On 24 January the CAA launched the next stage of its consultation on ATOL reform which closes on 24 March 2023. The CAA is asking for comments and feedback from industry as it finalises its proposals for reform with implementation targeted for April 2024. Our previous article discussing the initial consultation can be found here.
Proposals under consideration
Despite the recovery of the travel sector following the initial waves of the Covid-19 pandemic, spiralling inflation and the lingering effects of Covid-19 remain prominent concerns when considering the robustness of the sector. Against this backdrop, the CAA is continuing to evolve the ATOL reform programme with the twin aims of improving the financial resilience of the ATOL scheme and ensuring that pricing better reflects the risk that ATOL holders or the value of their bookings pose.
The next phase of the consultation focusses on the following proposals:
Segregation of customer monies
As part of its initial consultation, the CAA presented the total or partial segregation of client monies from cash balances as one solution to stop the over-reliance of ATOL holders on consumer money thereby ensuring funds are held to the benefit of the consumer in the event of a failure. The CAA’s view has developed to consider that segregation of client monies is more likely to lead to improved industry resilience as a whole and should result in individual travel businesses being more financially resilient to market shocks in future.
The CAA has published further details in its interim findings, reiterating the fact that total trust segregation is only one of a number of proposed solutions. The level (and impact) of segregation could flex depending on the size of the ATOL holder, the nature of the operation and whether the ATOL holder is an integrated operator.
Mandatory bonds
In its initial consultation, the CAA proposed that a mandatory bond be provided by a third party (such as a bank or insurance company) in favour of the Air Travel Trust which could then be called upon only in the event of an ATOL holder failure. Based on the analysis and respondent views submitted, the bonding option appears less favourable when compared to the segregation option. Accordingly, the CAA is focussing on using bonding or other financial products as a complementary measure sitting alongside segregation of customer monies to cover the cost of insolvency protection.
Changes to the ATOL Protection Contribution (‘APC’)
The industry acknowledges that the current cost of APC (£2.50 per passenger) is not reflective of the specific financial risk position of the ATOL holder or the value of the booking. Consultation feedback indicated that a variable APC based upon value and/or risk would be preferable to the current flat rate APC, leading to a fairer system in which financially sound ATOL holders are not subsidising riskier undertakings. As a result, the CAA is maintaining dialogue with stakeholders on this issue and investigating the interaction between APC charging and another method of direct protection of customer money (whether that be through segregation or bonding or other financial products).
ATOL-equivalent consumer financial protection
Feedback from the initial consultation and discussions with industry has raised concerns as to the ability of financial products such as insurance to provide coverage for the entirety of the travel sector. Concerns raised relate to the volatility of premiums, availability of policies and the ability of such products to pay out in an insolvency. The German market has provided a useful example of the effectiveness of such protection based upon inadequacies of market coverage in relation to the Thomas Cook failure. The CAA is now considering the use of financial products as a complementary measure sitting alongside other mechanisms instead of a standalone measure to cover the entire market risk.
Next steps
Paul Smith, Consumer Director at the UK Civil Aviation Authority, said: “Our aim is to protect consumers by increasing the financial resilience of both the ATOL scheme and the wider industry, while continuing to see a competitive market with choice for consumers. […] We want to get this right and this provides industry further opportunity to comment on the direction of travel of the reform programme and to assist us in the finalisation of our proposals. […] As we proceed, we will take full account of any changes and allow time for the industry to adjust accordingly.”
By consulting with industry, the CAA wants to improve the financial resilience of the ATOL scheme whilst ensuring a competitive travel market for the benefit of consumers. The CAA accepts that reforms might lead to some ATOL holders considering exiting the market, ceasing to offer flight inclusive package holidays or making alternative changes to their business model. Potential exits will also be a factor considered in the CAA’s approach to reform.
No final decisions have been made on the preferred options for reform and the CAA is keen for stakeholders to engage with the consultation to have their say.
It will be interesting to see the outcome of the consultation and the consequential impact on consumer choice, consumer confidence and investor appetite in this sector.
If you want to discuss any of the issues above, please get in touch with Emily Scaife or your usual Burges Salmon contact.