Firms typically use holiday deposits as a vital part of funding their business. The travel industry lifeboat Atol was created in 1971 to step in if a company failed and the money was lost.
Ringfencing customer cash, a common practice in other industries such as banking and , would mean firms would not be able to use the money handed over when booking.
Firms currently reapplying for their annual renewals will have to set up segregated accounts, sources said. Companies will be restricted to a number of bookings based on the amount of cash they agree to keep in trust.
Martin Alcock, a director at the Travel Trade Consultancy, said that while there were plenty of positives to segregating customer deposits, they were “not a panacea”. “They can be painful to set up, and they tie up a lot of cash… Many travel businesses will be unable to afford them,” he said.
The plans are aimed to also address fears that the taxpayer-backed Atol scheme is insufficiently capitalised.
Labour MP Meg Hillier, chairman of Parliament’s public accounts committee, said: “The flaws in the travel industry model have left consumers at the bottom of the heap for too long. When a business goes bust or a flight or holiday is cancelled, consumers often struggle to get their hard-earned cash back in any reasonable time.
“A new model that protects consumer cash is overdue. It will change the working model of many travel firms but it will provide much-needed consumer protection. The collapse of businesses and Covid have highlighted what can go wrong.”
The CAA did not comment.