Custodianship of consumer monies and the fiduciary obligation via trustees

Travel Trusts pre-date 2001 when I first became a Travel Trustee and started designing and implementing Trustee management systems. Since then, we have acted as Trustee for an estimated 2,000 businesses and overseen the disposition of £billions of travel and non-travel funds.

The ATOL Reform consultation of 24th January 2023 has led to much commentary and speculation in the travel press; many of the comments show how little is understood about ATOL Trusts and their value in providing the best protection for consumer funds - funds which are collected weeks and months ahead of travel. Disappointingly those who should understand how trustees do operate with advanced data management and reporting capabilities, continue to show a lack of knowledge and understanding of the value of these high quality, supportive and cost-efficient trustee systems currently in use.

A major trade association has been consulting with various interested parties on this CAA consultation Despite making many comments about travel trusts and the CAA’s proposals, no attempt has been made to reach out to us to understand how efficient and cost-effective travel.

Objections emanate from those that appear to oppose travel trusts regardless of empirical evidence of their unqualified success and how trustees daily successfully support travel companies. During the period of Covid 19, trust operating clients could reassure their clients that their monies were safe and protected. This was superior and meaningful when compared to the quantum of unsecured refund credit notes issued by travel companies and airlines that did not operate trust accounts and were heavily reliant on Covid loans to stay in business. Many struggled to refund the cash they had collected.

Those that oppose travel trusts because they are reasonably concerned about the cash flow consequences rightly require reassurance but that must be via the use of accurate and informed knowledge and understanding – not the comments we have seen in the travel press thus far. The utilisation of consumer funds for working capital purposes should be addressed but in a sympathetic and practical manner.

The CAA and the ATT are correct in their attempt to mitigate their risk and protect the travel sector by enhancing confidence. Bonds have not proved to be adequate and insurers as it is well known are reluctant to return to the “old days”. Then there are the merchant acquirers and their concerns and their reluctance to support travel without seeking security.

We accept there are others that should be brought into the mechanism such as airlines and pipeline monies held by agents, but these are not the subject of this missive.

In writing this article we try and address some of the key concerns and it is accepted that there may be an impact on cashflow. The move to trusts requires a judicious mix of building working capital whilst moving to trusts over a sensible transition period of 2 to 3 years as a maximum. The reason why insurers and merchant acquirers see travel as high risk is very significantly down to the fact that consumer monies are collected well in advance and used for non-travel related services and for unsecured payments to suppliers.

We support hybrid trusts as was stated in our submission to the previous consultation in April 2021 and as we shall do in response to the current consultation. Hybrid trusts would require a proportion of travel funds to be held in trust and the balance released before travel to cover advance payments to airlines, accommodation suppliers, etc. Such releases would be secured via readily available approved insurance products.

Merchant acquirers rarely go beyond T+1 or T+2 when paying monies into Trust accounts. T is the transaction date, and the (+) number is how many days after transaction date funds are received.

Segregation of consumer funds is a relatively simple proposition and experience over many years has shown, if properly managed, poses few challenges to well supported travel clients. Trustees have few issues in managing transactions at a granular level and reconciling regularly.

There are three ways funds are paid into travel trusts:

• 100% of a travel company’s transactions are licensable (trust) and are paid directly into the trust account. That is the model operated by a large number of travel businesses and monies are received via merchant acquirers since consumers pay with their debit and credit cards.
• Larger travel businesses will have both licensable (trust) and non-licensable transactions. In those situations, the CAA require all travel funds to be paid into an Interim account operated and manged by the travel business. Those businesses operate sophisticated systems which readily compute licensable transactions and those funds are paid into the Trust account.
• Escrows are a growing proportion of ATOL arrangements, and the travel business must ensure a set percentage – generally 70% - is held in trust and reconciled weekly. Trustee systems provide full support for this arrangement.

The Companies Act requires all companies to maintain adequate and appropriate accounting records to demonstrate control of transactions to safeguard assets and record liabilities.

That data which in this case would relate to travel bookings must be recorded and maintained by law and it exists in all cases.

The question then becomes how can professional trustees use this essential travel data (booking by booking) and obtain access efficiently, and not overload travel companies’ resources. To this end, certain trustees have invested in systems to source, record, store and manage data efficiently. Such is the quality of those trustee systems which have existed over the last ten years, clients can obtain reports to assist them in managing and reporting on their trusts. These systems reconcile trust monies on a regular (daily, weekly, etc) basis – booking by booking. During Covid 19, each week, clients were provided fully reconciled trust data and provided support them when it came to refunds, cancellations or monies being allocated to different bookings. These systems are designed to process vast volumes of data at speed and with accuracy overseen by a highly experienced team of trustee executives and data analysts.

During the onboarding process, it is relatively simple to design and build client specific portals to record and report such data with the clients help in as little as two weeks. Those trustees do the “heavy lifting” and there is significant experience of what clients’ needs are likely to be.

These systems readily support all manner of computations including refunds, cancellations, change of bookings and associated funds; and computing percentages for escrow arrangements. No permutations are beyond the scope of those well-developed systems. Those trustees are able to support all trust computation requirements and daily reconciliations on a client-by-client basis.

Further ongoing investment in research and development ensures ongoing improvement of these systems and reporting of data. Eventually travel clients will be able to access their data and generate relevant banking and claims reports by logging into their portal.

The CAA, relevant Merchant Acquirers and Insurers have an in-depth knowledge of the capabilities and processes developed by trustees operating these systems and the fact that those trustees hold reconciled real time data.

We believe ATOL operating Trust costs in all cases are significantly less expensive and less onerous from a reporting point. We understand that:

• Bonding levels are set by the CAA are a percentage of authorised licensable turnover. In the best cases, for highly rated ATOL holders, the CAA have agreed to bond percentages as low as 10% but new ATOL applicants must have a non-negotiable bond level of 15% (or higher) in place during the first 4 years of holding an ATOL.
• Underwriters will generally set bond premiums levels based on a combination of size and their view of risk. These premiums are at least 4% to 5% & c.3% for “Blue Chip” travel companies of the bond amount.

Trustee fees are based on a combination of time, volumes and any special factors and are generally in our experience significantly below the above-mentioned bonding costs. Furthermore, trustee fees are stable from year to year and are not subject to material changes. For bonding, there are annual applications which are subject to risk assessment by the CAA and Insurers – both bond levels and premiums are reset each year and that causes uncertainty and concern each year at the time of renewal and of course are open to the vacillations on the bond insurance market which has never been stable.

Premiums are payable annually in advance whereas Trustee fees are paid monthly.

The 2018 Package Travel Regulations (PTR 2018) require that the Trust monies are held and managed independently and this is something we have done as Trustees for nearly 22 years.

What appears to not be considered or referred to in any detail is the fact that operating a trust leads to a system of stewardship and oversight that does not exist in any other model. Independent trustees managing those funds and in auditing claims add real value and confidence by managing and supporting at a granular level.