Guest Post: Has Lowcost Holidays started firing gun on race to the bottom?

By Travolution
By Travolution
January 3, 2014 12:17 PM GMT

Farina Azam, a solicitor at Travlaw, considers whether Lowcostholidays' move to Spain marks start of a trend

There has been much talk about the new Package Travel Directive and the impact it will have on the industry.

However, one area that hasn’t been discussed as much is the change to the powers given to regulators.

Under the current Package Travel Regulations, businesses are regulated by the body of the country in which the package is sold.

However, under the new directive, it is the regulators of the country in which the company is registered that are responsible for regulating the company and ensuring compliance with the rules, in particular for financial security.

Mutual recognition

Under the new directive, there is also a requirement for ‘mutual recognition’ among member states.

This means each state must recognise the regulatory authority of another member state for the purposes of satisfying its own requirements of financial protection.

Thus, financial protection obtained by a company in one member state will be sufficient for the purposes of satisfying financial protection requirements in another member state.

In other words, a company established in, say, Spain, complying with the requirements of the Spanish authorities in relation to financial protection, will be sufficient for the purposes of selling packages to UK consumers.

One can’t help consider that this may be at the expense of consumer protection.

Protection discrepancies

The directive is silent on the levels of financial protection that member states must have. This means there could be major discrepancies between the requirements for companies registered in different states.

The protection offered by a company established in, for example, Romania and complying with the Romanian requirements for financial protection, would, under the revised directive, have to be accepted by the UK authorities – even if those requirements were lower than the requirements demanded of UK-based firms.

This raises many customer-protection issues.

For example, customers may not be aware that although their package holiday is ‘financially protected’, the level of financial protection differs depending on the country in which the company is registered.

Furthermore, in the event of a company becoming insolvent, UK customers would be at the mercy of overseas regulators and dependent on these foreign regulators to refund or repatriate them.

Here, possible issues spring to mind.

Holidaymakers could face language‑barrier problems, exacerbating matters at an already stressful time.

And it would not be surprising if consumers phone a foreign regulator to discuss repatriation, only to discover that the regulator had no idea they existed.

Competitive disadvantage

There is also the issue of competitive advantage and notably the fact that those companies registered in the UK and complying with UK financial protection may well end up being at a competitive disadvantage to companies registered in member states with more relaxed rules.

While the UK’s strong stance on consumer protection is something which should be applauded and held up as the ‘gold standard’ within the EU, it may well end up placing companies established in the UK at a financial disadvantage.

This may force the UK to lower its costs and standards, and many in the industry think that would be a good thing.

Otherwise, what is to stop companies moving their businesses overseas and taking advantage of possibly less-stringent regulations in another member state – but still being able to sell to UK consumers, advertising ‘financially protected’ package holidays, and at lower prices than their UK established competitors?

This scenario is mirrored by Lowcost Holidays and its move from the UK to Spain, even without the proposed new mutual recognition requirement.

We await with interest the results of the CAA investigation, but we may well end up seeing more UK companies making the same move and, indeed, the start of a race to the bottom, if the proposed Package Travel Directive revision is enacted.

Travlaw will holding its annual Big Tent Event in London on January 22. Entry is by invitation only.

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