The new Package Travel Directive: a regulatory race to the top
The existing Package Travel Directive (the "Existing Directive") has been around for a very long time. It was introduced in 1990 to harmonise European rules on the sale of package holidays in order to encourage more cross-border trade.
One of the most important concepts introduced by the Existing Directive was an insolvency protection regime aimed at protecting the customer's money in the event of the insolvency of the package organiser. A laudable aspiration but not without its problems, one of which has been the inconsistent way in which it has been implemented across Europe. There are different insolvency protection rules for different countries.
That is obviously unattractive to travel companies. It is massively inefficient and bureaucratic to have to make separate arrangements to comply with the insolvency protection regimes in each country to which sales are made, as opposed only to the insolvency protection regime of the place where the travel company is established. As a consequence, cross-border trade has been inhibited. The objective of the Existing Directive has not been achieved.
There is one country which, in theory at least, was meant to take a more outward looking approach to the sale of package holidays and that is the UK. When the Existing Directive was implemented in the UK, the regulations (the "Regulations") expressly stated that travel companies which complied with the insolvency protection regime of the country where they were established did not have to comply with the insolvency protection rules in the UK. Regulation 16(2) states that a travel company does not have to comply with the insolvency protection regime in the UK if "the package is covered by measures adopted or retained by the Member State where he is established for the purpose of implementing Article 7 of the Directive."
Or at least that was the theory. We all remember the controversy which ensued when Lowcostholidays sought to rely upon this exception. It transferred its package business to Spain, complied fully with the Spanish insolvency protection regime and so, pursuant to Regulation 16(2), did not need to comply with the UK regime. However, the immediate response from the Civil Aviation Authority to this move was not altogether positive. It published a press release on 18 December 2013 which stated:
"UK holidaymakers warned to consider risks before booking on lowcostholidays.com as legal investigation begins"
The new law
Whatever the rights and wrongs of the Lowcostholidays relocation, it is now historic because the EU has moved to make it absolutely clear that the Lowcostholidays model is legitimate. It is precisely what EU lawmakers are trying to achieve.
The EU has passed a new Package Travel Directive (the "New Directive") which the member states must implement within two years. It expressly requires all member states to recognise the insolvency protection regimes of other member states and it will be illegal to impose additional burdens upon foreign travel companies. To give a practical example, a travel company established in Slovenia and selling to customers in England will only have to comply with the insolvency protection rules of Slovenia. The Civil Aviation Authority will have to accept the legality of that arrangement.
So how is this going to change the travel industry?
The new regime is obviously attractive to travel companies because it means that they can decide which regulator they would like to be regulated by, and which insolvency protection regime they prefer, for all European sales.
To illustrate this, if one takes Slovenia as an example, the last research the writer saw on this issue showed that the insolvency protection which travel companies have to provide the local authorities in Slovenia is a fixed bond of €41,730. Allied to a corporation tax rate of 17%, Slovenia certainly has some attractions. That compares to the regime in the UK whereby travel companies have to pay £2.50 per flight package sold, in addition to any other bond they are required to provide by the CAA, and a corporation tax rate of 20%.
A race to the bottom?
The real question is whether we are now at the beginning of a race to the bottom, whereby member states will offer the lightest regulation and the cheapest insolvency protection regime in order to attract big employers? Are travel companies going to go regulation shopping?
There are obviously very strong commercial reasons in favour of going regulation shopping. For example:
- There will clearly be a regulatory saving to be made by only having to comply with one set of regulations and one insolvency protection regime. There will be no need to incur the cost of understanding the local rules in each member state and liaising with the regulator in each member state.
- It will also be an opportunity to avoid difficult, inefficient and bureaucratic regulators in favour of those which provide the best service.
- By bringing all its business to one Member State, a travel company will have greater negotiating power with that regulator and also the bond and insurance providers for that market.
If travel companies are prepared to shop around for the best deal, this will inevitably put regulators in competition with one another, but that will not necessarily lead to a race to the bottom.
This is new ground for the travel industry but not for Europe. For instance, the battle over the right to sell goods from one country into another, amid concerns about the inadequacy of the regulatory regime of the country of origin, has long since been decided in favour over free movement of goods. What we are seeing now is a repeat of the same arguments which have been fought before but in a different context. By looking back at this history, it is possible to foresee what the future holds for the travel industry.
What's apparent from looking back is that the concerns expressed by regulators that mutual recognition of regulation leads to a race to the bottom is not really supported by empirical evidence. There are many studies which show that what one tends to get is better, more efficient and innovative regulation, as opposed to no regulation. The following paper captures the point:
"…there is little evidence that mutual recognition encourages a 'race to the bottom' in terms of regulatory standards. Opponents argue that regulators are encouraged to slash red tape to win business across the single market for their home firms. But regulatory competition can in fact make regulation more efficient. The single market process forces regulators to appraise which rules are really necessary…" [Centre for European Reform, How to build European services markets, September 2012]
That must be right. National regulators are not going to ignore their regulatory obligations simply to attract large employers. It is too big a risk for a member state to be responsible for leaving thousands of tourists stranded in foreign jurisdictions because it decided not to require adequate insolvency protection. If large operators were to move to Slovenia tomorrow, one can be pretty confident that the fixed bond of €41,730 would fairly hastily be increased.
Rather than focussing on the bottom line, the member states which are more likely to succeed in attracting business are those which provide the best regulation at the best price. Those which tackle the perceived inefficiencies of the current system. Consider the following examples:
- There are separate insolvency protection regimes in the UK for flight packages and non-flight packages. Why? It makes little sense and adds to the administrative inconvenience and cost to have two such regimes.
- There are overlapping insolvency protection regimes in the UK. Consider the example of a customer who uses a credit card to buy a package from an IATA and ABTA registered agent. There are four insolvency protection regimes in play here – the ATOL regime, the consumer credit act regime and IATA and ABTA bonding regimes. Given that the customer is only paid out once, why do travel companies have to suffer the expense and inconvenience of so many different bonding regimes?
- A strong system of regulation which is rigorously policed is good for travel companies. It reduces the risk of large failures and the need to call upon the security provided by that travel company, which in turn will make it cheaper for other travel companies to obtain security.
It will be the regulators with the will and imagination to tackle longstanding inefficiencies such as these which will attract travel companies into their jurisdictions. That is why the New Directive will bring about a regulatory race to the top.
Rhys Griffiths is a Partner and the Head of the Travel Group at Fieldfisher LLP. If you would like to discuss any of the issues raised in this article or the Travel Group more generally then please do not hesitate to contact him on 020 7861 4000 or email@example.com