Cost of Preferred (or more likely) Option Net cost to business per year (EANDCB in 2014 prices)

Transcription

1 Title: Primary legislatin t strengthen the ATOL scheme in rder t partially implement the new Package Travel Directive (2015) IA N: DfT00375 RPC Reference N: RPC16-DfT-3284(2) Lead department r agency: Department fr Transprt Summary: Interventin and Optins Impact Assessment (IA) Date: 06/01/2017 Stage: Final Surce f interventin: EU Type f measure: Primary legislatin Cntact fr enquiries: Stephen Pwtn (stephen.pwtn@dft.gsi.gv.uk) RPC Opinin: GREEN Ttal Net Present Value Business Net Present Value Cst f Preferred (r mre likely) Optin Net cst t business per year (EANDCB in 2014 prices) One-In, Three-Out Business Impact Target Status m m 1.2m Nt in scpe Nn qualifying prvisin What is the prblem under cnsideratin? Why is gvernment interventin necessary? The statutry Air Travel Organisers' Licensing (ATOL) scheme prtects cnsumers when a travel cmpany becmes inslvent. It is a key mechanism in which the existing Package Travel Directive (1990) is implemented in the UK. Legislative change is necessary t ensure that the ATOL scheme cmplies with the new EU Package Travel Directive (2015), when it is brught int frce in The Eurpean Cmmissin believes that interventin is necessary t reduce cnsumer detriment in the hliday travel market. This stems frm the infrmatin asymmetry that exists in the market, cupled with the fact that mney is taken far in advance f delivery f the hliday, and the difficulties cnsumers face in securing refunds frm an inslvent cmpany. The UK Gvernment will need t transpse the new Directive int UK law by 1 January What are the plicy bjectives and the intended effects? The plicy bjectives are t strengthen the ATOL scheme and bring it int line with the Package Travel Directive (2015) in a way that ensures it is cmpliant with EU legislatin (N Gld plating). The intended effects are t change the cverage f ATOL t make crss-brder trade easier fr businesses, make infrmatin n inslvency prtectin available fr cnsumers and ensure they receive effective prtectin when purchasing frm an ATOL prtected cmpany established in the UK. We als intend t exempt general agreements fr Business-t-Business sales frm the ATOL scheme in line with the requirements f the new Directive. What plicy ptins have been cnsidered, including any alternatives t regulatin? Please justify preferred ptin (further details in Evidence Base) Optin 1: D nthing. This was cnsidered as a plicy ptin, hwever due t the ptential fr legal and financial challenge resulting frm ATOL being misaligned with the new Package Travel Directive (PTD2) this was nt selected. Optin 2: Strengthening ATOL t be cnsistent with PTD This is the D Minimum ptin which invlves passing legislatin t change the tax-raising pwer fr ATOL which will be the fcus f this impact assessment (N gld plating). Optin 2 is the preferred ptin as it is the nly ptin that wuld achieve the bjective f ensuring effective transpsitin f the new Directive in the UK by 1 January Will the plicy be reviewed? It will be reviewed. If applicable, set review date: January/2023 Des implementatin g beynd minimum EU requirements? N Are any f these rganisatins in scpe? Micr Yes Small Yes Medium Yes Large Yes What is the CO 2 equivalent change in greenhuse gas emissins? (Millin tnnes CO 2 equivalent) Traded: NQ Nn-traded: NQ I have read the Impact Assessment and I am satisfied that (a) it represents a fair and reasnable view f the expected csts, benefits and impact f the plicy, and (b) that the benefits justify the csts. Signed by the respnsible Minister: Date : 09 February

2 Summary: Analysis & Evidence Plicy Optin 2 Descriptin: Strengthening ATOL t be cnsistent with PTD 2015 FULL ECONOMIC ASSESSMENT Price Base Year: 2016 PV Base Year: 2018 Time Perid Years: 10 Net Benefit (Present Value (PV)) ( m) Lw: High: Best Estimate: COSTS ( m) Ttal Transitin (Cnstant Price) Years Average Annual (excl. Transitin) (Cnstant Price) Ttal Cst (Present Value) Lw High 1 Best Estimate Descriptin and scale f key mnetised csts by main affected grups There will be a ne ff familiarisatin cst t business f 6.7 millin. If the change in scpe f the ATOL scheme results in mre passengers being cvered by the scheme there will be; a cst t businesses f an annual renewal f their ATOL and cst f the ATOL Prtectin Cntributin (APC) (0.6 millin); and, a small cst t the CAA f mnitring/renewal csts fr these businesses. Due t a greater cverage f passengers there will be mre pay uts frm the Air Travel Trust Fund (ATTF) fr peratr failure ( 0.2 millin). If the change in scpe f the ATOL scheme results in businesses being remved frm the scheme there will be; a cst t the CAA thrugh a lss f incme thrugh fewer ATOL licence renewals ( 0.09 millin) and a reductin in APC receipts t the ATTF ( 1.2 millin). Other key nn-mnetised csts by main affected grups There may be sme additinal familiarisatin csts t UK cnsumers wh are nt used t the chsen Member State inslvency prtectin scheme. BENEFITS ( m) Ttal Transitin (Cnstant Price) Years Average Annual (excl. Transitin) (Cnstant Price) Ttal Cst (Present Value) Lw High Best Estimate Descriptin and scale f key mnetised benefits by main affected grups If the change in scpe f the ATOL scheme results in businesses being remved frm the scheme there will be; a benefit t businesses n lnger cmplying with the scheme thrugh APC cntributin and licence csts (Out f scpe) and a small benefit t the CAA f n lnger issuing these ATOL licences and nging mnitring/renewal csts. Due t a smaller cverage f passengers there will be less pay uts frm the ATTF fr peratr failure ( 0.35 millin). If the change in scpe f the ATOL scheme results in mre passengers being cvered by the scheme thrugh Eurpean expansin there will be; a benefit t the CAA thrugh an increase in incme thrugh mre ATOL licence renewals ( 0.06 millin) and an increase in APC receipts t the ATTF ( 0.6 millin). Other key nn-mnetised benefits by main affected grups Lwer crss brder barriers mean huge ptential benefits t bth businesses wh wish t expand and sell int ther Member States and businesses currently perating acrss Eurpe. Businesses will n lnger need t cmply with varius inslvency prtectin schemes and can perate under ne system. Key assumptins/sensitivities/risks Discunt rate (%) 3.5% The main risk arises frm the change in scpe f the ATOL scheme frm the place f sale t the place f establishment. Due t the uncertainty f future business decisins, we have assumed a net migratin f zer; such that businesses will nt chse t set up a new place f establishment in the shrt run, this represents ur central case. Tw alternative scenaris have als been presented in the analysis as sensitivity tests, these represents just ne view f a future reality based n ur implicit assumptins. The actual csts and benefits will depend entirely n hw business chse t perate under the new system. BUSINESS ASSESSMENT (Optin 1) Direct impact n business (Equivalent Annual) m: Csts: 1.2m Benefits: 0.0m Net: -1.2m Scre fr Business Impact Target (qualifying prvisins nly) m: N/A 2

3 1 Intrductin The Air Travel Organisers Licence (ATOL) is a statutry financial prtectin scheme managed by the Civil Aviatin Authrity (CAA) and funded by financial cntributins made t the Air Travel Trust Fund (ATTF). Its purpse is t prtect cnsumers buying package hlidays including a flight and sme 'flight nly' sales frm the inslvency f an ATOL licensed travel cmpany. If a licensed firm ges ut f business, the CAA can refund prtected custmers r ensure they can cntinue their hliday and return hme (repatriate). The ATOL scheme partly implements the EU Package Travel Directive 1990 (PTD) in the UK, which places an bligatin n cmpanies selling package hlidays t have inslvency prtectin in place. The PTD and ATOL were bth established t address cnsumer detriment in the travel market. This harm arises frm a number characteristics f the market; the time lapse between payment and delivery f the hliday; the lack f cnsumer awareness f the financial stability f hliday prviders; and, the difficulty cnsumers face in getting a refund frm an inslvent cmpany. Cnsumers may experience bth a financial lss frm nt receiving a refund r facing the cst f travelling hme by anther means, and the persnal lss arising frm the incnvenience f a cancelled hliday r frm being stranded abrad. Tgether the PTD and ATOL have prvided an effective framewrk fr regulating the industry fr decades, hwever in recent years it has becme apparent that they had becme ut f tuch with changes in the travel market. In particular, the internet has becme an increasingly imprtant medium thrugh which travel services are ffered. The ATOL scheme was partially refrmed in 2012 t ensure it was mre capable f meeting the needs f the mdern cnsumer. Further legislative change is nw needed t strengthen ATOL and align it with the minimum mandatry requirements f the revised Package Travel Directive (PTD2), which was published in December The ATOL Scheme and the Package Travel Directive Withut the existing regulatin, the ptential fr cnsumer detriment in this market frm the inslvency f a travel cmpany is significant. Payment fr hlidays and flights is ften made many mnths in advance f travel and befre suppliers have t be paid, while barriers t entry can be lw with little capital required. This gives rise t a real risk f businesses becming inslvent between the payment fr services and their delivery. If a travel cmpany becmes inslvent while a hliday is in prgress, cnsumers face the risk f being stranded abrad withut accmmdatin r a flight hme. This may be cmpunded where large numbers f ther hliday makers are in the same psitin with limited airline capacity t repatriate them. In additin t the detriment t cnsumers, there wuld be large calls n the cnsular service f the Freign and Cmmnwealth Office (FCO) frm UK residents stuck abrad. It was against this backgrund that a statutry ATOL scheme was established in the UK in early 1970s, fllwing the failure f a large travel peratr. Inslvency prtectin fr package hlidays became a requirement f EU law frm 1992 thrugh the Package Travel Directive (PTD). The ATOL scheme is bradly based arund the fllwing three functins: licencing by the CAA t sell travel arrangement that include a flight; an ATOL levy and reserve fund t finance the scheme; and the management f refunds and repatriatin in the event f a failure. ATOL Licensing by the CAA Businesses selling air hliday packages and sme third party sellers f flights in the UK are required by law t hld an ATOL. This allws the CAA t assess the risk f the business failing and take steps t ensure that adequate security is in place. An ATOL is nly granted after the cmpany has met CAA s licensing requirements, which can include bth persnal and financial fitness checks, and are carried ut ver the lifetime f the licence. There are different types f ATOL licence, which allw different ways f entering the scheme. This includes the standard ATOL and Small Business ATOL, which are managed by CAA, and Accredited Bdies, Franchises and Jint Administratin Agreements, where sme respnsibilities are devlved t third parties. An verview f the different licences can be fund n the CAA website 1. The vast majrity f ATOL prtected bkings (arund 95%) are arranged under a standard ATOL r a Small Business ATOL. The Small Business ATOL is pen t businesses selling fewer than 500 flights r 1 Overview f ATOL licences 3

4 hlidays a year. This is a relatively light tuch apprach which ensures an adequate degree f mnitring with a minimal administrative burden. Fr the largest businesses the CAA adpt mre detailed financial mnitring, and can impse requirements, such as fresh capital r a bnd, if there is a particular risk. New ATOL hlders, regardless f size, are als required t prvide a bnd r ther security as a cnditin f their licence in the first fur years. Airlines are excluded by law frm the ATOL scheme, when they sell flight nly, as they are subject t a separate EU licensing system, but are still required by the PTD t prvide financial security fr package hlidays they sell. In practice a number f UK airlines have established subsidiary cmpanies with an ATOL t sell package hlidays. Financing the ATOL scheme Licensed businesses make cntributins t the Air Travel Trust Fund (ATTF), which then pays ut when a licensed business cllapses. These are made thrugh the ATOL Prtectin Cntributin (APC), which is a 2.50 levy per passenger per bking. The Air Travel Trust fund has published its Financial Statements fr the year ended 31 March 2016, reprting a surplus f 139 millin. The fund is administered n behalf f the Air Travel Trust (ATT) by the Civil Aviatin Authrity 2. This is a public fund that is used in the event f peratr failure (inslvency) t ensure cnsumer refunds and repatriatin. Expenditure frm the Funds is nt a cst n business; payments t the fund thrugh APC cntributins are a cst t business. Fr many years the ATTF did nt have any incme. It was perated as a reserve fund under the previus ATOL universal bnding mdel, t be called n in the event that the bnds held by businesses prved inadequate t repay r repatriate their custmers. It had perated at a deficit since In 2008 the APC levy was intrduced t replace the bnding mdel (except fr businesses whse riskiness justified additinal measures). The intentin has been t gradually eliminate the deficit and build up a self-sustaining central fund that wuld be used t repatriate and meet refunds by custmers f failed ATOL licence hlders. This is cnsistent with Gvernment plicy that inslvency prtectin shuld be funded by the travel industry and its custmers, rather than general taxpayers. Managing failures f ATOL hlders Over the last five years, mre than 60,000 peple have been repatriated by the ATOL scheme and ver 230,000 peple have received refunds. The CAA manages mst failures, and generally it increases its mnitring when it becmes cncerned abut a cmpany s financial psitin. This means that when a tur peratr des frmally cllapse the CAA may begin repatriatin immediately, if this is necessary. Repatriatin is managed by btaining bking recrds frm the failed cmpany and liaising with airlines and accmmdatin prviders. The Package Travel Directive The Gvernment is bliged under Eurpean law t ensure that the EU Package Travel Directive is effectively implemented in the UK. The Directive intrduces a range f cnsumer prtectins, which apply acrss the travel sectr. In particular it requires cmpanies t prvide evidence f security fr refunds and csts f repatriatin in the event f inslvency. The first EU Package Travel Directive (90/314/EC) ( PTD1 ) was transpsed int UK law thrugh the Package Travel, Package Hlidays and Package Turs Regulatins (S.I. 1992/3288) ( PTR ). These regulatins require businesses selling package hlidays t be able t prvide evidence f prtectin fr prepayments and repatriatins in the event f its inslvency. While air package travel rganisers must use the ATOL licensing scheme summarised abve, nn-air package travel vendrs have a variety f ptins (including bnding, insurance and trust accunts) available t them t shw cmpliance. PTD1 als requires an rganiser t fulfil the entire package when there is a failure invlving smene else wh is prviding a cmpnent f the package. Fr instance, if a package is sld that invlves a flight cmpnent and the airline fails, the package travel rganiser is required t arrange an alternative flight r pay cmpensatin. In 2013 the Eurpean Cmmissin cmmenced wrk t refrm PTD1 and bring it up t date with develpments in the travel sectr. This prcess cmpleted with the publicatin f a revised Package Travel 2 4

5 Directive (PTD2) n 11 th December The UK Gvernment will need t transpse PTD2 int UK law befre 1 January The PTD2 includes the fllwing elements, which reinfrce the ATOL refrm measures already taken: Scpe and definitins a brader and clearer definitin f a package will prvide greater prtectin and clarity and help t clse dwn avidance in the ATOL scheme. Prtectin extended t cver nt nly traditinal package hlidays, but als t ffer prtectin t cnsumers wh bk ther frms f cmbined travel. It cvers 2 different srts f travel cmbinatins which amunt t an enhanced definitin f package : Pre-arranged packages 3 and custmised packages 4. Strnger infrmatin prvisins s that cnsumers receive clear infrmatin, befre and after bking abut the level f prtectin. Linked travel arrangements - if the cnsumer, after having bked ne travel service n ne website, is invited t bk anther service thrugh a targeted link r similar, the new rules ffer sme prtectin prvided that the secnd bking is made within 24 hurs The first f these amunts t an enhanced definitin f package and all bligatins in PTD2 apply t package rganisers. Linked travel arrangements are slightly different in that nt all f the PTD2 bligatins are applicable - nly the disclsure prvisins and limited inslvency prtectin bligatins apply. PTD2 als intrduces a single market apprach t inslvency prtectin, which will bring benefits fr EU established businesses, but will require sme changes t the ATOL scheme. At present, ATOL nly applies t sales made in the UK. Under PTD2, EU-established cmpanies will nw be required t cmply slely with the inslvency prtectin rules f the State in which they are established as ppsed t the place f sale. Hwever businesses utside f the EU will be required t cmply with different rules f each Member State in which they sell. T cmply with the PTD2 the tax raising pwers f ATOL need t be amended s that it can als apply when UK cmpanies are selling t cnsumers in Eurpe. This wuld be a psitive step fr UK business, as it wuld allw them t trade acrss Eurpe withut having t cmply with inslvency prtectin rules in each Member State. 2 Ratinale fr Interventin 2.1 Cnsumer prtectin fr the mdern travel sectr The ATOL scheme, and the PTR mre widely, are designed as a cnsumer prtectin measure. One f the biggest categries f husehld expenditure is recreatin and culture; in 2011 the ONS fund each husehld spent n average a week n package hlidays abrad and 1.70 n package hlidays in the UK 5. In the unlikely and unfrtunate event f a travel cmpany failure, hlidaymakers are particularly vulnerable t cancellatins in their travel and accmmdatin plans when they are abrad. In the absence f a cnsumer prtectin scheme, custmers may incur significant csts t return back t the UK r t cmplete their hliday. ATOL has existed fr mre than 40 years, and is a recgnised cnsumer prtectin scheme, but there have been significant changes t the travel industry since it was riginally set up. Technical innvatin, in particular the intrductin f the internet, pened up new ways f buying and selling hlidays. It enabled travel cmpanies t allw custmers t mix and match r dynamically package 6 the cmpnents f a hliday in a way that ften fell utside the traditinal scpe f PTD1 and ATOL. This saw ATOL sales as a share f all leisure flights fall frm ver 90% in 1998 t just under 50% in This als resulted in a lack f clarity fr cnsumers and industry, as t whether these types f bkings are 'package hlidays' as defined in legislatin, r are sales f separate hliday cmpnents falling utside the requirements fr statutry inslvency prtectin. This has led t an incnsistent apprach t inslvency prtectin, where sme hlidays are required t be cvered by the ATOL scheme and the PTD, while ther similar bkings have been sld withut these prtectins. Even where an ATOL licence is held, nt all bkings by that ATOL hlder will be licensable transactins cvered by an ATOL. 3 Ready-made hlidays frm a tur peratr made up f at least 2 elements: transprt, accmmdatin r ther services, e.g. car rental. 4 Selectin f cmpnents by the traveller and bught frm a single business nline r ffline Dynamic packaging is generally cnsidered t be a methd f selling hlidays, whereby a cnsumer is able t build their wn package hliday frm a cmbinatin f travel cmpnents (e.g. flights, accmmdatin, and car rental) instead f purchasing a pre-defined package. 5

6 This gap in prtectin has led t cnsumer detriment as cnsumers buying a nn-atol prtected hliday ften face the same risks frm the inslvency f their travel cmpany as thse wh have purchased an ATOL prtected hliday. It has als led t cnfusin fr the cnsumer in trying t understand whether a particular hliday has ATOL prtectin, bth when bking and in the unlikely event f the failure f their travel cmpany. The gap in prtectin and clarity regarding ATOL prtectin was evident in a number f travel cmpany failures, including XL Leisure Grup in September 2008 and Gldtrail, Sun4U and Kiss flights in summer In recent years, successive gvernments have recgnised the need t strengthen the ATOL scheme t bring it int line with the new trade practices and prvide clarity when custmers bk what appears t be a package hliday. This led t substantial refrms t the ATOL scheme in 2012 t make it easier fr everyne t understand which hlidays are cvered, and t restre prtectin t what lks like a package hliday but fell utside the legal definitin.the ATOL Regulatins were changed n 30 April 2012, t extend the scpe t include Flight-Plus arrangements 7, and als t intrduce ATOL Certificates and Agency Agreements t help imprve clarity. 2.2 Cmpliance with EU law The Eurpean Cmmissin has als recgnised the need t refrm PTD1. PTD2 was agreed acrss Eurpe in December 2015, t ensure that cnsumer prtectin keeps pace with the mdern travel sectr and the use f the internet t bk hlidays. The UK has supprted PTD2, as it is bradly cnsistent with ur wn ambitins fr ATOL refrm. The UK is a leader in this area, and in many ways PTD2 mirrrs the level f prtectin already prvided in the UK fllwing the refrms in ATOL scheme defined in law Finally, the ATOL scheme is defined in law, and cntributins t pay fr it are enabled by primary legislatin under the Civil Aviatin Act (1982). Thse cntributins are classified by the Office fr Natinal Statistics as a tax. Any changes t the scheme which are necessary t implement EU bligatins arising frm PTD2 wuld nrmally be made thrugh secndary legislatin using pwers in sectin 2(2) f the Eurpean Cmmunities Act (1972). Hwever, in this case, we have t amend the tax raising pwer in sectin 71(1) Civil Aviatin Act (1982), t cver businesses established in the UK, as ppsed t businesses directing sales in UK. We anticipate that primary legislatin will be used fr this which requires interventin frm the Gvernment. The utcme f the EU referendum n 23 June will see the UK leave the Eurpean Unin. Until we negtiate ur exit, the UK remains a member state f the EU with all f the rights and bligatins that this entails, including negtiating, implementing and applying EU legislatin. The utcme f the negtiatins fr leaving the EU will determine the future arrangements that will apply, in relatin t EU legislatin, when the UK has exited the Eurpean Unin. In the meantime there remains an bligatin t transpse PTD 2015 int UK law by January If ATOL is t cntinue beynd 2017 as a means f cmplying with the PTD2, it will need t be strengthened. Only HM Gvernment can intervene t achieve this. 3 Plicy Objectives The plicy bjectives are t strengthen the ATOL scheme and bring it int line with the Package Travel Directive (2015) in a way that ensures it is cmpliant with the minimum mandatry requirements f EU legislatin. The intended effects are: T change the cverage f ATOL t make crss-brder trade easier fr businesses, Make infrmatin n inslvency prtectin available fr cnsumers and ensure they receive effective prtectin when purchasing frm an ATOL prtected cmpany established in the UK. 7 Flight-plus is a frm f dynamic packaging where a business sells 1) a flight and 2) either accmmdatin r car hire, where 2) is within 24 hurs f 1). 6

7 4 Scpe f this impact assessment This impact assessment attempts t quantify the ptential impacts f passing the primary legislatin t change the tax raising pwer f ATOL in rder t implement the PTD2 by 1 st January A number f secndary regulatins n infrmatin prvisins and business t business sales will als need t be laid t fully implement the new PTD2, hwever these will be cvered in a separate impact assessment. The scpe f this impact assessment cvers UK businesses and cnsumers nly. The impact n Nn UK businesses has been explred t give an indicatin f the verall impact f the new PTD2 n the ATOL scheme but these csts and benefits have been nt included within the ttal cst and benefits estimates 8. Increased r reduced pay uts t the ATTF as a result f higher r lwer passengers cvered has als been cnsidered. This cst/benefit has been transferred frm ther Member States prtectin systems which have either gained r lst respnsibility fr cvering these failures. As nn UK prtectin schemes are utside the scpe f this impact assessment changes t ATTF pay uts as a result f change in passenger cverage has been cnsidered a cst/benefit and nt a transfer. This impact assessment and cmpleted cnsultatin exercise cnsiders the transpsitin f PTD2 int UK law, in s far as it influences the design f the ATOL scheme. It fcusses slely n the inslvency prtectin related changes frm PTD2 that affect the ATOL scheme and the travel cmpanies that it is set up t cver. The Department fr Business, Energy and Industrial Strategy (BEIS) has respnsibility fr the transpsitin f PTD2 as a whle. BEIS and DfT have undertaken a separate impact assessment and cnsultatin cvering the nn-flight based travel sectr and the wider requirements f the PTD2. The cnsultatin dcument als invited initial views n the ptential directin fr lnger term refrm, t ensure we are able t get the regulatry framewrk right in the future. The Gvernment is nt prpsing any lnger term changes at this stage, and as such this Impact Assessment des nt cnsider prpsals fr ATOL refrm, beynd what is required in PTD2. In accrdance with HM Treasury Green Bk guidance, the plicy is appraised ver 10 year hrizn and applies a discunt rate f 3.5% per year n future cst and benefit streams. Csts and benefits are estimated in 2016 prices, with 2018 as the first year fr present value calculatins. All estimates are given in sterling. The analysis presented in the IA takes a cnservative view f csts and benefits. Our scenari analysis des nt fit the NPV range presentatin as utlined in the standard IA summary sheet template. Presenting the highest benefit frm ne scenari with the lwest cst f anther scenari wuld be misleading as they are tw mutually exclusive utcmes. Instead we have presented the tw sensitivity tests alngside ur best case central estimate within sectin 8. 5 Cnsultatin The Gvernment ran a cnsultatin exercise n mdernising cnsumer prtectin in the package travel sectr, with specific fcus n the changes t the ATOL scheme. It sught views n strengthening ATOL t cmply with the Package Travel Directive, but als t seek views n lng-term ATOL refrm. The exercise ran between 28th Octber and 24th Nvember 2016, supplemented by three external stakehlder events. We received 61 respnses t the cnsultatin; these respnses have been used when building the evidence base fr this impact assessment. 8 Based n Green Bk guidance and the Better Regulatin Framewrk: (Sec 5.25) 7

8 6 Descriptin f ptins cnsidered DfT have been wrking clsely with BEIS and the CAA t cnsider the new requirements f PTD2 and the changes that wuld need t be made t ATOL, t ensure it remains an effective way f transpsing the new Directive by January 2018 (Optin 2). This has als been cnsidered against a D nthing scenari where the scheme remains unchanged (Optin 1). Optin 1: D nthing. Under this ptin, there wuld be n change t the ATOL scheme in rder t implement PTD2. The ATOL scheme, its structure and the regulatins wuld remain the same as nw. This wuld mean that the scheme wuld nt be fully r ptimally aligned with the new requirements f the PTD2. It wuld carry a significant ptential fr legal challenge and infractin cst frm nt cmplying with EU legislatin. It wuld als lead t detriment t bth cnsumers and businesses, if they are unable t access the ptential benefits that the PTD2 has been designed t bring. It is fr these reasns that this ptin has nt been selected fr further cnsideratin. Optin 2: Strengthen ATOL t be cnsistent with PTD2. This ptin invlves passing legislatin t ensure the ATOL scheme and structure is adjusted as required t align with the requirements f PTD2. This wuld invlve a mix f primary and secndary legislatin. This ptin wuld enable ATOL t prvide effective cnsumer prtectin within the new PTD2 regulatry framewrk, and it wuld be feasible t d s within the transpsitin timescales. It will als allw ATOL members and cnsumers t access the benefits that the PTD2 is designed t bring, while aviding gld-plating. Optin 2 it is the nly ptin that wuld ensure effective transpsitin f the new Directive in the UK by 1 January 2018 and is therefre the preferred ptin. This ptin therefre frms the basis f the Impact Assessment. This apprach, is als cnsistent with the lnger term prcess f ATOL refrm. In the lnger term, ATOL may remain in its current frm, r be used as a means f supprting transitin t a lnger term alternative apprach. Alternative ptins cnsidered One ptin cnsidered thrugh cnsultatin was a transitin t a market based apprach by This was cnsidered and ruled ut during the plicy making prcess. It is apparent that sme f the mre radical ptins, wuld require a lnger perid fr industry, the market and regulatrs t adjust t. Mving t a fully market based system wuld remve the existing ATOL regulatins and scheme, s that inslvency prtectin bligatins arising frm PTD2 are cvered entirely in the market. This ptin has been explred thrugh wrkshps, cnsultatin and stakehlder engagement. It appears t be a widely held view that it wuld nt be pssible t transitin immediately t a full market based apprach, where every business is able t cver its inslvency bligatins thrugh insurance, bnding r ther market based schemes. There were cncerns raised that there may nt be sufficient appetite r capacity in the market t cver all cmpanies r risks. There may als be disprprtinate csts r barriers that exist unless the market is given sufficient time t transitin and develp. Overall, there is a cmmn view that it wuld nt be feasible r desirable t mve inslvency prtectin fully int the market in time t implement the PTD2 n 1 Jan The Prpsal: Strengthen ATOL t be aligned with PTD2 The prpsal keeps the ATOL scheme in peratin, with alteratins made t reflect the minimum requirements f the PTD2. The ATOL scheme wuld cntinue t perate as utlined abve, hwever it wuld need t be adjusted s that; a. Inslvency prtectin applies t sales by businesses established in the UK b. The definitin f package is mdified t cver a brader range f bking mdels c. The bligatin n businesses t prvide infrmatin n inslvency prtectin is expanded d. The applicatin f inslvency prtectin fr Business-t-Business sales is remved 8

9 e. A new definitin f Linked Travel Arrangements (LTAs) is intrduced t cver sales f cnnected hliday elements purchased frm separate suppliers. LTAs wuld receive a different level f inslvency prtectin. Maintaining the existing apprach is attractive in that it is likely t invlve the least disruptin t industry, cnsumers and the regulatrs in transitining t the new PTD2. Hwever, even making as few changes as pssible will change hw the ATOL scheme perates. The fcus f this impact assessment will be n inslvency prtectin applying t sales by businesses established in the UK (prpsal a. abve) as ppsed t place f sale. Implementatin f this requires primary legislatin. The remaining changes will be implemented thrugh secndary regulatins via the Eurpean Cmmunities Act (1972) and will nt be cnsidered in this assessment. Primary legislatin changes: Place f sale t Place f establishment The applicatin f UK inslvency prtectin will be changed frm the lcatin f the sale f the trip, t sales made by businesses established in the UK. Travellers buying trips frm businesses elsewhere in the EU will nt be entitled t ATOL prtectin, but shuld be ffered the inslvency prtectins as laid ut in the Member State within which the business making the sale is established. Hwever this des nt preclude businesses established verseas frm btaining ATOLs, prvided they meet the requirements. Traders established utside f, and, making sales int the EU will be bliged t cmply with the dmestic inslvency prtectin systems f each State in which relevant activities are directed. The primary legislatin des nt create any enabling pwers, s n secndary regulatin will be enabled under this primary legislatin change. 7 Sectrs and grups affected The main sectrs and grups that will be affected are as fllws. It is imprtant t recgnise that in BEIS assessment f the impacts n the nn-flight based travel industry there may be effects n ther sectrs and grups: Passengers: PTD and PTD2 are aimed at prviding enhanced prtectin fr cnsumers in the event f an inslvency in the sectr. Passengers will find the prtectin they receive, and wh prvides it, may change under PTD2. They will als be affected thrugh changes in infrmatin prvisin and clarity abut the financial prtectin f packages they buy. ATOL sales as a share f all leisure flights have fallen frm ver 90% in 1998 t just under 50% in The abslute number f annual ATOL sales has risen slightly in recent years, perhaps wing t the widening f scpe in packages falling under ATOL in the 2012 Regulatins. Hwever, the scale f the impact is still cnsiderable; in 2015/16, the CAA prtected 25.2 millin passengers 9. Travel cmpanies/package peratrs: The biggest effect will fall n the package travel sectr, in particular n tur peratrs, travel agents r ther vendrs invlved in making available travel cmbinatins, either as package r linked travel arrangements. The plicies may change the way they sell their prducts, r where they sell thse prducts frm. There are an estimated 4,545 travel agency businesses in the UK (accrding t the 2016 UK Business Register 10 ), with an estimated 2,068 businesses currently licensed under the ATOL scheme. Ttal authrised turnver fr current ATOL hlders is 21.8bn 11. The ther businesses may prvide nn-air based travel r d nt sell ATOL licensed gds. Nn-air based travel businesses sit utside f the scpe f this impact assessment; air-based travel businesses previusly utside the scpe f ATOL may nw fall int scpe, and therefre are cnsidered in this impact assessment. As can be seen frm figure 1 belw, the scheme is dminated by three large cmpanies wh make up nearly 40% f the ttal licenced passengers falling under ATOL. The ATOL market is heavily skewed t the larger ATOL hlders fllwed by a large tail f small-medium sized businesses perating under ATOL SIC cde Surce: 11 Figures prvided frm the CAA Nvember This is fr sales t the public and include packages, Flight-Plus and Flight-Only. 9

10 Tp ATOL Licence hlders Number f passengers cvered (millins) Prprtin f all licensed passengers % % % % Ttal: % Figure 1 Breakdwn f ATOL hlders CAA: The CAA is the regulatr f the ATOL scheme in the UK, thus any changes affecting the ATOL scheme will have an effect n CAA peratins. It is respnsible fr licensing businesses and nging mnitring and enfrcement. The CAA als administers the Air Travel Trust Fund and manages the refund and repatriatin bligatin f failed ATOL hlders. Gvernment (Department fr Transprt): Ultimately, under EU law the Gvernment is respnsible fr ensuring that the inslvency prtectin bligatins in the PTD are met and are effective. The CAA manage the ATOL scheme n behalf f the Secretary f State fr Transprt, and the Fund is integrated within the Department fr Transprt s accunts. Changes t the structure f the ATOL scheme culd have an impact n the viability and sustainability f the fund, which may lead t calls n Gvernment t cnsider a lan r ther interventin, subject t state aid rules. (PTD2 des nt require cver t extend t highly remte risks.) 8 Csts and benefits f the Prpsal: D Minimum Optin 2 is the cntinuatin f the ATOL scheme with sme adjustments t bring the scheme int cmpliance with the Package Travel Directive The primary legislative changes required are thse that the bligatin fr businesses t have an ATOL licence will mve frm thse business wh make their sales in the UK, t sales made by businesses established in the UK. The implicatins f intrducing this measure are explred belw. Changing the scpe f the ATOL scheme will have bth immediate and lnger term impacts. In the shrt term the legislatin will result in the ATOL scheme extending t cver passengers bking packages in the EU with a cmpany established in the UK, and ceasing t be respnsible fr cmpanies based in ther Member States selling packages int the UK. It will cntinue t apply t cmpanies based utside f the EU wh are selling int the UK. 8.1 Changing incentives fr businesses chsing a Member State fr establishment The new PTD2 aims t prmte a level playing field fr businesses by harmnising rules and remving bstacles t crss-brder trade. If we assume that all Member States transpse the PTD2 at an equivalent level, there shuld nt be much difference in attractiveness t businesses acrss Eurpe purely n the basis f inslvency prtectin. The PTD2 raises the minimum bar fr the standard level f inslvency prtectin ffered acrss Eurpe. One respndent t ur cnsultatin nted there shuld be little mtivatin fr businesses t g regulatin shpping acrss Member States t take advantage f varying prtectin schemes. In the shrt term it may be difficult fr a business t mve their place f establishment due t factrs such as prperty rents r IT server lcatins. In the lnger term, hwever, businesses may make strategic decisins n their place f establishment, which may lead sme cmpanies t leave r establish in the UK. These decisins will be based upn a brad range f factrs, the cnsideratin f the relative csts and benefits f inslvency schemes acrss Eurpe represents just ne f these. Anther cnsultatin respndent nted: It is unlikely t make much sense t cnsider mving ur travel businesses t a lcatin utside the UK There will be a number f factrs taken int accunt in determining whether a future businesses place f establishment, and the cst f cmpliance with the ATOL Scheme will simply represent ne element. Businesses established in a Member State and perating acrss Eurpe will have a number f ptins available t them in rder t cmply with the PTD2: 10

11 - Establish the business in ne EU Member State and sell under that Member States inslvency prtectin t custmers acrss Eurpe - Structure the business such that it can establish in tw r mre separate Member States, with each distinct entity cmplying with the crrespnding Member State inslvency prtectin f where it is established, and selling t cnsumers either slely in that member state, r acrss Eurpe, under different inslvency prtectin schemes - Establish utside f Eurpe, and sell int Member States, cmplying with the inslvency prtectin f the Member State int which they sell There culd be an increase r decrease in the number f businesses perating under ATOL leading t a rise r fall in the number f passengers paying APC int the ATTF. We cannt knw whether cmpanies will decide t establish r leave the UK, s in the shrt term we assume a net migratin f zer. Specifically we assume that a business in the shrt run will nt set up a new place f establishment. We have assumed a net migratin f zer due t the uncertainty surrunding future businesses strategic decisins. Cnsultatin respnses frm tur peratrs suggest that British cmpanies are presently unlikely t reestablish their businesses utside the UK. Sme f the larger peratrs have indicated that they will review their psitin pst Brexit and ATOL refrms: the change wuld certainly encurage a cmprehensive cnsideratin f the emerging pprtunities. Hwever, the majrity f peratrs wh respnded t ur cnsultatin indicated n intentins t re-establish their businesses utside f the UK. This reinfrces are net migratin f zer assumptin used within ur central case. 8.2 Overview f Analysis Given the uncertainty whether cmpanies will decide t establish r leave the UK we have undertaken tw scenaris as sensitivity testing. The base case cnsiders the immediate impacts r vernight change after implementatin. This assumes a net migratin f zer; we assume that a business in the shrt run will nt set up a new place f establishment. The tw scenaris as sensitivity tests cnsider a lnger time hrizn. It is assumed in this case that sme businesses within a year f the plicy being implemented may chse t change their primary place f establishment. The three scenaris cnsider the alternative business reactins r market respnses t the new PTD2: Scenari 1: Base case central scenari (Sectin 8.4) Scenari 2: Reductin sensitivity (Sectin 8.5.1) Scenari 3: Expansin sensitivity (Sectin 8.5.2) The ATOL reductin and ATOL expansin scenari are cnsidered against the ATOL base case scenari. Our scenaris represents just ne view f a future reality based n ur implicit assumptins. The exact csts and benefits will depend n hw businesses chse t react under the new PTD2. The table belw shws the breakdwn f different types f businesses and verall impacts and flws that have been cnsidered within the analysis: 11

12 Cuntry f establishment Cmpany sells hlidays t Shrt term impact Medium term impact UK UK N change Businesses may chse t EU EU sales cme under ATOL leave r establish in the UK resulting in an expansin r Rest f Wrld ATOL des nt cver sales made in Rest f Wrld reductin in ATOL. We have cnsidered bth an EU UK These cmpanies fall ut f ATOL expansin and reductin scenari. The central case EU N change, nt cvered by ATOL is a cmbined scenari which therefre assumes a Rest f Wrld N change, nt cvered by ATOL net migratin f zer. Rest f Wrld UK N change, sales cved under ATOL EU 8.3 Key Impacts Rest f Wrld N change, sales cvered by Member State scheme N change, sales cvered by alternative prtectin measures Figure 2 Impacts and flws The Impact Assessment identifies and mnetises the fllwing key impacts n businesses: Licensing csts Admin cst f applying fr licenses APC payments t the ATTF Familiarisatin csts Payments frm the ATTF t passengers Impact n businesses Licence csts If businesses chse t establish in the UK r utside f Eurpe and sell in the UK they will be required t cmply with the ATOL scheme. This will mean familiarisatin csts, the cst f applying fr a licence frm the CAA, and the APC rate paid n each licensable hliday sld. The current licence csts are set by the CAA and shwn in Figure 3. Type f licence Cst f licence Administrative Cst f Applicatin Charge per licenced Seat Standard ATOL 1, Small Business ATOL 1, N/A N/A ABTA Jint Administratin Scheme N/A Franchise ATOL Standard Licence renewal 1, N/A 123 Accredited Bdies Figure 3 Licence csts Dependent n Accredited Bdy Cst f licence amendment Administratin cst as utlined in Official Recrd Series 5 - Scheme f Charges table 1 fr amending licences. 12

13 In additin t the standard cst f an ATOL licence and administratin csts, a business applying fr a standard ATOL (ver 501 licensed seats) will have t pay a fixed charge per passenger /seat charge f pence 13. A business applying fr a Small Business ATOL (less than 500 licensed seats) is exempt frm the fixed charge per licenced seat. Administrative csts Businesses will als need t cver the administrative cst f applying fr a licence which is estimated t be 19.5 hurs wrk fr senir crprate managers in the case f a Standard ATOL licence; 4.4 hurs in the case f ther ATOL licences; and, dependent n the Accredited Bdy in the final case 14. The administrative cst f applying fr each type f licence is shwn in Figure 3, and is based n an average wage f per hur fr Crprate Managers and Directrs. The administrative cst f a Standard ATOL licence renewal is estimated t be 8.25 hurs at f senir crprate manager time at per hur 15. APC payments t the ATTF Businesses perating under the ATOL scheme will als incur the cst f paying the ATOL Prtectin Cntributins (APC) at a rate f 2.50 per prtected passenger wh purchases a hliday. Under this measure there will be n additinal licence cmpliance csts fr businesses already established in the UK slely selling int the UK and fr business established utside f Eurpe and selling int the UK. Fr businesses established in the UK but selling acrss Eurpe, the terms f their ATOL licence will require t be amended by the CAA and they will nw be required t pay the APC levy fr all passengers (as ppsed t just UK passengers). Fr businesses established in Eurpe and selling int the UK they will n lnger be required t part f ATOL and will need t cmply with the inslvency regulatins in place within the Member State they are established. Familiarisatin cst Businesses will have t becme familiar with the ATOL scheme in rder t cmply with the prpsal. There is guidance available n the CAA website and businesses will likely have t spend time reading this guidance and seek further infrmatin where they need clarity. The cst f familiarisatin t businesses new t ATOL is estimated at 95 per business. The CAA have estimated this t be n average 3 hurs wrk fr senir crprate managers t cmplete in the case f a Standard ATOL licence 16. All businesses new t ATOL have t cmplete a shrt nline training curse and test befre jining the scheme. Fllwing discussins with the CAA, we anticipate that current ATOL hlders will als be required t undertake a similar training curse nce PTD2 and scheme is implemented in The brad range f cnsultatin respnses cnfirmed that businesses will have assciated implementatin and familiarisatin csts. The majrity f respndents are unable t cmment precisely until the prpsals are cnfirmed. The amunt is very much dependent n the size and mdel f each business. Our familiarisatin cst assumptins have been based n the limited number f quantified respnses that the Department received thrugh cnsultatin. One f the largest ATOL hlder anticipated a familiarisatin cst f 250, ,000. We have used the higher end f the range as a cnservative estimate and assumed a per passenger familiarisatin cst f 9 pence fr large multinatinal firms 17. We apply this t the tp 30 largest ATOL hlders, which represent 75% f ttal licensed passengers under ATOL. A medium sized ATOL hlder (75,000 licenced passengers) respnded with an anticipated cst f 60,000, giving a per passenger cst f 80 pence. The majrity f small t micr businesses were either unable t quantify r utlined minimal csts. T be cnservative we have assumed the 80 pence per passenger cst t cver the remaining ATOL hlders within the scheme. These businesses are unlikely t explit the ecnmies f scale that the larger multinatinals pssess. UK established Businesses currently making sales under the ATOL scheme within the UK There are three categries f business t cnsider in this circumstance; businesses established in the UK and selling slely in the UK; businesses established in the UK and selling acrss Eurpe; and businesses 13 This refers t the Licence Limit f passengers r seats n the ATOL. 14 Based n a telephne survey carried ut by the CAA in 2016 n the time taken by 24 ATOL hlders t apply fr their licence. 15 Based n 2014 ASHE, Pay by SOC 4 digit 2010 cde, Table 14.6a. The figure f is the grss wage rate, adding in nn-wage labur csts gives a figure f Nn-wage labur csts taken frm the Labur Cst Survey is the grss wage rate, adding in nn-wage labur csts Businesses with ver 100,000 licenced passengers. 13

14 established in the UK and at least ne ther Member State and selling acrss Eurpe. Under PTD2 businesses must sell under the inslvency prtectin scheme in which they are established. Fr businesses established and selling slely in the UK there will be n change in inslvency prtectin fllwing the change in law. These are likely t be smaller businesses selling specialist r niche hliday packages. Fr this subsectin there will be n change in csts. The amendment culd bring huge ptential benefits t these businesses as they shuld find it easier t sell int ther Member States (if they wish t expand) withut the need t cmply with varius inslvency prtectin schemes. Businesses that are slely established in the UK and selling acrss Eurpe already have an ATOL licence (fr their UK passengers) but will nw have t ensure that all Eurpean passengers are als cvered under their ATOL licence. These businesses will have t cmply with ATOL fr all their passengers (and pay the APC). The increase in APC payments will represent a greater cst t the business; this will be partially ffset by savings frm nt having t cmply elsewhere in Eurpe with their equivalent scheme. Althugh APC cntributins represent a benefit t the ATTF, they are a cst t business and are hence a transfer payment. The net impact is therefre zer. These business will n lnger be required t cmply with the varying inslvency prtectin schemes f ther Member States in which they perate. Assuming under PTD2 the levels f prtectin ffered and levels f cmpliance are similar acrss Member States, businesses shuld benefit frm perating under ne cherent system. Businesses will nly have t cmply with ne scheme fr all their Eurpean sales. On tp f this there shuld be additinal savings frm reduced licence fee payments fr these businesses perating acrss Eurpe. Businesses will n lnger have t licence in many different cuntries. Additinally, there will be administrative savings frm n lnger having t take the time t fill in licencing frms in different cuntries. Businesses that have chsen t structure themselves such that they are established in the UK and ne r mre ther Member States will have the ptin t cmply with the level f inslvency prtectin ffered in each Member State in which they are established r pt t align all the peratins with ne Member States prtectin scheme. Businesses perating under such a structure may therefre wish t cntinue business as usual (Cntinue perating under different schemes including ATOL), pt t slely perate under the UK inslvency prtectin (ATOL) r pt t slely perate under the prtectin f an alternative Member State scheme. These business will nly chse t amend their current peratins t take advantage f the new PTD2 if it represents a mre cst effective slutin. UK Businesses wuld als have the ptin f establishing utside f Eurpe, and selling int the UK. This means the business wuld have t cmply with the individual inslvency prtectin f the Member States int which they sell. Businesses may pt t change their cuntry f establishment as a result f the new PTD2, thugh fr this t be viable it wuld need t represent a mre cst effective slutin in the lng term. This has nt been cnsidered as viable ptin fr business in the shrt term. Fllwing cnsultatin and discussin with industry we d nt deem it realistic t assume that a businesses will chse t re-establish utside f Eurpe t be able t perate under the ld place f sale measure. Nn UK established Businesses currently making sales under the ATOL scheme There are tw categries f business t cnsider in this circumstance; businesses currently in ATOL but established in Eurpe nt including the UK; and, businesses currently in ATOL established utside f Eurpe. Nn EU established businesses can be assumed t remain under the ATOL scheme as these businesses will cntinue t perate under the previus Place f sale rule. Hwever Businesses which are established in the EU will nw be able t perate under their Member States chsen scheme. These businesses will n lnger have t cmply with ATOL. The impact n the CAA and the ATTF The CAA will face the cst f issuing new licences t businesses wh chse t establish in the UK r nw chse t sell int the UK frm utside f Eurpe. They will als have t change the terms f sme licences in rder that the hlder can cver its Eurpean sales. Alngside the cst f issuing and amending licences there will be the cst f nging mnitring f new ATOL hlders. As the CAA charges fr ATOL licences n a cst-recvery basis this will be a transfer payment frm businesses and the net effect is zer. The impact n the ATTF is dependent upn the strategic decisins taken by businesses n where t establish. If they mve t the UK and decide t perate under the ATOL scheme then the ATTF will grw frm increased APC but will need t cver refunds and repatriatin fr thse passengers. If businesses leave the UK then the ATTF will nt benefit frm thse APCs but will als n lnger need t cver refunds and repatriatins fr thse passengers. 14