08 Dec

ATOL Reform – what it means for ATOL holders and their agents

The following article appears in ABTA's latest issue of Travel Law Today.

By Zohar Zik, Partner and Gareth Miller-Reedman, Claims Manager at HFW

Consultation closed in August for the proposals on how the Air Travel Organiser’s Licence (ATOL) scheme might be changed by the Civil Aviation Authority (CAA). The ATOL scheme in its current form has been high on the agenda for many years and is once again in the spotlight following several high-profile failures in the travel industry, culminating in the collapse of Thomas Cook in 2019. That required repatriation of more than 150,000 people, 45% of whom were protected by ATOL, and a pay-out in excess of £445 million from the beleaguered Air Travel Trust (ATT). 

The ATOL proposals focus on the way licence holders should be funded and hold customer funds in the future, as well as the regulatory requirements and insurance infrastructure needed to achieve this and ensuring that licence holders are better positioned to refund customers themselves.

Proposed changes 

The CAA has proposed two very distinct routes for insolvency protection with varying levels of flexibility:

Segregated customer accounts – as part of this proposal, operational cash balances would be held separately from customer funds. Crucially, there would be no access to the segregated funds until the customer returns from holiday. This will, in effect, require ATOL-holding operators to finance their operations by alternative means or funds, for example, the funds could be segregated by trust, escrow or customer accounts. This, however, could negatively impact licence holders’ cash flow and finances and risk rendering their business commercially unviable.

Mandatory bonds – extending the current practice of requiring bonds from applicants who do not meet certain financial criteria to a mandatory requirement for bonds to be provided by all ATOL holders. 

One proposal is to select one of the above options and introduce it across the board; an alternative would be to allow applicants to choose that which works best for them. 

ATOL Protection Contribution (APC)

The CAA has proposed amendments to the APC, noting that the current fee of £2.50 per passenger is not linked to either financial risk or the value of the booking:

  1. Flat rate APC: an increase in the existing flat rate, although this does not account for either the risk of failure or the value of customer bookings. In addition, this would fail to incentivise the ATOL holder to protect customer monies.
  2. Risk priced APC: a variable rate APC could be charged taking into account the risk profile of the ATOL holder. This might include financial and business risk, capital structure or whether customer monies are used to fund the business.
  3. Value priced APC: this APC would be based around the value of the booking. Whilst the option does not reflect the risk of some ATOL licence holders, it does more accurately reflect if a booking is for a higher value product.
  4. Hybrid risk and value model: this option considers both risk and value of the booking, with any formula to calculate the rate of APC to be weighted in favour of risk of the business

Options linked to legislative change

Whilst the CAA would remain responsible for issuing ATOLs, operators could seek insurance cover through third-party providers, as is the case elsewhere in Europe. These insurers would establish the criteria in addition to the cost of any such policies. Part of the requirement in offering this type of cover would be to ensure protection in accordance with the existing ATOL scheme.
Insurers would not be permitted to exempt any areas included in the current scheme, which could deter some underwriters from participating and lead to increased premiums and, as such, could potentially render this option unappealing to licence holders.

The future of ATOL following consultation?

The CAA is expected to announce their findings from the consultation in spring 2022 (with further consultations planned before any transition or implementation). There is no doubt that the ATOL scheme in its current form does need to be revisited. However, it is likely that a cautious, measured approach will be necessary. Indeed, Richard Moriarty (CAA CEO) has recently spoken about the need for the CAA to be open to further conversation and has said that he does not intend for this process to cause a contraction of the UK travel market. 

Whilst licence holders, and ABTA as their main trade association, are generally supportive of the CAA’s ambition to reform ATOL, they remain concerned that a one-size-fits-all approach could actually increase the proportion of holidays sold without protection and that an ATOL reform without a parallel corresponding reform of airline insolvency rules – most chiefly to reverse the automatic suspension of Air Operator’s Certificates and Operating Licences of insolvent airlines – would be counterproductive.
What is clear during this period of consultation on ATOL reform is that this comes at a time when the travel trade is still fragile as it begins a period of slow recovery from COVID-19. It is essential that these long-awaited measures are not rushed through, so that both licence holders and their customers are given the best possible chance to benefit from truly meaningful reform.