Do we need more or better regulation? What should any regulatory regime look like?

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One of the common themes in the media is that the second anything goes wrong in any industry sector, there are calls for the level of regulation on that sector to be increased, or the regulator is encouraged to take stronger action. One of the challenges that many industries, including the travel industry, face is that currently regulation on the sector is applied inconsistently, and it is possible, and sometimes easy to fall entirely outside the scope of regulation.

 

Regulation does bring with it many positive aspects – it encourages those regulated to behave consistently and fairly towards their customers and often forces good practices into industries and businesses where previously behaviours were, to say the least, dodgy. At the same time, regulated businesses have a double whammy in relation to costs. They generally have to pay the regulator for the privilege of being regulated, and then have additional costs to ensure that their businesses comply with the requirements of the regulator. If a business can escape the clutches of the regulator, it can often get a significant cost advantage against regulated businesses.

 

It has probably been this issue, more than any other that has polarised the debate regarding reform of the Package Travel Directive. The tour operators in particular, who are already subject to a significant regulatory cost of complying with the requirements of the Directive want the scope of the Directive widened sufficiently so that anyone selling a product that looks anything like a holiday are subject to the same regulatory regime that they face. At the same time, those who are likely to be pulled into the scope of protection point to those business models which will continue to fall outside the scope and argue that they are competing with the unregulated businesses, and should not therefore be compelled to incur additional compliance costs. At the same time, some businesses sit on the outside, keeping their profiles as low as possible, and hoping that no-one is able to work out how to regulate them.

 

And do consumers really care whether or not an industry or business is regulated?  It depends partly on the sector. I think that we all sleep slightly more comfortably at night knowing that the aviation industry is subject to a strong regulatory regime, so planes are not going to fall out of the sky with us on board. However, for most of the time, consumers are happy to choose cheaper options if they are available, whether or not those options are regulated. How many consumers ever ask, for example, whether the houses they are renting through the house share websites are properly licensed, and whether the owners are paying the correct tax on those houses? This only tends to become an issue and a focus when something goes wrong. At that point, we frequently expect that the product we have purchased has been regulated, and that therefore we have a means of redress against the business, either directly or through the relevant regulator. It is then, if we discover that there is no protection, that we start demanding some, or stronger regulation.

 

I was struck by this dilemma recently when looking at a type of business which whilst not directly in our industry is playing an increasingly visible role which affects it, and which adds a cost to all travellers. As a result of the changes made the European Court, air passengers can now make a claim if their flight suffers a delay of more than 3 hours. As a result, a substantial industry is developing to “help” or encourage delayed air travellers to make claims. There is a remarkable level of consistency between the amounts that these claims businesses charge, with a typical charge of 25% to 27% of the claims value, often with a handling fee of €25 on top. However, the claims businesses seem to fall into 3 distinct camps:

  • Firms of solicitors, who are subject to the regulatory regime of the Solicitors Regulation Authority (SRA).
  • Claims management companies based in the UK, who currently are entirely unregulated – there is a Claims Management Regulator, but they do not address this area of work.
  • Claims management companies based overseas, typically in the Netherlands or Germany, and there is even one US business in this market, who are neither regulated in the UK nor in their home market.

 

As a result, there is absolutely nothing to prevent any company setting themselves up as a claims management company, claiming to be specialists in flight delay claims and trying to get a slice of what seems to be a pretty lucrative market – if every customer who suffered a delay of more than 3 hours in the UK alone made a claim, the market size is around €250 million per annum – which represents around £50 million in fees for the claims management companies. Clearly not everyone is going to claim – nor will they always use claims management companies, but that is a pretty sizeable sector to be entirely unregulated.

 

The aviation industry is, understandably, concerned at the cost of addressing flight delay compensation. Whilst some of the solution is within their own hands, it seems to me that a sensible measure in bringing some sort of order to those who make their livings claiming against airlines would be for those airlines to lobby the Claims Management Regulator to include these claims businesses within the scope of regulation. I am sure that those businesses who are currently regulated by the SRA would welcome the levelling up of the playing field in this regard.

 

On the broader question of regulation of the travel industry, as a person whose professional expertise has been in dealing with regulators, you would expect me to say that regulation is necessary within our sector. Whether or not it is necessary, I believe that it is unavoidable. All the while that travel businesses hold significant amounts of consumer money before those consumers travel, there are risks which should be regulated. It can be argued that the same principle should be applied to all travel businesses who receive advance payments, including airlines and hoteliers, as well as intermediaries like travel agents and tour operators – and it is hard to justify any distinction. Successive governments and the European Commission have shown themselves remarkably reluctant to grasp this particular nettle, so I am not holding my breath that anything is likely to happen.

 

The other main aspect of regulation to which the travel industry is subject is the question of how we treat our customers – and the distinction between those within the scope of the Package Travel Directive and those outside has been narrowing, as consumer rights are progressively strengthened, particularly by the European Union. However, it is equally clear that the buyers of holidays should have similar rights irrespective of how they have chosen to buy those holidays, and the regulatory regime applicable to those transactions should be consistent – and proportionate.

 

In the 1990s, there was a debate about whether the government should create an “Oftrav” to regulate the travel industry in a similar fashion to Ofcom and Ofgem. I am not convinced that this is a necessary or appropriate step, but if for any reason, future governments consider this approach, then it is important that all players in the sector are subject to the same regulatory regime – don’t hold your breath about that happening!