Sunvil Holidays chairman Noel Josephides warns trust accounts are no panacea when it comes to consumer financial protection

The trade press seems to be full of articles extolling the virtue of trust accounts.

You would think, reading all the comments in favour of them, that consumer financial protection to date has been inadequate and that bonding is a system past its sell-by date.

We need to take a step back and have a closer look at how trust accounts are used. I set aside notions of money not being paid into a trust account because this should be covered by insurance. I also ignore the cost of running such an account.

To my mind, a trust account should be fed all of each and every customer’s money, with that money staying in the account in its entirety until the customer returns from holiday – because at any time the customer may need that money refunded to them, as has been the case during the Covid-19 crisis.

But is that what happens with a trust account?

If you have a look at the booking conditions of several of the prominent companies that use trust accounts, you will see this is not actually the case.

What they do is pay airlines out of the trust account as and when they are required to do so – and certainly well before clients travel. In some cases, I assume a portion of the funds is also used to pay for accommodation if the supplier does not give credit to the tour operator.

So when it comes to refunding clients in an emergency, as is the case with this pandemic, there may not be enough money in the pot to pay out in full and companies therefore have to promise payment in two stages as they wait for the refunds from the airlines to come in first.

This is hardly ideal and it is contrary to the Package Travel Regulations although, I presume, the clients at least receive some of the money they are due within approximately 14 days.

How can this be termed a proper trust account, when the operator is using the client’s money?

In my opinion, this version of trust accounting is hardly what it should be because, when the money is required, it may not be there.

If we are to have trust accounts, then they must be operated properly. But can anyone afford to do this?

Let’s look at what an operator would need to do. The money initially comes in from the client and is paid into the trust account. Quite separately, tour operators would have to pay for the flight portion of the holiday out of company money, because the funds in the trust account would be unavailable to them.

If the tour operator was required to pay the accommodation provider in advance, too, that money would also have to be sourced from the operator’s own funds.

For long lead-time trips, the financial requirements would be particularly onerous.

Many operators would find that, to work properly with trust accounts, they would have to substantially increase the amount of capital in their businesses. Prices would rise dramatically.

The problem of switching to trust accounts is even greater for operators working with charter flight and accommodation commitments – how tour operating used to be.

If you need to carry volume or work with certain market segments, then operators need commitments. Deposits have to be paid to airlines and to accommodation providers.

Even for a small operation, these deposits could amount to several hundreds of thousands of pounds. If all customers’ money is locked up in a trust account, the capital requirements to fund operations would soar.

Final balance payments also have to be factored in. These balances are generally payable to airlines two to four weeks in advance. Any last-minute bookings would mean that final balances – possibly amounting to 30% to 40% of turnover – would also have to be funded out of the tour operator’s pocket.

What is worrying is that merchant acquirers are pushing tour operators towards trust accounts in the hope that this will lead to fewer failures.

Banks, card companies and regulators are increasingly dictating to tour operators how to run their businesses. This is not a healthy situation. Form filling and reporting to regulators is taking more and more of tour operators’ time – time taken away from running their businesses.

Over the past few years, the industry has registered very few failures with the exception of two already vulnerable cases, Thomas Cook and Monarch.

Our industry is more mature and, thanks to the CAA and Abta, better capitalised. To restrict tour operators now in their ability to manage their businesses is a recipe for disaster.

Finally, hand on heart, is there any business that has not used customers’ money at some point in its growth?

Freehold properties bought years ago now constitute a valuable fixed asset on balance sheets. Customers’ money has been used wisely by many operators, with customers’ money protected by bonds (if you can still obtain a bond, but that is another story) helping to keep prices low and providing millions of financially-protected holidays over many years.

We all need choice. Don’t, please, shoehorn us into a financial protection system which suits some but not all.

Noel Josephides is chairman of Sunvil Holidays