Regulators are considering introducing new rules demanding that travel agents put customers’ cash in separate accounts as a safeguard against insolvency.
Taxpayers are supporting the travellers’ protection fund, used by the Commission for Aviation Regulation to compensate customers of insolvent holiday firms, when the companies’ insurance does not cover the cost.
Next year the commission and the Government plan to restart a review, of both the fund and the insurance schemes, which was suspended when Covid-19 restrictions froze travel in early 2020.
One of the options set out in a document submitted to Government by the commission, is to require travel agents to put cash paid by customers for holidays into client trust accounts.
Under this system, travel agents will only be able to draw the cash to pay for the services for which their customers have paid. They will not be able to use it for day-to-day spending.
The regulator acknowledges that while trust accounts would protect customers’ funds “a backup fund would be required to cover repatriations”.
The commission is also weighing a pooled system, where each travel agent or tour operator pays a levy per customer.
This then goes into a common pool used to cover the cost of any insolvencies, eliminating the need for insurance. The UK takes a similar approach.
Commission licensing rules require travel agents to put up bonds – a type of insurance – amounting to 4 per cent of turnover – to compensate customers in case of an insolvency. Tour operators must put up bonds equivalent to 10 per cent of turnover.
Where a company goes out of business and the bond is not enough to compensate its customers, the regulator uses the travellers’ protection fund to make up the difference.
Industry contributions originally funded this, but the remaining €1.8 million in the fund now comes from taxpayers via the Department of Transport.
The department confirmed recently that it would put aside €5 million next year as a contingency in case there was not enough cash in the fund to meet any calls on it.
It put aside €10 million for the fund this year, but so far none of that cash has been used. The department returns any money not called on by the fund to the exchequer at the end of the year.
The travellers’ protection fund peaked at €7.5 million in 2007-2008, but subsequent payouts, including the high-profile Lowcostholidays failure, depleted this to €1.8 million by 2017.
The falling balance prompted the commission’s review of both the fund and the bonding scheme. The State had not sought industry contributions to the protection fund since the 1980s.
Travel agent Trailfinders was one of several businesses that gave the commission feedback during the review.
Dave Hayeems, managing director of Trailfinders Ireland, said the company already operates its own client trust accounts.
“Trailfinders are bonded by the Commission for Aviation Regulation, which is a condition of our licence, but the bond is superseded by our financial model,” he says.
Mr Hayeems dubs the current bonding system as “woefully inadequate”, arguing that it effectively allows travel agents to borrow from customers, masking any undercapitalisation.
His company told the commission that an increase in sales diluted the bonds, while the proportion of turnover demanded was too low.
“In the event of failure the bond doesn’t cover the value of forward bookings,” he says. “Recourse is then made to the travellers’ protection fund.
“The fact that the travellers’ protection fund is now empty, is damning evidence that the current bonding system doesn’t work.”