-licensable bookings. This is a task which many companies do not carry out daily as a matter of course and it may require significant investment to implement.
Without set-off or deduction: The consumer is entitled to have the full amount of a payment protected. Merchant acquirers which 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.
Client money segregation is difficult. It require a real commitment both to the theory and the practice of keeping consumers’ money away from a business’s
Accessibility: The Air Travel Trust trustees require a clear, quick and enforceable route to claim segregated consumer funds in the event of an insolvency. Currently, they ensure this by prohibiting the mixing in one account of licensable and non-licensable funds, prohibiting segregated funds being put on treasury deposit (which offers a fixed rate of return over an agreed period) and by seeking undertakings from the banks holding the accounts. Meeting these requirements can prejudice account holders and put a disproportionate obstruction in place in the current segregation infrastructure. It thereby 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? For verification to act as an effective deterrent to a business tempted to dip into protected funds or as an effective tool to provide security to an underwriter or merchant acquirer, it would need to take place at least quarterly.
Independent control: The 2018 Package Travel Regulations (PTRs) specifically addressed the shortcomings created by directors acting as trustees over their own companies’ trust accounts. The legislation 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 and would be a step backwards for consumer protection.
Availability of bonds and insurance products: The CAA’s ‘Request for further information’ document acknowledges the bonding and insurance 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 proffered by the CAA without, in effect, doubling the cost of protection. Critically, it’s hard to see how any insurance or bond provider would ever recognise a simple client account as security enough to provide supplementary cover at a reasonable cost.
Flexibility required
Having said all this, these are not insurmountable issues. There are ways to make segregation simpler. However, 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 will require an appreciation of the huge changes and challenges which segregation represents to the travel companies it will primarily affect.
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