Scrap the regulation

We are living in a time when big society and small government is being encouraged.  Surely it’s time to cull the bureaucrats and cut the bureaucracy from the travel industry who make life incredibly difficult for budding entrepreneurs and offer very little consumer support or protection.

Anyone in the UK who makes a purchase of over £100 with a credit card or Visa debit card is protected under the 1974 Consumer Credit Act.  In the event that the customer doesn’t receive what they’ve paid for, they will receive a full refund.  When travel companies cease trading, the CAA usually refers customers who are yet to travel to claim their money back from their card issuer which is causing tension between the CAA and the merchant acquiring banks. So why has the UK travel industry been debating outdated package holiday regulation for a decade with no clear or sensible path forward and exactly the same debate still dominating every conference and industry event including the recent Travel Convention in Malta?

There are arguments against relying on these merchant acquiring banks to provide consumer protection in the travel industry but each one can be answered more than adequately and are dealt with below.

The banks don’t have a great recent record in evaluating risk

Certainly the large investment banks played a huge part in the worldwide financial crisis.  However, the credit and risk teams within the commercial banks are entirely separate and in fact are fairly conservative when evaluating risk.  The merchant card acquirers insure themselves against chargeback risk in the travel industry (at a cost of about £1 per transaction) and if they rely on that insurance too often, the insurance premium rises so it’s not in their interest to act recklessly. 

What about repatriation?

Without CAA package holiday regulation, there would need to be a central government fund and a commitment to repatriate UK holidaymakers stranded as a result of insolvency or indeed as a result of another crisis such as the volcanic ash.  A small portion of the APD could be used for this fund since the idea that APD is some kind of environmental tax is utterly phoney. The management of the fund during a crisis could be put out to tender in the private sector.

It would discourage new businesses

There is no basis for this argument. Currently, if a budding entrepreneur wants to start a travel company selling package holidays, they would need to source a new ATOL bond and a merchant acquiring bank. If the ATOL regulation was scrapped, they would have one less hurdle and would just need to find a merchant bank. Easier said than done but despite all the bad press, banks will back and support good business ideas and good businesses and less regulation will encourage entrepreneurs to the travel industry. If a new travel company trades responsibly and profitably, they will be rewarded over time with better terms (lower rates and a shorter deferred period) by their merchant acquiring bank.

It would fuel companies such as E-Clear

If the industry were to rely on merchant acquiring banks to provide consumer protection, there would need to be legislation to ensure that debit and credit cards are only charged by the travel provider which the customer is booking with.  There could be no third party involved in the transaction.  Regardless of any change in legislation, this should be made law since 3rd party transactions fuel overtrading & fraud.

Customers need financial protection because they are purchasing so far in advance

Yes – but they don’t need to be protected twice.  Most UK travel companies charge a credit card surcharge and the cost of ATOL regulation is priced in to their final selling price so consumers are often paying for protection twice.  Consumers also purchase sofas, cars and sometimes foreign exchange (in the recent case of Crown FX) well in advance of actually taking delivery of the goods but the prices of these goods are not inflated by outdated regulation.

A holiday is so important to families; they must have 100% financial protection

Indeed it is but the ash crisis and recent failures have exposed the complete and utter confusion over package holiday regulation. Surely it’s worse for customers to travel under the false impression that they are financially protected only to find out that they’re stranded when something goes wrong. By scrapping package holiday regulation and having a central repatriation fund, the only customers who would be at financial risk are those who choose to pay by cheque or bank transfer (switch cards are being phased out). Pre-paid credit cards are widely available nowadays though and consumers must also take some responsibility for their choice of travel supplier and choice of payment as they have to in most other countries.

A lack of a regulatory body will encourage reckless travel companies

Very unlikely because merchant acquiring banks are in the private sector and answerable to shareholders so when they get it wrong as they did with the Sun4u collapse, there are severe consequences for those responsible. When the CAA gets it wrong which they invariably do, the bureaucrats move some more paper around and tick a few more boxes. The merchant acquiring banks have tools at their disposal to discourage reckless travel companies – most notably by deferring payment by anything up to 99 days.

If ATOL was scrapped, merchant fees would soar

Again, there is no basis for this argument. Merchant acquiring banks insure against chargeback risk in the travel industry at a cost of about £1 per transaction so any % increase would be tiny. Furthermore, merchant acquiring banks refund the majority of customers impacted by a travel company failure because the CAA pass the buck by responding incredibly slowly.

Conclusion

Since the government wants to make cuts, they should start by looking at industries such as travel which is operating with utterly outdated and unnecessary regulation. The CAA is using public money to pay bureaucrats to make life difficult for budding travel entrepreneurs and pursue legitimate companies such as Travel Republic through the legal system.

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