Ian Taylor reviews the regulator’s report outlining its assessment of possible changes to the consumer protection regime
The CAA update on Atol reform and request for information explains the regulator’s approach “to appraising the options” for reform and includes analysis of the likely impacts of these.
It acknowledges “the far‑reaching nature of some of the proposals [and] their potential to have a significant impact on some stakeholders”, and explains the CAA seeks further information “to ensure it has identified and understood the range and magnitude of the impacts of each option on different stakeholders”.
The CAA “will use the responses” to finalise its recommendations on reform but stresses “no decision has been taken on the final proposals”.
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It makes clear the CAA will look to introduce new arrangements “as soon as possible, potentially from April 2024”. But the CAA insists it is “mindful of the need to have an appropriate transition period”, although it gives no indication of what this might be beyond saying it will “depend on the option(s) chosen”.
Pipeline monies held by agents will no longer be part of this stage of Atol reform, with the CAA concluding: “It’s prudent to focus efforts on the options for reform as they apply to Atol holders and direct sales.” But it will give “further consideration” to pipeline monies “once a preferred option is identified”.
The CAA also reports it has ruled out using third‑party insurance to cover the Atol market, having concluded it is “not currently a viable option”, though insurance will remain “a complementary measure”.
It acknowledges the options it is considering “may lead to increased costs . . . potentially passed on to consumers through increased prices . . . [and] some Atol holders will incur greater costs than others”.
The CAA notes that as a consequence some Atol holders “might decide to exit the market” or “stop offering flight‑inclusive packages and instead sell holiday components separately . . . to lower regulatory costs”. However, it states: “This opportunity already exists”.
But the CAA repeats the rationale for undertaking the reforms, arguing: “Many travel businesses are highly reliant on customer money as a source of funding working capital and are not strongly capitalised enough in their own right; and the Atol Protection Contribution they incur may not [reflect] the risk individual Atol holders or the value of their bookings pose.”
Total trusts ‘only one option’
Segregation of customer money remains a keystone of the CAA’s Atol reform proposals, but the regulator has sought to dispel concerns that mandatory trust arrangements would be required of Atol holders.
It notes a “widespread industry assumption that trust accounts would require all customer monies to remain in trust” until consumers returned from holiday but insists “total trust segregation” remains only one of the options for segregation, saying: “The proposals remain broader than total trust segregation.”
The options include ‘total trust segregation’, but also trust segregation that allows the release of funds for certain types of supplier payments or up to a certain value or percentage of advance payments, and which could be covered by bonds or insurance, or where money can be released to cover the value of all supplier payments.
Options also include client account segregation which could operate under any of these approaches, validated by an independent auditor, or a ‘tailored’ or ‘hybrid’ approach allowing the release of funds protected by a bond or other security.
The CAA notes the factors it would consider in assessing these options as the size of the Atol holder, its supplier payments and whether it is part of a group with an airline.
It acknowledges “smaller Atol holders could be disproportionately impacted” by the costs of setting up and operating trust accounts and concerns that trust accounts “don’t suit operators required to prepay suppliers”. However, it notes existing trust account arrangements permit payments to third‑party airlines “subject to certain detailed requirements and conditions”.
The CAA also points out it is considering “a range of different approaches to segregation . . . which would be cheaper to operate . . . and could be more flexible in terms of the range of payments allowed out of the account”, as well as “the degree to which payments from the segregated account should be covered by another mechanism”.
It adds: “The requirements in relation to types of payments allowed out of the account . . . could be approached in a standardised way or, as currently, set by the CAA for each Atol holder based on an individual assessment of risk.”
Differing impact on firms
The CAA analysed the financial impacts of various reform options on different types of Atol holder.
These were based on a firm’s cashflow and cash position over 12 months, and its ‘failure liability’ – cash from passengers for trips not yet taken combined with potential repatriation costs, using data from 2019.
It concludes: “There is a fundamental trade-off between the level of failure liability coverage provided and the impact on Atol holders’ costs and liquidity. A greater level of failure liability coverage provides greater direct protection of customers’ money, often with greater adverse impacts on costs and liquidity.
“This fundamental trade-off can be seen across the different market Reforms aim to protect holidaymakers segments (traditional tour operator, online travel agent, integrated operator and flight-only operator).
“The most prominent distinguishing factor between the segregation options and bonding option . . . [is] the impact on working capital . . . The segregation options are generally more favourable than bonding . . . because any additional capitalisation provides further liquidity. In contrast, funds put aside in bond collateral . . . are not available for working capital.
“In summary, the segregation options appear more favourable generally than the bonding option. In light of this, the CAA is minded to focus work . . . on how bonds can be used as a complementary measure.”
Move to variable rate of APC
A move to a variable Atol Protection Contribution (APC) forms a key part of the CAA reform proposals, designed to “appropriately recognise the direct protection of customer money by the Atol holder”.
This will be based on the principle “that a discount to the rate of APC should apply where the Atol holder provides a greater level of direct protection/security than required by the terms of their licence”.
The CAA commissioned an actuarial consulting company to advise on calculating APC rates to take account of Atol-holders’ financial risks and bookings value, and this suggested a variable APC based on passenger numbers, the average value of trips, and the financial strength of the firm judged by the ratio of liabilities to assets.
From this, the CAA reports it derived “a variable rate APC for each Atol holder of around 50p to £15 per person per booking” compared with the flat rate £2.50 of today. It notes these figures will be subject to further consideration and that the analysis takes no account of the potential to vary the APC rate based on the degree to which an Atol holder protects client money.
Consumer attitudes to Atol
Research on consumer attitudes to Atol protection and how travel businesses use customer money forms part of the CAA’s assessment. This involved both an online survey of 1,000-plus consumers and a series of consumer focus groups.
It found consumer concerns focus on the quality of a trip or transport delays and cancellations, leading the CAA to conclude: “The risk of a travel company becoming insolvent is not a front-of-mind concern. Consumers trust their holiday company will deliver their holiday.”
The research found “little indication most consumers want to think about how travel companies use the money they pay for holidays”.
However, the CAA suggests Atol protection “ties into trustworthiness in consumers’ minds” and consumers rate the cost of Atol a “bargain”. It notes: “Although consumers aren’t always aware of what Atol protects, Atol protection is associated with ‘peace of mind’.”
The research found consumers unaware how much Atol protection costs “although there was an assumption it was more than £2.50. When informed about the level of protection they receive and the flat rate of APC, consumers saw this as a bargain. An APC rate below £10 was considered acceptable by the vast majority, with a rate below £5 considered great value for money”.
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