The Civil Aviation Authority (CAA) has launched a long-awaited consultation on changes to the Atol regime which includes proposals to move the sector to trust arrangements and introduce varying rates of Atol Protection Contribution (APC) on holiday bookings.

The CAA consultation document proposes a number of ways to improve “financial resilience” including the segregation of customer advance payments in trust or escrow accounts, although the regulator could allow what it calls “partial segregation”.

The APC on bookings, which finances the Air Travel Trust to repatriate and refund customers when an Atol holder fails, could change from the current £2.50 rate to a variable payment depending on the extent to which customer money is segregated – partially or in total.

The APC rate could also vary according to the level of ‘financial risk’ a company presents, as assessed by the CAA, or the value of a booking – meaning the APC on a luxury holiday or cruise could be higher than on a short break.

Most travel firms operating trust arrangements at present use a system of partial segregation in order to be able to pay suppliers, typically low-cost airlines, at the time of booking.

The consultation gives no indication as to whether the overall rate of APC will increase, although this is widely expected after the failure of Thomas Cook in 2019 largely wiped out the Air Travel Trust fund which contained just £35 million last November.

The CAA proposes that trust or escrow arrangements could be backed by bonds in a ‘hybrid’ system of protection.

The authority said the proposed changes would improve “direct protection of consumers’ money and the financial resilience of the Atol scheme”.

The consultation document notes: “There are two principal problems:

“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 APC they incur may not be reflective of the risk individual Atol holders or the value of bookings pose.”

The CAA points out that some Atol-protected travel businesses “use customers’ advance payments for holidays to fund their operations, before customers have had their holidays”.

It notes that using “customers’ advance payments for holidays to fund [travel firms’] operations” is a long-standing practice in the industry, but said: “It may fail to incentivise sufficiently robust financing arrangements.”

The regulator added: “The Covid-19 pandemic has also highlighted how challenging it was for some businesses to pay customers the refunds to which they were entitled.”

The CAA also asks whether ‘pipeline monies’ received by travel agents on behalf of Atol holders should be segregated.

The CAA stresses this is an initial consultation to assess the industry response and a second consultation on detailed proposals will follow early next year.

The consultation will close on July 30.

CAA director Paul Smith said: “The Atol scheme exists to protect consumers and it is therefore right that we work to continually strengthen its financial resilience.

“Following several large Atol failures in recent years, we have become concerned about the impact of businesses using consumers’ money as a source of funding working capital.

“That is why we are seeking people’s views on changing these arrangements to further enhance Atol protection of customers’ money.

“The travel industry can be reassured we understand the impact the Covid-19 pandemic has had on their finances.

“We will take full account of the need to allow industry to adjust to any new arrangements that will be implemented following the overall consultation process.”