UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 1798-ii

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Transport Committee

Air Travel Organisers’ Licensing (ATOL) Reform

Wednesday 22 February 2012

Rt Hon Theresa Villiers MP and Kate Jennings

Evidence heard in Public Questions 132 - 156

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Transport Committee

on Wednesday 22 February 2012

Members present:

Mrs Louise Ellman (Chair)

Jim Dobbin

Julie Hilling

Mr John Leech

Paul Maynard

Iain Stewart

Graham Stringer

Julian Sturdy

________________

Examination of Witnesses

Witnesses: Rt Hon Theresa Villiers MP, Minister of State, Department for Transport, and Kate Jennings, Head of Aviation Policy Implementation Division, gave evidence.

Q132 Chair: Minister, we have questions for you on ATOL. We are sorry for the reason that you were unable to be with us when we intended to discuss this, but it is good to see you back again.

Mrs Villiers: It is good to be back. I would be happy to do a very brief scene setter on ATOL if the Committee would allow me. Again, I am very grateful for the opportunity to come here somewhat later than anticipated.

It is very welcome that the Transport Committee is looking at ATOL. We have a long-standing problem where the money that families may spend on their holidays may form a substantial part of their annual income, and yet, as a matter of course, it tends to be paid out to the travel industry weeks or even months before people get the benefit. There is this inherent risk in the way the industry is structured of families being on risk in relation to the insolvency of companies in the travel industry.

ATOL has provided some very effective protection over the 40 years it has been in operation. Around 18.5 million people who benefited were covered by ATOL last year, but the realities of the modern holiday market mean that it does need to be updated. We have a successful and dynamic travel industry that has developed all sorts of products, and, although they may look and feel rather like a package holiday, they do not fall within the current definition. People expect and want to be protected in the event of insolvency. We believe that, by extending ATOL to Flight Plus and potentially in the future looking at airlines, we will be providing greater clarity and greater protection for consumers.

Q133 Paul Maynard: Once your proposals have been implemented, what proportion of holidaymakers do you think will be covered by ATOL-bonded protection?

Mrs Villiers: There is a range of different types of holidays. We have come up with the estimate that an additional six million or so holidays would be covered by bringing Flight Plus into the system as compared to what would happen if we were to stick with the current rules. I know there is a degree of controversy around that figure and it does involve a degree of speculation. It is not difficult to predict with great accuracy the extent of the exit from the ATOL scheme that could happen over the coming years if we do not act to bring Flight Plus in. It is difficult to make a very clear estimate of exactly how many holidays will be covered by ATOL at the end of the process, but it will be significantly more than is currently the case.

Q134 Paul Maynard: Would you agree that there will still be a significant number of holidaymakers who will not be protected because of quirks in the system? For example, we were cited the example of lowcostholidays.com, which operates its own website-based provision, which would be covered by ATOL, but it also operates on behalf of easyJet’s holiday bookings. Those would not be covered. Does that give you any pause for thought in terms of whether, more generally, this is an area in which it is appropriate for the state to be regulating, given that so many people now purchase travel insurance separately-for example, scheduled airline failure insurance? Does the state still need to be as involved as it was in the 1970s when this first came to fruition?

Mrs Villiers: The example you give about easyJet and airlines gives me pause for thought. That is why the Civil Aviation Bill has a provision in it, which, if it is adopted by Parliament, would enable the Government in the future to bring airlines into the system so that the holidays they sell are treated in the same way as those sold by their competitors in the travel industry. I do take that point very seriously. If we were to go ahead and bring airlines in, you are absolutely right that there would still be a range of holidays that are not covered. There is a debate at a European level on the Package Travel Directive, which again could see further holidays brought in. In taking all these decisions, it is, of course, important for us to make sure that we do our very best to minimise the regulatory burden on the travel industry and balance that against the real value that consumers place on the protection of the ATOL scheme.

Q135 Paul Maynard: Given the changes to the Package Travel Directive that you are hinting at, why are you legislating now rather than waiting to see what changes are likely to be brought in that might require further legislative change? Why act now?

Mrs Villiers: We are pretty confident that what we are doing now will not be inconsistent with any changes to the Package Travel Directive. If there is a change to the Package Travel Directive, it is likely to require an extension of coverage. We would anticipate that that would be achievable via secondary legislation. We do not think that we are pre-empting a European reform, but the reality is that there have been well publicised insolvencies in the travel trade. Also, when people’s incomes are under pressure as a result of the difficult economic circumstances we find ourselves in, it is more important than ever to make sure that their hard-earned money is protected when they book their holiday. If at all possible we should try to extend the level of protection at a time when people can ill afford to lose several hundred pounds if the tour company they have booked their holiday with goes bust.

Q136 Paul Maynard: If we accept the notion that the state should be regulating this, the issue of Flight Plus arrangements is going to be covered in the legislation, but there is a concern among many providers that the 24-hour window is too short. We have had evidence not just from larger tour operators but also smaller groups, who point out that it should be extended to seven days. Where travellers have complex needs-and we had evidence from someone who organises pilgrimages to Lourdes-it is very difficult to put together the more detailed package that the traveller needs within the 24-hour time frame. Would you be prepared to look at extending it beyond 24 hours to seven days, for example?

Mrs Villiers: We looked with some care at this issue and obviously took into account the representations we received in the consultation. The place we have ended up is that, where additional components to a holiday are booked the same day as a flight or the day before or the day after, that is the appropriate time limit for a Flight Plus holiday. We have to weigh in the balance the burden this places on the travel industry. The longer the period over which a Flight Plus booking can be made, the more complexity and cost for the travel industry. I think we broadly have the right compromise where consumers would tend to associate elements booked in fairly close proximity with a package. The more widely spaced those bookings are, the less there is the perception that this is a single holiday that people are booking as a package.

Q137 Paul Maynard: That is a no then; thank you.

Mrs Villiers: Yes, not at the moment. At the moment we are happy with the arrangements we have made on timing; so we do not have any proposals to move to a seven-day alternative.

Q138 Chair: But it is not entirely ruled out.

Mrs Villiers: Our plan is to go ahead with the secondary legislation as we proposed. In the future, we are prepared to keep an open mind on future reform.

Q139 Mr Leech: I would like to follow on from Mr Maynard’s questions. Have you made an assessment of how people will avoid the new regulations? It is clear from previous witnesses that there will be a way round the new proposal for Flight Plus. Have you done any assessment on how many holidays will avoid being covered by the new scheme?

Mrs Villiers: If we do not act to bring Flight Plus into the system, we could see as many as two million or so holidays exiting the ATOL scheme. In terms of the estimate of how many would seek to restructure the way they sell holidays in order to avoid the new rules on Flight Plus, I am not certain if officials have done any specific assessment on that as an issue.

Kate Jennings: There is no formal assessment of that as such, but things like the two-day period were designed with that in mind. We felt that two days was long enough to prevent people avoiding saying to people, "Come back in a few days and then it won’t be a Flight Plus." In the Bill, also, we are looking at taking powers to cover "agent for consumer", which would be one of the main ways to avoid the scheme, effectively.

On the earlier point of the two days or the seven days, it is worth saying that it is a permissive regime. For example, if after seven days the customer asks to add car hire and they wanted a certificate-they want a protection-there would be nothing to prevent the tour operator from then covering the holiday in that way.

Q140 Mr Leech: It would be fair to say that some people within the travel industry have raised some concern that there will be the opportunity to get round the new system.

Mrs Villiers: It is realistic to say that no system is going to be bulletproof. There are always going to be ways in which elements of the travel industry try to find a way to take themselves out of the scheme, but we are acting to bring considerably more holidays into the scheme with the secondary legislation. As I have said, we see this as an ongoing process whereby the Civil Aviation Bill is potentially a further step forward in this. There is potential as well, as I have said, for further reform at a European level in relation to the Package Travel Directive.

Q141 Mr Leech: I want to come on to the fact that, to me, there does not seem to be any logic in not going the whole step now and to include airlines at this stage. We heard evidence from previous witnesses that some airlines that are completely outside of the ATOL scheme are responsible for part of this deficit in the ATOL scheme because their airline failure has resulted in other travel companies effectively paying to bring their passengers home. Surely the fairest system would be to do it all in one go and include airlines now.

Mrs Villiers: That has been the major criticism of the Government’s proposals. In practical terms, if we were to bring airlines into the ATOL scheme, we need primary legislation. We are pressing ahead as quickly as possible with giving the Government the option of bringing airlines into the scheme. Before we take a final decision on that, though, it is essential that we listen with care to the industry and the people affected by this and make a careful assessment of the cost impact and the most effective way we can deal with this problem. We are at too preliminary a stage to say that there will be a definite decision to bring airlines in. We believe there is potentially a case to do that, which is why we are setting aside legislative time to make that possible.

Q142 Mr Leech: Would it be fair to say that certain airlines are putting a significant amount of pressure on not being included in any future scheme?

Mrs Villiers: Yes. It is common knowledge that the airlines are largely opposed to this. My feeling is that the whole of the travel industry benefits if people have confidence when they book their holidays. Although there are costs attached to the ATOL scheme, overall there is a greater benefit for the industry because people have more confidence.

Another stage of future reform on which the CAA is working at the moment in a very dedicated way is to see whether we cannot explore different ways to manage the ATOL scheme that are cheaper for both the current people in it and potentially airlines in the future, to try and give some reassurance to airlines that we are doing our absolute best to make sure that, while we continue to protect the consumer, we do it in a way that is as cost-effective as possible and minimise the burdens on their business.

Q143 Iain Stewart: In the impact assessment on reforming ATOL you look at the radical alternative of not having ATOL and leaving it all to personal travel insurance, but you cite the potential difficulty that insurance policies tend not to cover repatriation costs and related issues. Have you had any discussions with insurance companies that they might be able to adjust their policies to cover these sorts of issues?

Mrs Villiers: I have not discussed this directly with insurance companies myself. This option was one that I wanted to have looked at very seriously, not least because of the pressing need to minimise any additional regulatory burdens on industry. As you have said, one of the reasons why an insurance-based scheme is not as effective as extending ATOL is because so many insurance policies do not cover this kind of problem. Even those that cover, say, the insolvency of a travel operator do not necessarily cover the repatriation costs, or you may be covered for one part of your holiday, but that leaves you liable to pay the hotel bill and you no longer have the means to get there because the flights have been sold to you via a company that has gone out of business.

Leaving all that aside, because, as you say, there might be ways in which the insurance industry could give a better product than is currently available to mitigate some of those problems, the reality is that the Package Travel Directive legally requires protection to be given for certain types of holidays. If we were trying to move to an insurance-based system, we would still be stuck with the problem that consumers want protection for package holidays, there is a broad expectation that they are protected, but only certain holidays sold by certain people are protected. It is the clarity point that cannot be solved by an insurance-based scheme. One of the key problems we are trying to address is consumers not being aware of whether or not they are protected. Having looked at this carefully, I concluded that the better way to deal with that, rather than trying to push for a more insurance-based scheme, was to extend the ATOL scheme.

Q144 Julian Sturdy: Minister, how much is the deficit in the Travel Trust Fund driving the changes?

Mrs Villiers: It has been part of the decision-making process. I want to assure you that there is no question of people being in danger of not getting what they are entitled to out of the ATOL Trust Fund. Although there is a deficit, it is supported by a Government guarantee. We think the change is a fair one. One of the consequences of the changes we are proposing is that the fund becomes self-sustaining so that it is funded by the travel industry and holidaymakers rather than being supported by the taxpayer. We think that is fair, but the primary rationale behind what we want to do is to give more effective protection to consumers. Putting the ATOL fund on a self-sustaining basis is also a useful consequence, but for me it is not the primary driving factor in going ahead with this.

Q145 Julian Sturdy: In the evidence we have taken so far there have been arguments put forward that the proposals are being rushed through to resolve the short-term problems with the deficit, and, while that might resolve things in the short term, the long-term issues and problems with it will come back at a later date.

Mrs Villiers: To be honest, the desire to keep up the pace and get on with this is more about what might happen if there was a major insolvency. That can be covered by the fund, but the trouble is we want to make sure that we press ahead to ensure that as many consumers as possible are protected. There are many consumers out there who are not currently protected by ATOL and who we think should be protected by ATOL. In an era where we are in difficult economic circumstances, we cannot exclude the possibility of major insolvencies. If they are of companies that are selling Flight Plus and not traditional package holidays, that leaves a whole range of consumers who are not protected. The reason for trying to press ahead promptly is to make sure that we do as much as we can to protect consumers from the consequences of insolvency.

Q146 Julian Sturdy: I have one last point. Do you envisage having to revisit this situation at some point in the future? You talked about this in answer to Mr Leech’s question about looking at expanding this to airlines. You are envisaging coming back and revisiting this in the future, are you?

Mrs Villiers: Yes. We would envisage consulting in the future on whether airlines should be brought in. We are also very interested in ideas to improve and modernise the way the ATOL fund is managed, potentially moving to an industry-led, more private sector approach to how that fund is managed.

Q147 Julie Hilling: It seems to me that the ATOL scheme has been very effective in terms of the public mind. People believe that if they have booked a holiday they are covered. Sadly, of course, in many cases they are not. You have talked about people being given a certificate if they are ATOL-covered. What about an indication for those people if they are not covered? Most people would expect that insurance is going to get them home or that they are covered in some way.

Mrs Villiers: There is not a legal way to require companies not covered by ATOL to make that clear. There is not a reverse ATOL certificate. It is an important role for the CAA to try and raise awareness of the ATOL certificate and the importance of looking for it. One of the issues we are particularly concerned about is where a company may be selling some ATOL-protected holidays and some that are not. Therefore, they could have an ATOL logo on their website but be selling someone a holiday that was not ATOL-protected.

The expansion of the scheme will cover part of that problem, but we also think there needs to be clarity in consumers’ minds. We need to impress upon consumers the benefit of asking for the certificate. Raising awareness is another key part of the reform, but it is not something we can deliver via legislation. It does require efforts in terms of informing consumers what their rights are.

Q148 Julie Hilling: Do you have a programme in mind to do that? One of the things other witnesses have said is that people will make a decision on booking this holiday or that holiday because that one is £5 cheaper than the other one. It may be that that has the protection. What sort of programme do you have in mind for that?

Mrs Villiers: I know that the CAA has a programme in mind. I do not know whether Kate has any details of it.

Kate Jennings: As you may have seen in the announcements, the full certificate will not be comprehensive until 1 October because some companies will not be ready to issue the full certificate. Initially, there will be some holidays that are sold with the information that will be included in a certificate but not in that certificate format. That is just so that we minimise the transitional costs on business. The CAA is already working towards doing a big launch campaign for the certificate on 1 October. We very much hope that industry will work alongside the Civil Aviation Authority on that because we think it is in everyone’s interest to promote this together. The early indications are that the major companies are very interested in working together on that.

Mrs Villiers: That is another of the reasons why I am delighted that your Committee is looking at this issue because your reports regularly generate a lot of media interest. The more attention we can draw to the concept of ATOL and the importance of an ATOL certificate, the better. If this Committee felt able to play any kind of role in that, I would be hugely grateful.

Chair: Our concerns for a very long time have been about increasing the clarity to the passenger about who is and who is not covered, and also having a fairer system. We have been pursuing this for many years now and I hope we are going to make some progress.

Q149 Graham Stringer: One of the concerns that we heard from small travel agents at the last evidence session-I do not know if you have read the transcript of that-was that there was not a level playing-field under the current scheme and the proposals between small and large travel agents.

Mrs Villiers: I am conscious that in the normal course of things a uniform regulatory burden across industry can impact more heavily on smaller operators than bigger operators. The CAA has a programme that seeks to relieve and reduce the burdens on smaller businesses. The work it is doing with accredited bodies is very positive, whereby a smaller business joins an accredited body, which acts as the intermediary. By acting as a group, it does reduce, overall, the costs of being a member of the ATOL scheme. The CAA is very much aware of this. It is something I have pressed them on. This is something my BIS colleagues have pressed on me in terms of the interdepartmental discussions.

Q150 Graham Stringer: There was a real sense of injustice. It was quite an exciting evidence session really because the witnesses argued with each other quite a lot. Is there anything more you can do? Essentially, they have to provide more security as a percentage than the larger firms. Is there anything you can do to level that playing-field?

Mrs Villiers: The estimates about the costs for a small business if they choose to comply with ATOL requirements through an accredited body could be as low as £100 or £200 extra on their membership fee. My understanding is that there are some genuine lower-cost options for smaller businesses. As we take forward these reforms and see how they are implemented in practice, of course it will be a priority for me, as Minister, to keep up the pressure on the CAA to ensure that it is doing everything it can to minimise the costs for all businesses but particularly for smaller ones.

Q151 Graham Stringer: You partially answered this question before when you said that there are European regulations for package holidays that you have to have some kind of scheme. I find it philosophically interesting that a Conservative Government are trying to extend their involvement in the industry rather than looking for free market solutions and reducing the Government’s involvement. Can you justify that?

Mrs Villiers: It was something that troubled me, to be honest. As I said to Iain Stewart, I was very keen to fully explore a move to essentially a system where, as long as consumers got complete transparency about whether they were covered or not, we left it much more to the consumer to decide. As I said before, that is not really an option in that already there is a certain type of holiday that is going to be covered because of the Package Travel Directive. You cannot resolve the clarity problem in that way. I also remain to be convinced that the insurance options are as good as ATOL protection.

We also have the problem that it will be very difficult to mandate genuinely effective transparency requirements across the whole of the industry that made it absolutely clear to passengers whether they are covered or not. Yes, we have come to a position that is somewhat counter-intuitive for a Conservative Government, but I think it is the right one. In the longer term, as I have said, we are prepared to look at a more private sector-oriented solution via reforms and modernisation of the way the scheme itself is managed.

Q152 Graham Stringer: From the answers you have given previously and the fact that we are in Committee on the Civil Aviation Bill at the moment, it is likely that there is going to be an early review of whether or not to bring airlines in. Why then in the RIA have you put that it is going to be in five years’ time?

Mrs Villiers: I am not aware of the statement that it would necessarily take five years to do this.

Q153 Graham Stringer: In a sense it is a tricky question. I wondered why, at the bottom of the regulatory impact assessment, you have put that it will be reviewed in five years when you are clearly going to review it in the next-

Mrs Villiers: In terms of a review, no, I think we would expect to make some progress on a decision as to whether to bring airlines in much more quickly than within five years. I am not sure if we have published an estimated date for when a decision might be made.

Kate Jennings: We would expect the Bill to complete its progress in Parliament by April 2013. We would look to do a consultation probably some time next year.

Q154 Chair: For what?

Kate Jennings: For any consultation on bringing airlines in or using the Bill powers. The reason we are thinking at the end and not any sooner, because in principle there is nothing to stop us consulting earlier before the powers are in place, is because we would like to wait and see what is proposed at the European level. We also want CAA to start its work on thinking about future models for funding. We understand from the industry that there is an element of consultation fatigue. It is just seen as realistic that we spend this year ensuring that the secondary legislation is implemented.

Q155 Chair: Have you made any assessment of the cost of these changes to the travel industry?

Mrs Villiers: The impact assessment puts them at £6.5 million, but that does include the cost of the £2.50 APCs, which ultimately will be passed on to consumers. It is not all administrative costs.

Q156 Chair: Minister, you referred earlier to looking again at how the ATOL scheme was managed. When will we be able to hear more about what you are proposing?

Mrs Villiers: Again, we have not taken a final decision on how quickly that will happen in terms of a full public consultation, but the CAA is working on that at the moment. To reiterate on airlines, I would be uncomfortable if we were going out there doing an impact assessment and consulting on whether to bring airlines in when the legislation has not completed its passage through Parliament. That is one of the reasons why we need to wait and start that formal part of the process after the Bill has gone through, we hope, but it is not the case that we are going to be sitting around waiting for five years before we do anything about this.

Chair: Thank you very much for coming and answering our questions.