The Civil Aviation Authority (CAA) has opened its consultation on ATOL Reform, an assessment of funding arrangements and the protection of customer money. The consultation focuses primarily on how to mitigate the practice of ATOL holders using customers’ money to fund working capital and how to make sure that the risks such an approach can pose to consumers are fully considered in licensing arrangements. This has been prompted in part due to the COVID-19 pandemic and the difficulty some ATOL holders have had in refunding customers in line with legal obligations where the customer’s payment had already been used to fund working capital, as well as the failure of some big ATOL holders in recent years.
Protection of customer payments
The CAA puts forward several proposals which it believes may better protect customer payments and the speed of refunds being made to customers by forcing ATOL holders to move away from a reliance on customer payments to fund working capital. These include:
- Segregation of customer monies
- Requiring ATOL holders to segregate customer monies from their operational cash balances. These segregated funds (which could be full or partial) cannot be accessed or used by the ATOL holder until successful completion of the customer’s holiday. ATOL holders would therefore be required to fund operational activities from alternative sources, and the segregated funds would have to be arranged so that they do not form part of the general estate of a company that enters insolvency and are held to the benefit of the Air Travel Trust for consumers in the event of a failure.
- Segregation of customer monies could be on a total or partial basis. With total segregation, all monies paid by the customer (either directly or indirectly through an agent) would be held in a secure segregated account. This could be done through a customer monies, escrow or trust account and the ATOL holder would not be able to access or remove the money from the segregated account until the day after the customer returned from their holiday. With partial segregation, some payments would be allowed to leave the account prior to successful completion of the holiday, for example, to pay suppliers, up to an amount agreed by the CAA (for example, 20% of the total amount of the package holiday).
- Mandatory bonds
- Requiring ATOL holders to provide a bond (provided by a bank or insurance company) in an amount set to meet a mandatory minimum of customers monies collected by the ATOL holder, although those ATOL holders with a weak financial position may be required to provide a higher bond amount. However, in order to achieve the aim of improving financial resilience of ATOL holders, this option would need to be accompanied by a variable APC structure to allow for increased ATOL holder risk to be priced into the system.
- Hybrid model
- The CAA also offers the option of a hybrid model offering a choice between segregation of funds or bonds (or indeed using both methods in order to achieve the minimum level of protection required), allowing ATOL holders the flexibility to choose whichever option best suits their business model. This would likely be accompanied by a variable APC structure that led to the ATOL holders with a higher risk of failure, and/or bookings that would cost more to refund, paying a higher contribution. By requiring that a mandatory minimum of customer monies was protected regardless of the form of the security, combined with a variable APC, the CAA would be able to ensure that the risk to the consumer was priced into the cost of financial protection.
ATOL Protection Contribution (APC)
In order to address the issue that the current APC is not reflective of risk, the CAA is also consulting on whether to change the way in which APC is charged. The current cost of APC is £2.50 per passenger, which does not take account of the financial risk position of the ATOL holder or the value of the booking. One of the intentions behind changing the APC would be to give ATOL holders the incentive to take steps to protect their customers’ monies. The likelihood is that APC payments by ATOL holders that took lesser steps in that regard would be materially higher.
The options put forward by the CAA include:
- Flat Rate APC
- The CAA could increase the flat rate APC and apply the new rate to all ATOL holders. The specific rate would be calculated in line with the proposed changes to the financial security framework. However, charging all ATOL holders a single rate would fail to take into account the risk of failure that individual ATOL holders and the value of bookings pose to consumers and would fail to incentivise changes to the approach individual ATOL holders take to protect customer monies.
- Variable Rate APC
- A variable rate APC would allow the CAA to better charge for the additional risk of failure posed to consumers, whether this was a risk posed by the individual ATOL holder (risk-priced APC), due to the value of the holiday (value priced APC), or both (hybrid risk and value APC).
- Risk-priced APC: the amount of the APC would take into account the risk profile of individual ATOL holders. Each ATOL holder would be risk assessed taking into consideration the following factors (but not limited to) the financial and business risk profile, capital structure; and whether advance customer monies form part of the source of funding the business’s working capital.
- Value priced APC: the APC charged would depend on the value of the booking. This would be a proportionate contribution that did not take in to account the individualised risk of the ATOL holder but would seek to reflect the increased cost that higher value bookings pose to consumers.
- Hybrid risk and value model: This approach would take into account the value of the holiday and the risk profile of the ATOL holder. However, it’s likely that the formula used to calculate the cost of the APC would be weighted more toward risk than value to ensure that those that represent greater probability of failure are contributing proportionately more than those of lower risk.
For ATOL holders using retail agents, an area of risk has always been that of pipeline monies, whereby retail agents collect and hold on to consumer monies until such monies are forwarded on to the ATOL holder. Should the retail agent fail whilst holding on to the customer monies, the ATOL holder is still under a legal obligation to fulfil the customer’s booking, even though it hasn’t received payment from the retail agent. Over time, a number of ATOL holders have lost significant sums of money through the failure of retail agents whilst holding on to pipeline monies. Historically, this risk has primarily been managed contractually – by requiring the retail agent to promptly forward on all consumer monies and robust credit control to ensure this is complied with.
The CAA is consulting on how pipeline monies should be treated under the different frameworks presented by it, and also asks:
- Whether pipeline monies should be immediately passed on to the ATOL holder, thereby removing the need for agents to hold any pipeline monies; and
- If agents continue to hold pipeline monies should agents be required to use a form of segregation?
Change to Agency Term 11
Since the introduction of mandated ATOL agency terms, the CAA has had to make changes to them on several occasions, requiring ATOL holders to issue new agreements to their agents with the updated terms. The CAA is now proposing amending Agency Term 11 so that any future amendments to the mandated agency terms come into effect automatically from the date of publication (without the need for ATOL holders to issue new agreements). However, for this proposal to take effect, ATOL holders would be required to initially reissue all their agency agreements. However, once that is done, the administrative burden on ATOL holders and their agents in future is likely to be greatly reduced.
The consultation can be foundhere and all stakeholders are encouraged to respond, with the deadline for representations being the 30th July 2021. After the consultation has closed, the CAA expects to publish the responses on its website shortly afterwards.
In the event the CAA implements any of the options proposed in the consultation, all travel businesses are encouraged to start considering the impact this may have on their business model, including:
- In the event the CAA mandates the use of segregated funds (whether for ATOL holders or retail agents), how well placed is the business to fund its working capital, and does the business need to consider seeking funding from alternative sources?
- How will the use of segregated funds affect how and when supplier payments can be made, and will it be possible to renegotiate supplier payment terms if needed?
- What impact will a variable APC have on the business, and how will this be dealt with? Will it be passed on to consumers or absorbed by the business? If it’s passed on to consumers, how will this be reflected in advertised prices?
- How will the business manage the administrative burden of re-issuing agency agreements?