The size of the discount which is usually offered for an up front payment is so far above prevailing interest rates that the motivation for the offer has to be less than obvious.
At best, the school is doing it to motivate the student and prevent him leaving early.
The money is not held in escrow and this is what gives rise to the problems. The school uses the money for working capital - a polite way of saying that you don't have money and you need constant inflow of it from new customers to pay for current-customer expenses.
So when the school goes bust (they usually do, after a few years) the current deposits are lost. The average UK PPL takes a year to do (mainly due to weather but also due to occassional school related issues) so if the average life of a school is say 5 years (and I have seen a few go in less than that; a couple going down with massive inside-job frauds and police being involved over stolen credit card details in one case) you have a 20% chance of losing at least some of your money.
Another problem is that there are various reasons why one might want to change schools. The new student is in a very poor position to judge whether the instructors are any good, whether the school is well organised, whether the planes they fly are good or crap, etc, and quite a lot of people do change schools. And one can't do that if one has paid for a 45hr block up front.
The discount normally applies to a block of X hours, say 45 (the min PPL requirement) but the average UK PPL time is 55-65hrs, so one overruns one's budget anyway. I would suggest that if the punter's money is so tight that he is relying on the discount to afford the PPL course, he would be better off going off to the USA, where he will save 30-50% off the UK price, in return for a load of hassle with the TSA/Visa process taking 2-3 months to arrange.