Progress towards a more risk-based Atol financial protection can only made if merchant acquirers are not being forced to continue “shadow bonding” the scheme.
Acquirers process credit card payments and despite the CAA collecting £2.50 from every booking to fund Atol, it directs consumers with to acquirers when there is a failure.
Because credit card payments are protected under Section 75 of the Consumer Credit Act acquirers cover their risk by demanding bonds or withholding payments.
The CAA is consulting with the travel industry on reforms that could see the £2.50 Atol Protection Contribution (APC) varied based on an assessment of risk.
Although the consultation found little industry consensus on the way forward, the regulator is preparing to consult on a range of options later this year.
Will Plummer, chief executive of Trust My Group, said financial sector confidence in travel must be restored.
“Why are there standard Atols with absolutely no collateral and ultimately shadow bonding that falls back onto the acquirer? That doesn’t feel right in terms of trying to progress this.
“I have sympathy with the CAA in terms of travel is not a simple beast, it’s multifaceted with multiple different players in it.
“But the bottom line is there’s just not one set of risk, there’s not just Atol’s risk, it’s not just supplier failure, we are also pushing back on the merchant acquirers.
“The thing that grieves me about Atol is when you’re trying to get merchant acquirers back into the market but charging £2.50 and then falling back on chargebacks and Section 75.”
Plummer said using technology to make data available centrally will restore confidence among financial institutions and insurers that consider travel “super high risk” post COVID.
“We’re coming from a set up that’s been around for a long time but COVID, and the Thomas Cook and Monarch failures, have revealed how fragile it is.
“We need to work collectively to get better with data, then you can accurately know what the risk really looks like, not a finger in the air in terms of calculating that risk.”
Paul Smith, the CAA’s group director of consumers and markets, said: “It’s not just the risk of failure it’s the impact of failure.
“Over time, I would not say that the risk of failure is particularly different in different parts of the market.
“We have seen failures at the smaller end, the medium end, and periodically at the bigger end. The impact is just so much different in those different scenarios.
“What we are trying to do is find an approach that is based on outcome and not unduly prescribing the means by which each company must do business.
“We should be open to people doing it in different ways rather than saying this is the only way which you must do it.
“We are also conscious people change and innovate so if you pick a particular way of doing something it might look like the best solution right now but is it in three, four, five year’s time?”
Is the pace of reform happening quickly enough?
There are concerns reform isn’t happening fast enough after COVID and the Monarch and Thomas Cook collapses placed huge strains on consumer financial protection in the UK.
The CAA has completed a first round of consultations on changes to the Atol scheme and will consult further on specific proposals later this year.
But industry experts expressed concerns at the pace of reform and whether changes will be out of date once they are eventually brought in.
Matt Purser, director of the Travel Trade Consultancy, said: “You are trying to build a system that will stand the test of time.
“We have to accept that regulators will always be reactive rather than proactive because there’s innovators out there that will always come up with something different.
“The longer the consultation takes, the more it worries me, because when reform finally comes in it will already be out of date and we will be trying to catch up again.”
Plummer said the CAA should incentivise firms to provide it with data to properly understand the risk to Atol before reforms are complete.
“Isn’t there a danger that the longer the consultation takes the more it feels like business as usual, which is compounding the errors of the past?” he said.
Paul Smith, group director of consumers and markets, said: “We will come out later this year with a firm set of proposals having had lots of engagement.
“What our view is will still be up for consultation, so there will be opportunity for people to shape that.
“There will need to be some thought about the implementation timetable. It depends on what the proposals are.
“What we have deliberately done is focus on the things that we have control over.”
The Elephant in the Room
Atol reform must address the “elephant in the room” that the biggest risk is posed by large tour operators and airlines that have accumulated “debt mountains”.
Industry entrepreneur Steve Endacott criticised the CAA’s track record on regulating industry giants in the aftermath of the XL Airways, Monarch and Thomas Cook collapses.
He conceded there was government pressure to mitigate the impact by keeping them trading, but claimed it was clear how much trouble they were in before they failed.
“The track record says the system doesn’t work because three times the Atol fund has been all but wiped out,” he said.
Endacott added: “The elephant in the room is the airlines and the lack of control by the CAA.
“Until they get regulatory authority over them, we can’t do anything about it, but it has massive knock-on effects.”
Smith said airline insolvency reforms have been delayed by COVID, but that the CAA is in favour of having more regulatory powers over airlines.
“Where we have focused is around our enforcement powers and the government has consulted recently on expanding our powers.
“We have some powers, but they are quite slow to implement. We have a case we took against Ryanair that dates back to 2018 that’s still going through the court system.”
Smith added: “We have never seen our role as preventing all failures. If you’re going to have a competitive market you have to accept there’s a degree of failure risk.
“But having been through Covid, having been through those larger failures, we have to ask the question can we do things differently.
“There’s never an easy time to make change...but if you’re not going to try on the back of that then when are you going to try?”
Do people really want financial protection?
The CAA should have greater powers to enable holidays to continue in the aftermath of a failure because consumers want holiday protection not financial protection.
Endacott said: “Booking a holiday is a trust item. People want to know if something goes wrong in the chain I still go on holiday. They don’t want a refund.”
Purser agreed: “When I was at the CAA, when you phoned people and said unfortunately you can’t go on holiday but you can get your money back that’s not what they wanted.
“And it costs more to give them the money back because some of the suppliers have already been paid. Going on the holiday is really important to people.”
Purser said a guarantee holidaymakers will travel would reduce the risk for all involved in providing financial protection, including merchant acquirers and insurers.
“Whereas at the moment the default is everyone gets a refund,” he said.
Does the answer lie with technology and data transparency?
Centralising data to provide greater transparency of where risk lies would reduce the multiple layers of protection and the costs of providing financial protection.
Plummer said a multifaceted approach involving bonding, trust accounts and insurance, is the answer if merchant acquirers and insurers are able to accurately understand their risk.
“If everyone’s covering risk it’s costing someone, and you’re paying the cost three or four times over.
“If you had one set of data, that allows you to be able say here’s the booking and here’s the exposure on that supplier, that principal, that acquirer.
“Atol would have full visibility over that data and connect it up to Atol receipts. There is not one solution here. It’s multifaceted.”
Should virtual cards be made mandatory?
Dynamic packaging has been effectively banned because insurers are not prepared to risk offering supplier failure cover to agents booking with airlines, said Endacott.
However, he said when agents use virtual cards to pay for air at the point of booking there is a clear audit trail and the risk falls on the merchant acquirer of the airline.
“If a flight’s covered by a virtual card there’s risk, but it’s minimal. If all other suppliers are paid on departure, there’s hardly any risk.
“The only risk left is the commission of the agents and that can be insured because it’s minimal.”
Endacott added virtual cards should also be used to pay commission upfront releasing revenue for advertising so agents do not have to use customer money which is not theirs.