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Reforming ATOL: the new Consultation

26/02/2018

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United Kingdom

It has been a long time coming, but on 23 February 2018 the Department for Transport (“DfT”) and the Civil Aviation Authority (“CAA”) both published consultations on the changes they intend to make to the ATOL scheme as part of the UK’s implementation of the Package Travel Directive 2015 (“New PTD”). 

Both consultations give a clear indication of how the Government intends to revise the ATOL scheme and they now provide the travel industry with the opportunity to have its say by 23 March 2018.  In this article, Rhys Griffiths, Partner and the Head of the Travel Group at Fieldfisher LLP, looks at some of the key changes on which the Government is consulting.  Copies of his earlier summaries on the New PTD are available here.

The ATOL Regulations will remain

The ATOL Regulations 2012 will remain in place – we will not have an entirely new scheme.  Rather, the Government intends to amend and tinker with the existing system so that it is brought into line with the New PTD.  There will still be a basic obligation on those who “make available flight accommodation” in the UK to obtain a licence from the CAA unless they are an airline or can bring themselves within one of the exemptions. 

The ATOL Regulations will therefore capture tour operators and travel agents selling flight-only or flight-inclusive package, as it does today, although the definition of a package has been significantly broadened so that it includes most flight-plus bookings.  As a result, flight-plus will no longer exist and it is being deleted from the ATOL Regulations.

Linked travel arrangements to become even more confused

In what had become an open secret, the Government has confirmed that linked travel arrangements (“LTA”) will not fall within the ATOL scheme, even when they include a flight which must be financially protected (“Flight LTAs”).  LTAs really are the unloved child of the New PTD and the DfT and the CAA have decided that they want nothing to do with them.  All LTAs will be left for the Department for Business, Energy & Industrial Strategy (“BEIS”) to deal with in the new Package Travel Regulations 2018 (“PTR”), which are due to be laid before Parliament after Easter. 

This is controversial and at odds with what the industry said it wanted in response to the earlier ATOL consultation of 2017.  The industry had said that it wanted Flight LTAs to be included within the ATOL scheme.  The Government had even promised that it would do so.

The Government’s volte-face has been driven by the CAA’s strong concerns about including Flight LTAs within the ATOL scheme.  It is concerned that doing so will pollute the ATOL brand because there is a marked difference between the insolvency protection provided under a normal ATOL sale and the insolvency protection provided for Flight LTAs.  The former provides refund and repatriation protection against the risk of the ATOL holder’s insolvency up until the flight takes place, whereas Flight LTAs only provide refund protection for the period of time the travel company is holding the customer’s money. 

The Government says – quite rightly – that it does not have the discretion to align Flight LTA coverage with ATOL coverage because the New PTD is a “maximum harmonisation” directive.  This means that it must implement the New PTD in strict accordance with its terms.  It cannot fiddle with the parts it does not like because that would lead to inconsistency with the laws of other Member States.  That is exactly what the New PTD is designed to avoid.

As a result of this mismatch between ATOL and LTA protection, and to protect the ATOL brand, the Government has decided to put Flight LTAs outside of the ATOL scheme.  They will be dealt with in the PTRs, which means that travel companies will have to provide the lower level protection for LTAs by taking out a bond, insurance or through using a trust account.  They will be overseen by local trading standards departments and not the CAA.

However, when one digs a little deeper into the consultations, it transpires that the Government’s proposition is an illusion.  The ATOL scheme will still require travel companies to ATOL protect flight-only sales.  Accordingly, if a travel company facilitates the sale of Flight LTAs in the UK, that travel company will have to protect the flight element of the LTA using the ATOL scheme.  Consider, for instance, a travel company which sells a flight and then cross-sells the customer to a hotel-booking company to make a booking within 24 hours.  In this scenario, an LTA will exist, the flight element will have to be protected and the travel company will have to ATOL-protect the flight booking.

It is questionable whether this arrangement complies with the “maximum harmonisation” requirements of the New PTD.  The Government does not believe that the ATOL scheme is compliant with the insolvency protection requirements for LTAs because the ATOL scheme offers more rigorous protection that what the New PTD requires.  Nevertheless, travel companies which facilitate Flight LTAs will have to provide this higher-level ATOL protection for Flight LTAs.  There is no option for travel companies just to provide the lower-level protection contemplated by the New PTD.

The anomaly described in the paragraph above might be acceptable to most given that the industry wanted Flight LTAs to be included within ATOL in the first place.  However, the Government’s plans also introduce an administrative headache for travel companies facilitating Flight LTAs.  If a Flight LTA contains multiple components which have to be financially protected (e.g. flight and hotel), the travel company will have to arrange split-protection for the customer.  The flight will be covered by ATOL, and the hotel will be covered by one of the PTR options.  This is going to make compliance with the regulations much more complicated and confusing for the consumer than what it needs to be.

Cross-border sales

It is currently quite complicated to sell package holidays across the EEA because there is a fractured system for insolvency protection.  In general, travel companies have to comply with the insolvency protection rules of each place of sale.

This will change under the New PTD.  An organiser may use the insolvency protection arrangements of its place of establishment to cover all its EEA-wide sales.  The regulators of the place of sale will not be allowed to impose any additional requirements.  This is potentially very attractive for UK-based travel companies as they will be able to use ATOL to cover flight-inclusive package sales throughout the EEA.

What is not clear under the New PTD is whether organisers must use the insolvency protection scheme of the place of its establishment for all EEA sales, or whether it can instead opt to take out insolvency protection in the place of sale if it prefers that option.  There may be good reasons for why a travel company might want to take this approach – certain insolvency protection schemes (such as ATOL) have strong brand value in the local market and so an EEA (non-UK) travel company may want to obtain an ATOL.

The Government proposes to allow EEA (non-UK) established travel companies to sell into the UK using the insolvency protection rules of the UK if they so wish.  However, those travel companies will only have available to them the PTR options (i.e. bonding, insurance and a trust account).  They will not be allowed to apply for an ATOL, which will be reserved for UK-based organisers only.  This is good news for UK-based travel companies as using the ATOL badge may give them an advantage over their non-UK competitors, whereas non-UK travel companies may challenge this arrangement on the basis that it does not comply with the EU’s rules which prohibit a regulator from discriminating against companies on the basis of nationality.

What may be more of a surprise is that the ATOL Regulations will not offer UK-based travel companies the same option as non-UK travel companies in being able to decide whether to comply with the insolvency protection rules of the place of establishment or the place of sale.  UK-based travel companies will have to include all EEA sales of flight-inclusive packages within the ATOL scheme.  This may be inconsistent, but ultimately the administrative convenience of using ATOL to cover all EEA sales may outweigh the lack of flexibility for UK-based travel companies.

Extension of the ATOL scheme to facilitators

The Government proposes finally to close the loophole which has put travel companies acting as an agent for the consumer outside of the ATOL Regulations.  There will be a new regulation which specifically requires those which procure flights as an agent for the consumer to be licenced.
However, what is of more interest is the further extension of the ATOL Regulations to any company which “facilitates” the making available of flight accommodation by another person (the “Flight Supplier”).  Such facilitators will now be caught by the ATOL Regulations if they (i) receive and pass on in whole / part the customer’s money to the Flight Supplier; (ii) arrange for the customer to make a payment directly to the Flight Supplier; or (iii) receive a payment from the Flight Supplier as a consequence of the flight booking.

The concept of facilitation is very broad.  There are many companies which provide a facility for travel companies to make flight accommodation available to consumers in the UK - metasearch, Google, ISPs and companies which licence “white label” travel companies to use their brand and website to sell flight-inclusive arrangements. 

The only real limitation on whether these facilitators are caught by the ATOL Regulations is that they must also satisfy one of the three payment conditions described above.  The broadest condition is the third: the facilitator must receive a payment from the Flight Supplier as a consequence of the flight booking.  This is likely to capture the cost per acquisition pricing model used by some intermediaries which do no more than advertise and so this new concept has the potential to bring within the scope of the ATOL Regulations a number of new business models.

Flight-Only ticket fully paid exemption

The CAA intends to broaden an ATOL exemption which currently exists for flight-only sales where the airline is paid using the consumer’s credit or debit card.  This exemption will now apply regardless of how the airline is paid and even if the travel company uses its own credit card.  What matters is that the airline is paid in full and the customer receives a confirmed ticket at the time the consumer makes the booking and pays the travel company.  This is likely to apply to many online travel agents who pay the airline in full using a virtual prepaid credit card when the customer books, and issue a confirmed ticket immediately to the customer.

ATOL Certificates

The basic requirement for ATOL Certificates remain unchanged, but there will be some modifications made to bring them into line with the New PTD.  The most interesting development concerning ATOL Certificates is the CAA’s wish for these to be issued by the CAA and not the travel company, using data provided to it by ATOL holders in a real-time or daily basis.  At this stage, this is an idea which the CAA intends to explore further – it will not be something which is implemented alongside the New PTD.

New enforcement powers for the CAA

The Government plans to give the CAA powerful new enforcement tools to ensure compliance with the ATOL Regulations.  In addition to having the power to bring criminal prosecutions and to revoke, suspend or amend an ATOL, the CAA will have the power to impose variable monetary penalties, stop notices and undertakings (amongst other sanctions).

Next steps

The DfT and the CAA have now set out how they intend to change the ATOL scheme to bring it into line with the New PTD and to refresh various other aspects.  A copy of the DfT consultation can be found here and a copy of the CAA consultation can be found here

There is now the opportunity for the industry to provide its response by engaging with the consultations and getting in responses by 23 March 2018.  We will not, absent a change of heart from BEIS, get the same opportunity with the PTR itself and so this may well prove to be the final opportunity to influence the law before the New PTD is implemented in the UK on 1 July 2018.

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