THE FOREIGN PACKAGE HOLIDAYS
(TOUR OPERATORS AND TRAVEL AGENTS)
ORDER 2001

REGULATORY IMPACT ASSESSMENT

JULY 2001

1. Purpose and intended effect

Issue
1.1 In December 1997 the MMC reported on the supply of tour operators' services and travel agents' services in relation to foreign package holidays. (1)

1.2 The MMC concluded that making the offer of discounts on foreign package holidays conditional on the purchase of travel insurance was against the public interest (the insurance/discount tie). The MMC also concluded that the use by tour operators of "most favoured customer" (MFC) clauses in their agreements with travel agents was against the public interest (MFC clauses require the travel agent to offer the same discounts on that tour operator's holidays as it offers on another tour operator's holidays, without compensating the travel agent). Ministers accepted the MMC's recommendations. An Order under the Fair Trading Act was made to remedy the adverse findings on 7 August 1998. (2) A Regulatory Impact Assessment (RIA) was prepared in conjunction with the Order.

1.3 A judicial review judgment handed down by the Court of Appeal on 9 December 1999 (3) found that the MFC clause provisions in the 1998 Order (articles 3 and 4) went beyond the findings in the 1997 MMC report. It was therefore necessary to make a new Order with the MFC clause provisions reduced in scope.

1.4 The insurance/discount provisions in the 1998 Order are reproduced unamended in this Order. Therefore, those parts of the 1998 RIA which deal with those provisions (article 2 of the new Order) are reproduced unamended in this RIA. In relation to the MFC clause provisions, this Regulatory Impact Assessment covers the reduction in the scope from the 1998 Order.

Objective
1.5 The objective is to remedy the adverse effects identified by the MMC.

1.6 The Order prohibits travel agents and interconnected tour operators from discriminating against any customer in the price they charge for a foreign package holiday, or from making an additional charge, if the customer does not buy insurance with the holiday. This is intended to prevent travel agents from making the advertised discount on foreign package holidays seem larger than in fact it is by recouping it on the sometimes large margins made on the sale of travel insurance.

1.7 The Order removes the prohibition in the 1998 Order on tour operators making an agreement, which imposes any restriction on the sale by the travel agent of the foreign package holidays of other tour operators.

1.8 The Order prohibits tour operators and travel agents from making agreements which require the travel agent to offer the same discounts on that tour operator's holidays as he offers on those of other tour operators, unless the tour operator compensates the travel agent for the value of those discounts. The Order also prohibits a tour operator from refusing to supply or discriminating against a travel agent on the grounds that the travel agent will not make an agreement which requires him to offer the same discounts on that tour operator's holidays as he offers on those of other tour operators without being compensated for the value of those discounts.

1.9 The provisions in paragraph 1.8 are intended to have the effect of encouraging competition between travel agents and tour operators, in turn leading them to offer discounts which they would otherwise not be prepared to offer.

2. Options

2.1 The Court of Appeal found that the MFC clause provisions in the 1998 Order were ultra vires and articles 3 and 4 were quashed. It was therefore necessary to amend the 1998 Order to reflect the Court of Appeal's view of the MMC's adverse findings.

3. Risk assessment

3.1 The MMC concluded that the two practices it identified result in harm to consumers in the following ways:

Insurance/Discount Tie

• Consumers obtain less value for money than would otherwise be the case. Because prices are distorted, consumers are misled into thinking they are receiving a greater discount on the holiday than in fact they are, and shopping around by consumers for the best deal is reduced.
• Competition in sales of insurance and holidays is distorted between travel agents (because some tie insurance and discounts and others do not).
• Competition in the sale of travel insurance is distorted between travel agents and other sellers of insurance.
• Consumers may be purchasing travel insurance, which in some cases has coverage inappropriate to their requirements or is more expensive than policies with equivalent cover.

MFC clauses

• Consumers pay more for some foreign package holidays, because travel agents do not offer discounts that they would otherwise be prepared to offer.

3.2 It is difficult to evaluate with precision the extent of the adverse effects. For example, the vertically integrated travel agents and a large number of independent travel agents use the insurance/discount tie, but there are many small travel agents who do not. In the MMC report ABTA estimated that 60% of all foreign package holidays were sold at a discount and that, of these, half were conditional upon the purchase of travel insurance.

4. Issues of equity or fairness

4.1 The Order is likely to result in consumers paying lower prices and obtaining better value for money overall. Although there may be a decrease in the level of apparent published discounts for holidays, overall there is likely to be an increase in competition in the sale of insurance for package holidays. There should be an improvement in competition for the supply of travel insurance, as insurance companies will have better access to consumers.

4.2 Increased price competition is likely to result in a transfer of economic surplus from travel agents and tour operators to consumers. Thus, assuming travel agents and tour operators do not take other actions to restore profit margins, consumers benefit via lower prices.

5. Benefits

5.1 The expected benefits from any competition enquiry are:

• lowering prices to consumers;
• eliminating wasteful behaviour by producers, including costs and rent seeking behaviour;
• encouraging innovation (in this case, innovation in the sale of travel insurance directly to consumers); and
• improving allocative efficiency, in this case through more competition between travel agents, tour operators and sellers of travel insurance.

5.2 Only the last three of these result in net gains to the economy and these gains are generally recognised to be small. As noted in paragraph 4.2, the first is a transfer of economic surplus from producers to consumers. In the current case it is not possible to value accurately the scale of this potential transfer. The MMC estimated the value of sales of foreign package holidays in 1996 to be some £5 billion; therefore the gains to consumers from even a small fall in prices could be significant.

5.3 It is not possible to evaluate the potential gains to the economy from more innovative forms of insurance sales and the potential reduction in costs from more intense price competition.

5.4 There are no quantifiable benefits to be expected from the amendment to the MFC clause provisions. There are no benefits in the form of a reduction in compliance costs because it was estimated that all costs in connection with the MFC clause provisions were initial, and all initial cost should by now have been incurred.

6. Costs

6.1 There are a number of potential offsetting costs arising from the Order. These are:

• compliance costs for business;
• costs to consumers from shopping around more for the best insurance deal; and
• monitoring and enforcement costs for the Office of Fair Trading (OFT).

Compliance costs for business

6.2 The business sectors affected by the Order are the suppliers of travel agency services and tour operator services (code 6330 in Business Monitor PA1003). At 2000 figures, there were some 5,630 businesses in this sector. It should be noted, however, that this figure includes the activities of travel organisers, tour guides and related activities not elsewhere classified, which will not be covered by the Order. The MMC report indicates that there are some 1,000 tour operators and 2,000 travel agents. The MMC estimated the total value of the sales of foreign package holidays to be some £5 billion in 1996.

6.3 Implementation costs for the new MFC clause provisions will fall on those tour operators who may decide to prepare new standard contracts and modify existing ones following the reduction in scope of the prohibition of MFC clauses. This is estimated to be at most in the region of £1,000 per tour operator. Assuming all tour operators draw up new contracts, these costs might be up to £1,000,000. However, if only Thomson and Airtours (the only two companies found by the MMC to use MFC customer clauses) draw up new contracts, this would give a total cost of £2,000. However, there is no requirement on companies to change their contracts to reflect the reduced scope of the MFC prohibition, so any costs incurred in doing so are voluntary. There will be no policy costs, and no costs to small companies.

Costs to consumers

6.4 The prohibition of the insurance/discount tie should result in increased competition, both in the market for foreign package holidays and in the market for holiday travel insurance. This should mean that consumers shop around more in order to find the best value and most appropriate insurance. However, any additional costs to consumers as a result of this would be incurred voluntarily, and we do not consider that they would be significant.

Monitoring and enforcement

6.4 OFT did not anticipate that significant resources would be required to monitor and enforce the 1998 Order. They do not anticipate that any additional resources will be required to monitor and enforce this Order.

7. Comparison of costs and benefits

7.1 In the 1998 Regulatory Appraisal, non-recurring costs were annualised over 20 years at 6% as follows (1998 figures):

Transfers

Gain to consumers/loss to travel agents from lower insurance prices (not valued).

*These costs are expected to be minimal.

8. Devolution

8.1 Competition regulation is not a devolved matter. Responsibility rests with the Government of the United Kingdom. Consequently the Order applies to England, Scotland, Wales and Northern Ireland. It has no special or different effect on Scotland, Wales and Northern Ireland.

9. Results of consultation

1997/98
9.1 A press notice issued on 19 December 1997 announced publication of the MMC report, set out the proposals for action, outlined the proposed provisions to be included in an Order and gave notice of the public consultation on the proposed provisions (which ran until 11 February 1998). A legal notice was also placed in Travel Trade Gazette, a publication for the travel industry with a circulation of 26,000 (ABC July 96-June 97). In addition, the press notice and legal notice were sent to all those named as monopolists in the MMC report and representative organisations. Those who were sent copies of the draft provisions were asked to comment on the costs and benefits. Eighteen representations were received commenting on the proposals. No information on compliance costs was provided.

2001
9.2 A statutory notice outlining the draft provisions to be included in the new Order was published in Travel Trade Gazette, a publication for the travel industry with a circulation of 27,000 on 12 February 2001. The notice was also posted on the DTI website. The public consultation ran until 21 March 2001. In addition, the notice and a draft of the Order were sent to all those named as monopolists in the MMC report and representative organisations. Those who were sent copies of the draft Order were also sent a draft RIA and asked to comment on the costs and benefits. Two representations were received commenting on the draft Order. No comments were made on the draft RIA, and no information on compliance costs was provided.

10. Summary

10.1 The Order is intended to remedy two adverse public interest findings made by the MMC in their 1997 report on foreign package holidays, and to reduce the scope of the 1998 Order in relation to the MFC clause provision to reflect a judicial review judgment. Tour operators may incur some initial costs (estimated at between £2000 and £1m), but these would be voluntary rather than a requirement of the Order. There may be savings for consumers in the form of lower prices overall, but it is not possible to value this. Other costs and benefits are minimal (monitoring and enforcement costs for OFT, costs to consumers from having to shop around more for the best insurance deal), or impossible to value (potential for innovation in the sale of insurance).

11. Enforcement, sanctions, monitoring and review

11.1 OFT will monitor complaints about non-compliance with the Order and will review the effectiveness and benefits of it after a period of time. If a company breaches the Order any contractual terms made unlawful by the Order will be unenforceable. There is no other sanction for past non-compliance, ie in the form of fines. Civil proceeding may be brought against a company, which is in breach of the Order. Breach of any injunction obtained as a result of such proceedings would constitute a contempt of court exposing those in contempt to financial and other sanctions.

Contact point:

Valerie Carpenter
Competition Policy Directorate 3a
Department of Trade and Industry
020 7215 6937

ANNEX 1

1998 SMALL BUSINESS LITMUS TEST

With the help of the MMC, 3 small firms were identified and interviewed. Two were examples of the smallest businesses in the sector, each with single outlets. The third is slightly larger, with two outlets.

Firm 1

Firm 1 is a tour operator with one outlet in London, employing four staff. The firm has an annual turnover of around £1.5 million. It was not able to identify any compliance costs likely to be imposed by the Order.

Firm 2

Firm 2 is a travel agent with one outlet in Oswestry, employing six staff. The firm has an annual turnover of around £1.3 million. It was not able to identify any compliance costs likely to be imposed by the Order.

Firm 3

Firm 3 is a travel agent with two outlets in the Hertfordshire area, employing 16 staff. The firm has an annual turnover of about £1.5 million. It was not able to identify any compliance costs likely to be imposed by the Order.

Footnotes

1. 'Foreign Package Holidays: a report on the supply in the UK of tour operators' services and travel agents' services in relation to foreign package holidays', December 1997 (Cm 3813)

2. 1998 No. 1945, The Foreign Package Holidays (Tour Operators and Travel Agents) Order 1998

3. R v Secretary of State for Trade & Industry ex parte Thompson Holidays