THE LEGISLATIVE FRAMEWORK The Package Travel Directive

D.6 In 1990, the European Package Travel Directive (“the directive”) mandated Member States to implement national protective measures for consumer holidaymakers who had booked and paid partly or in full for a pre-arranged package holiday (irrespective of the mode of transport). Protections include provision of adequate information prior to the conclusion of the contract and appropriate safeguarding of consumer funds to ensure a refund or repatriation of travellers on retailer insolvency.

Insolvency protection

D.7 Article 7 of the directive and regulation 16 of the Package Travel, Package Holidays and Package Tours Regulations 1992 (PTR) states that the organiser or retailer shall:

provide sufficient evidence of security for the refund of money paid over and for the repatriation of the consumer in the event of insolvency.

D.8 Most Member States have a uniform system for the protection of consumer prepayments for package holidays which does not depend on the mode of transport.¹ However, as the United Kingdom already had protections in place which predated the directive, the Government decided to maintain the pre-existing distinction between air and non-air travel when it transposed the directive through the PTR. This has resulted in two concurrent schemes of protection dependent on the mode of transport employed:

(1) While subject to the PTR, package holidays involving air travel are exempt from its financial safeguarding requirements as they are already protected under the Civil Aviation Authority’s ATOL scheme, overseen by the Department for Transport.

(2) Travel organisers providing packages involving other types of transport must safeguard funds in one of the three mechanisms laid out in regulations 17 – 21 of the PTR.

Revision

D.9 The Package Travel Directive is currently being revised at European level. It is expected that the new directive will be published later this year and be implemented in the United Kingdom by 2017/2018. As at 5 June 2015, the European Council and Parliament had reached political agreement on the text of the revised directive. The provisions on package organiser insolvency, set out in articles 15 and 16 of the agreed text, are significantly more elaborate than those in article 7 of the current Package Travel Directive. A risk-based approach appears to have been adopted:²

The security shall be effective and shall cover reasonably foreseeable events costs. It shall cover the amounts of payments made on behalf of travellers in respect of packages, taking into account the length of the period between down payments and final payments and the completion of the packages, as well as the estimated cost for repatriations in the event of the organiser's insolvency.

1 Germany, for example, requires companies providing package travel to have insurance from one of four insurance companies whereas Denmark operates a Travel Guarantee Fund for such holidays.

2 The document 8969/2015 is available on the website of the European Council under institutional file 2013/0246 (COD). See article 15(2).

The Package Travel Regulations 1992

D.10 The directive was implemented in the United Kingdom by the Package Travel, Package Holidays and Package Tours Regulations 1992 (“the Package Travel Regulations”, the PTR). The PTR apply to “packages sold or offered for sale in the territory of the United Kingdom”,³ though packages subject to the ATOL Regulations are exempt from the financial protection requirements of the PTR.⁴ D.11 While the directive is silent as to how insolvency protection must be achieved,

regulations 17 – 21 of the Regulations set out the mechanisms by which this may be done in the United Kingdom for non-ATOL protected packages: through bonding with an approved body, insurance or trust accounts. Regulation 16 makes it an offence to fail to implement financial protection in one of these ways.

Bonding with an approved body

D.12 Bonding is only possible under the PTR if the organiser is a member of an

“approved body”, defined in regulations 17 and 18 as a body approved by the Secretary of State for the purposes of the regulations. Examples of such bodies are ABTA and the Confederation of Passenger Transport (CPT), though others exist.

D.13 A bond is a guarantee given by a third party guarantor (normally a bank or other institution in the bond surety or financial insurance markets) to fulfil an obligation if the party who intends to fulfil it is unable to do so. If a bonded organiser in the travel sector becomes insolvent and is unable to honour consumer prepayments, the guarantor will provide funds to the value of the bond to the approved body of which the organiser is a member. The organiser will pay an annual premium in exchange for the guarantor’s commitment to pay out on the bond should it become insolvent.

D.14 Regulation 17 requires the organiser to obtain a bond that will be paid in the event of its insolvency to an approved body of which it is a member. The value of the bond must be reasonably expected to enable all monies paid by consumers under contracts for packages which have not been fully performed to be repaid.

At a minimum, the value of the bond must not be less than the smaller of:

(1) the maximum amount of all the payments which the organiser expects to hold at any one time in respect of contracts which have not been fully performed; or

(2) 25% of all the payments which the organiser estimates he will receive under or in contemplation of contracts for packages in the 12 month period following the entry into force of the bond.

3 Package Travel Regulations 1992, reg 3(1).

4 Package Travel Regulations, reg 16(2)(b).

D.15 Where the approved body of which the organiser is a member has a reserve fund or insurance, regulation 18 reduces the minimum bond value to 10% (rather than 25%) of all the payments the organiser expects to receive for packages in the subsequent year.⁵ The reserve fund or insurance cover must be sufficient to allow prepayments to be refunded to consumers if the package has not been performed and the member becomes insolvent.

Insurance

D.16 As an alternative to bonding, organisers may wish to insure consumer prepayments. Regulation 19 allows organisers to have an “appropriate policy”

with an insurer that agrees to indemnify consumers (insured persons under the policy) against the loss of money paid by them in the event of a retailer’s insolvency. The organiser is to ensure that it is a term of every contract with a consumer that the consumer acquires the benefit of such a policy.

D.17 An “appropriate policy” is one which does not contain a condition excluding liability or causing liability to cease, including where the policy holder (that is, the organiser) has not made payments under the policy or which makes liability to be contingent on the policy holder keeping specified records or making information available to the insurer.

Trust arrangements

D.18 Should an organiser not wish to take out a bond or appropriate insurance cover, regulation 20 allows monies paid by consumers for package holidays to be held on trust for the consumer. Costs of administering the trust are to be borne by the organiser, though any interest which is earned on the monies subject to trust shall be held by the trustee for the retailer and payable to him on demand. The trustee will release consumer prepayments to the retailer when contracts have been fully performed, where funds have demonstrably been repaid to the organiser, or where the consumer has cancelled the package and forfeited payment.

D.19 On insolvency, monies held in trust by trustee shall be applied to meet the claims of consumers in respect of the holiday packages they purchased but which were not performed as a result of the organiser’s insolvency. Two exceptions to the general distribution principles of trusts law are made: if there are insufficient funds to meet the claims of consumers, payments shall be made on a proportionate basis; conversely, any surplus of funds after repayment to consumers will revert to the organiser’s estate and be available to the general body of creditors.

D.20 If an organiser makes a false statement to the trustee to enable release of funds, or uses monies released by the trustee for any purpose other than that for which it is intended, this will constitute an offence under regulation 22 of the PTR.

Sanctions and enforcement

D.21 Regulation 16 (safeguarding of funds) and regulation 22 (offences relating to the trust) are enforced by local authority Trading Standards officers.

5 Or the maximum amount of payments held at any one time, if this is lower.

D.22 We will consider the current position with respect to package holidays, before looking at travel arrangements which do not qualify as packages and other means of redress available to consumers.

PACKAGES INVOLVING FLIGHTS