It has been well documented that some customers have suffered very uncomfortable waits for refunds from their cancelled holiday, whether due from an airline, travel organiser or travel intermediary.
The reason behind many delays has been placed at the door of suppliers and, in particular, airlines – where refunds have been much delayed or in some cases denied.
Those businesses that have dealt well with refunds, and enhanced their reputations as a result, tend to have one thing in common – they are well capitalised, and as a result, are able to segregate their customer funds, meaning they could refund quickly.
In light of the challenges this year, there has been more talk about "ringfencing" customer money, including through trust accounts, an issue explored in Rob Gill’s article "Embracing a new reality" in November’s TTG.
It is important, though, to remember that trust accounts for ringfencing money and trust accounts for financial protection purposes are two different things, and should not be confused.
We have many Abta members that segregate customers’ cash, with some formally separating those funds utilising a client account and others simply maintaining an internal discipline not to draw on those funds until departure or return.
Businesses do not need the costs and administration of a formal trust account to achieve this result, they simply need to segregate the cash – a much lower cost solution.
But, they must be able to pay the refund out of that cash even if there is no certainty, or possibility, of recovering those refund monies from airlines and other suppliers that they have already paid out of their own money.
That is the same for trust accounts. So thinking about the challenges around refunds this year, if companies used a trust account that permitted pre-payments to the airline, the money would have been paid out and would be stuck.
And if the travel company failed, the customer’s money would not be fully in the trust account to repay them.
This takes us neatly on to look at the question of financial protection.
The Package Travel Regulations regime allows travel organisers to choose how they comply with the insolvency protection requirements through one of the following a methods:
Whichever method is chosen, the organiser must provide sufficient security to refund all payments made by or on behalf of travellers for any travel service not performed as a consequence of the company going out of business and to repatriate the traveller and pay for the traveller’s accommodation prior to the repatriation.
Regulation 23 requires that "all monies" are held in trust until "the contract has been fully performed".
Very few trust arrangements fulfil this requirement. This is because most trust arrangements allow for the earlier payment of suppliers from the trust and some allow the withdrawal of a value in relation to margin/commission.
Regulation 24 recognises there may be a "lesser sum" held in the trust, but then requires that the organiser has in place "insurance under one or more appropriate policies" to cover any shortfall of funds held in the trust.
Scheduled Airline Failure Insurance (SAFI) insurance alone is of no assistance unless the airline or other fails, while cover is still in place.
In addition, Regulation 24 requires there to be an insurance policy in place to cover for repatriation and pre-repatriation accommodation costs. These policies must be without prohibited conditions.
So, a standard SAFI policy may be one part of this requirement, but not the whole story.
The 2018 Regulations improved the legal framework for trust accounts, requiring independent trustees.
However, one of the reasons Aba has not so far been able to get comfortable with and approve any trust account scheme is that there have been too many cases in the past of customer funds not reaching trust accounts. What happens in that scenario? Where is the bond or insurance to cover that risk?
With the Atol scheme, we have the Air Travel Trust and government standing behind the scheme.
With Abta (and Abtot and the CPT Bonded Coach Holiday) schemes, there are bonds provided by regulated banks and insurance companies, backed up by reinsurance, all independent of the failed travel organiser and held by a government PTR-approved body with the resources to manage a failure.
Abta recognises that some of our members have experienced real difficulties renewing bonds or insolvency insurance policies, with underwriters seeking additional security and increasing rates.
Providing additional security in these very difficult times is clearly a challenge and drain on precious liquidity, but certainly no more so than tying up 100% of customer prepayments in a trust account, plus the fees and premiums associated with the management of the trust.
Many Abta members operating customer money segregation, which often supports a strong balance sheet and advantageous cost of bonding, enjoy the best of both worlds, as well as the customer recognition of the Abta accreditation.
It’s a logo that stands for much more than just financial protection, both for consumers and members.
John de Vial is Abta’s director of membership and financial protection.