ATOL reform: CAA extends deadline to give final opportunity to be heard

The Civil Aviation Authority (CAA) has extended the deadline for responding to its consultation on reforming the ATOL regime until 15 August 2021.

The content of the consultation comes as no surprise after high-profile failures such as Thomas Cook, and the events of the last year, have drawn the attention of regulators and the wider media to the way in which travel companies fund their operations.

As such, the CAA now wishes to consider changing the ATOL regime so that it improves the financial resilience of ATOL holders and makes them less dependent upon customer money as a source of funding working capital. This should also help achieve another objective for the CAA, which is to see ATOL holders better able to pay refunds for cancelled holidays.

The consultation will likely lead on to the most significant changes seen to the ATOL regime since 2012. If they have not already done so, travel companies should take the opportunity to make their views known given the fundamental importance of the ATOL regime to their business. The CAA will (indeed, must) take these views into account when deciding how to reform ATOL.

Why now?

According to the CAA, the Covid-19 pandemic has highlighted a number of issues in the business models of many ATOL holders. Poor capitalisation and using customers’ money as a primary source of funding working capital are seen as the main reasons why many travel businesses were not able to provide refunds within the 14-day statutory timeframe. Businesses which did separate customer monies from their working capital were often more financially resilient and better able to pay refunds for cancelled holidays.

Issues with the current ATOL scheme

The CAA believes that the current ATOL framework has not done enough to restrict businesses using customer money as a source of low-cost financing. There is generally no requirement for customer monies to be segregated from a business’s operational funds, which means that it can be used to pay suppliers and meet other operating costs.

In addition, the CAA believes that a flat rate ATOL Protection Contribution of £2.50 has failed to reflect the risk individual ATOL holders pose to consumers. Where businesses face increased risk of failure, they still pay the same contribution as other businesses which are financially more robust.

What does the CAA want to do?

The CAA wants to encourage and incentivise ATOL holders to reduce their reliance on customer money as a source of funding working capital.

This consultation considers a move to a framework which the CAA says will take a more systematic approach to ATOL holder risk, and that better prices any residual risk an ATOL holder poses to the consumer. 

The key proposals

The consultation sets out a number of proposals on which the CAA is seeking the industry’s views:

1. Mandatory rules or flexibility: the CAA is considering whether to mandate a single form of insolvency protection which all ATOL holders must provide. Alternatively, ATOL holders could be given the flexibility to choose between different forms of insolvency protection provided that, in total, they achieve the required level of protection which is required. The two options under consideration are:

• Segregation of customer money: under this proposal ATOL holders would be required to segregate customer monies from their operational cash balances. These segregated funds could not be used until the customer has completed the holiday. ATOL holders would therefore be required to seek alternative means of funding their operations. The CAA is considering three options for the method of segregation:  trust accounts, escrow accounts or a customer monies accounts.
• Mandatory Bonds: under this option, ATOL holders would provide a bond which would be called upon in the event of the ATOL holder’s failure.

2. The level of protection: whichever form of insolvency protection is required, the CAA seeks views on whether ATOL holders should protect all customer monies or only a “mandatory minimum”. For instance, ATOL holders may be required to retain 100% of customer monies in a segregated account, or only a certain proportion (e.g. the ATOL holder may be permitted to use a portion of customer money to pay for flights).

3. Changes to APC calculation: the CAA is suggesting changes to the way in which the APC is charged so it better reflects the individual risk of the ATOL holder. The options under consideration are to:

• increase the current flat rate of £2.50 and apply the new rate to all ATOL holders; or
• introduce a variable APC structure where ATOL holders with a higher risk of failure and/or bookings that would cost more to refund, pay a higher contribution. When calculating the value of the APC, the CAA has proposed three alternative approaches: (i) risk priced APC, which would take into account the risk profile of individual ATOL holders, (ii) value priced APC, which would be based on the value of the licensable booking, and (iii) a hybrid of the risk and value model.

4. Financial markets option:  under this proposal ATOL holders would be required to obtain full, ATOL-equivalent consumer financial protection from third party insurance providers. The CAA would specify minimum requirements, but the provider would determine the applicable criteria, conditions and cost of the protection.

Other points in the consultation

The consultation also includes other points on which the CAA seeks comment, including:

• Payment of ‘pipeline’ monies: currently there is no requirement for when customer monies held by an agent on behalf of an ATOL holder need to be passed on to the ATOL holder. This presents a risk to both the ATOL holder and the consumer if the agent goes into insolvency.  The CAA is looking at whether there should be some control over when the agent must remit the pipeline monies to the ATOL holder, or if agents should be required to segregate customer monies.
• Changes to agency terms: the CAA proposes to simplify the way in which changes to mandatory agency terms are incorporated into agreements between ATOL holders and their agents.
• APC reporting: the CAA is also consulting on changes to APC returns for those who hold small business ATOLs and certain franchise ATOL holders. The intention is to bring these in line with the APC returns submitted by standard ATOL holders to ensure consistent reporting.

Next steps

The consultation will close on 15 August 2021. Travel companies therefore still have time to make their views known and to shape the future of the ATOL regime. If you have any questions about these issues in relation to your own organisation, please contact a member of the travel team at Fox Williams.