The biggest threat facing the travel industry in 2011 is the continuing problems facing the regulatory regime behind customer financial protection, a WTM seminar heard today.

Alan Bowen, legal advisor to the Association of Atol Companies, gave his annual assessment of where the industry is and what the challenges will be over coming months.

He warned customers were wising up to the fact they could lose their money buying through a third party and that credit card firms, which end up paying out, could drop up to half their travel business.

Bowen said delays to the reform of Atol and increasing opposition to the proposals being considered by the Deparment for Transport like flight plus, are further undermining the system.

He said the existing financial protection system was “imploding” and “falling apart” and warned that by the time a new regime was in place there wouldn’t be anything left to reform.

Just this week it has emerged the Goldtrail Holidays failure has cost the CAA £6 million more than its original estimate of £20 million.

Bowen claimed that that failure and the failures of Sun4U and Kiss Flights over the summer has cost the CAA around £45 million.

When including income from Atol Protection Contribution, he estimated the Air Travel Trust Fund that backs Atol is around £50 million in the red.

To make matters worse, he added, the fund is facing having to renew its “catastrophe” insurance in April next year with AIG, the US insurance firm that has its own fair share of problems in the recession.

“We have to do something to stop the rot,” Bowen said. However, he pointed to growing dissent in the industry to the proposal of flight plus that will bring component sales into the regulatory regime.

And claimed attempts regulate click throughs – sales of a hotel from a link off a link from a related site – had been dropped.

He went on to claim that the boss of a leading credit card acquirer had told him that any attempt by the industry to leave it as the de facto protector of customer monies was intolerable.

“One of the major credit card acquirers said to me if you think we will sit back and accept responsibility you are living in cloud cuckoo land,” Bowen said.

“If banks are going to take on responsibility for all the costs of holidays they are going to require bonds, which you won’t get and they are going to delay payments.

“They already have the procedures to delay payments for 60 days and some are saying they will pay only when the customer has travelled – which will be an interesting way to do business.”

Bowen said the other action credit card companies would take would be to increase fees, by 3%-5%, or drop travel industry business altogether. He claimed his source said it would drop 50% of its business in travel.

“Atol protection is not going to change any time soon. The longer we leave it in this limbo the less there will be left to change.”