A leading proponent of trust arrangements has acknowledged “the weakness” of many trust accounts and proposed a way to fix it.

Mike Gooley, founder and chairman of Trailfinders, advocates a ‘pay on pushback’ model for passing on payments to airlines and suggests “undercapitalisation is the fundamental issue” in the sector.

Gooley outlined his proposal in a letter to Travel Weekly in response to a claim by Alan Bowen, legal advisor to the Association of Atol Companies, that most travel trust arrangements operate outside Package Travel Regulation (PTR) requirements.

Bowen said: “A trust account operates on the basis all the money goes into the account until the holiday is over. You can’t use the funds to pay suppliers.

MoreComment: There is a flaw in trust accounts

“The trust accounts used by most people don’t operate in accordance [with that]. They allow funds to pay airlines on the basis you insure against their failure.”

But he said: “There is no claim on insurance where the business doesn’t fail. Companies running trust accounts have been in no better position to offer refunds [for cancellations due to Covid]. The trust account hasn’t helped.”

Gooley argued: “Alan Bowen is right in pointing out there are trust accounts and trust accounts. However, escrow [trust] accounting does make the misappropriation of funds much more difficult.

“The weakness of trust accounts is they have to empty to [pay] suppliers so the safeguard can’t be carried through unless backed by reserves.”

He describes the payment of airlines months in advance as “the flaw” and suggests “a BSP Pay on Pushback” payment model.

Gooley noted: “The objection is that ‘the industry can’t afford it’. There is truth in this only because it has been allowed by a lack of financial regulation which is applied in all other areas of commerce where the payee is at risk of not getting what they paid for. Undercapitalisation is the fundamental issue.”

He pointed out: “This fundamental flaw in not safeguarding pipeline monies long precedes the pandemic, which has merely exposed the shortcomings of the system.

“It is time Whitehall fulfilled its responsibilities to properly protect the traveller.”

In a separate comment on the Trailfinders’ blog, Toby Kelly – Trailfinders’ chief executive – asked: “Have refund credit notes [RCNs] achieved anything more than delaying the evil day for travel organisers who spent client’s money as ‘working capital’ and then as ‘survival capital’.”

Kelly argued: “RCNs are not an issue if the travel organiser has the money and the client consents to taking one in place of cash.

“If, however, they are issuing RCNs because they don’t have the money, what will have changed by September 30, 2021?

“At some point, the travel organiser has to repay the client or pay for the holiday  booked using the RCN. Is it realistic that a travel organiser who is insolvent now will trade their way to solvency between now and September?”

MoreComment: There is a flaw in trust accounts

Comment: We must question why airlines are paid months in advance

Webcast: ‘Trusts are going to become more prevalent’