The travel industry has an enviable record in protecting customers' money, but when the system breaks down there are inevitably heartbreak stories in the media and the image of the travel industry suffers. This was common 20 years ago, before financial safeguards were put in place, but it can still happen today. The vast majority of travellers either continue their arrangements or get their money back if their travel organiser goes bust, but this is of little comfort if you are one of the unlucky ones.

Package holidays

The package holiday customer enjoys the highest level of financial protection, and it is well worth choosing a package rather than making your own arrangements if you are in the least worried about losing your money. And don't forget, a package holiday doesn't have to mean a chartered flight followed by a week on the beach in Benidorm. Tour operators are increasingly targeting the independent traveller, and many people who go trekking in the Himalayas or scuba-diving on the Great Barrier Reef are also on a package.

The situation with package holidays by air is straightforward, and the same is true for charter flight passengers buying a seat-only deal rather than a package. All tour operators must have an Air Travel Organiser's Licence (ATOL) issued by the Civil Aviation Authority (CAA), and to get one they must satisfy the CAA that they are financially secure, providing a bond that will be used to reimburse or repatriate customers if they collapse. If the bond proves insufficient, the CAA draws on the Air Travel Trust Fund, financed by a levy on package holidays since the 1970s.

The ATOL system is virtually fail-safe as regards package holidays by air departing from the UK, and now has been extended to cover packages using scheduled as well as charter flights. This includes most discounted scheduled air seats sold as 'seat- onlys' or as part of tailor-made itineraries for independent travellers. Some companies advertise themselves as 'agents for ATOL holders', and it is worth checking this out with the CAA. In such cases, the ATOL holder must take responsibility for travellers if the agent fails.

The situation regarding package holidays by surface transport is much more complex. Until recently, tour operators using coach or rail transport, cruises or ferries were not obliged to offer financial protection. Many opted to do so through various trade associations, but this was purely voluntary. But in January 1993, the British government adopted the EC directive on package travel, which introduced a wide range of consumer protection measures including the requirement for all package organisers to protect money. This was no great innovation in the UK, because of the ATOL system and the large number of tour operators providing bonds through trade associations. In some other EU countries, however, public protection lagged far behind the UK. But what might have seemed a good idea to the Eurocrats and MEPs gathered together in Brussels can in practice cause UK travellers a lot of confusion and give them a false sense of security.

The regulations affect all package travel arrangements sold in the UK, not just for travel to EU countries (including within the UK) but world-wide. It is generally believed that the EU's concern was to protect the traditional package holiday customer, but in fact the legislation goes much further. Many areas are poorly defined and the British government has not made things any clearer.

First of all, what is a package? According to the regulations, it is a combination of any two of three elements - transport; accommodation; and/or other tourist services making up a significant element of a package. The latter is open to interpretation, but could include theatre tickets, riding lessons, or golf, for example. Even a country hotel in England that includes a fishing licence in its weekend rates could be deemed to be selling a package, with the consequent requirement to protect any money paid in advance.

This goes far beyond the idea of a traditional holiday package. When the regulations were debated in Parliament, the British government admitted to having no idea how many package organisers there might be in the UK. Its 'educated guess' was between 10,000 and 20,000, when the total number of tour operators belonging to trade associations is less than 1,000. Many of the organisers are coach operators, who are considered to be package travel organisers even if all they do is a one-night trip to Blackpool. Others include social clubs, societies and even individuals, such as the local vicar leading an annual pilgrimage to the Holy Land. 'Occasional' organisers of package travel are exempt from the regulations, but the meaning of 'occasional' remains to be defined if and when a case comes to court.

Also unresolved at the time of writing is the role of the travel agent in putting together packages. If you ask a travel agent to put together a flight and hotel, it could well be that he or she will have to provide protection as a package organiser, even if the arrangements are not sold at an inclusive price. But business travel packages may not be affected, as most business travellers are on credit and do not pay until their return.

Not surprisingly, the regulations are causing grief not only in the travel industry but also among many other organisations and individuals who had no idea that they could be considered package travel organisers. But what is causing even more heartache among established tour operators is that there is no effective way of policing the regulations. A gaping consumer protection loophole is still there.

Organisers of packages using air travel must have an ATOL- that much is straightforward. But there is not a parallel licensing authority for surface travel operators. These are required to provide evidence to travellers that their money is protected in one of three ways: they can provide a bond, possibly to a trade association which has reserve funds in place; they can insure against the risk of financial failure; or they can place customers' money in a trust account and not touch it until travel has been completed.

Travellers taking a package by surface transport should look for some evidence that their money is protected - but the only policing authority is local trading standards officers, who by their own admission lack the resources and expertise to do the job properly. It is now a criminal offence to operate packages without protecting customers' money, but although the maximum fine is £5,000 the first case to come to court resulted in a fine of only £250. The unlucky traveller caught up in a collapse could try to sue the directors - but if the company has gone bust, the kitty will probably be empty.

Trade associations

The weakness of the new legislation means that trade associations continue to play a strong part in protecting travellers' money - especially the Association of British Travel Agents (ABTA), the only one with a strong public profile. Surveys show that members of the public identify strongly with ABTA because their money is safe, and this remains true despite its changing role.

Your money is still 100 per cent safe if you book with an ABTA tour operator, as ABTA has never reneged on its promise to repay customers who have booked a package holiday with a failed member. This is because ABTA requires all its 600 tour operators to be bonded, either with the CAA through ATOL, or through ABTA itself in the case of surface travel operators. In both cases, back-up funds are in place if bonds prove insufficient.

ABTA will not accept insurance against possible failure, or trust funds, as a substitute for bonding - as allowed by the government for non- ABTA members. It points out that insurance against failure is of no help to travellers stranded abroad after a collapse, while trust accounts are open to abuse.

ABTA is going through major changes, but its consumer promise remains intact. Before the new regulations it acted as a quasi-licensing authority, and tour operators had to join up if they wanted to sell through ABTA's 7,000 travel agents. But it is no longer a closed shop, and tour operators and agents can leave ABTA if they wish. When dealing with a non-ABTA company, the onus is on the traveller to ensure his or her money is safe -if in doubt, contact your local authority trading standards officers for advice.

ABTA will also protect your money if a member travel agent goes bust, whatever kind of travel arrangement you have bought. If you already have your tickets then normally you will be able to continue; if not, ABTA will reimburse you. This applies to independent travel as well as to packages, but only when the agent (rather than the travel provider) is the one who goes bust.

Other trade associations also bond their members to protect public money, although it is CAA member organisations such as AITO (the Association of Independent Tour Operators) who license all air packages. Other members include the Bus and Coach Council's Bonded Coach Holidays scheme, the Passenger Shipping Association (Cruises) and the Federation of Tour Operators, formerly known as Tour Operators Study Group. But remember, protection applies only to packages, not to simple ferry crossings or express coach tickets, for example.

The independent traveller

If you book independently rather than buying a package (depending on the definition of a package, which may one day become clear), your money is theoretically much more at risk. But in reality there are few occasions when a failure will leave you out of pocket. The main area of risk is scheduled airlines, bringing us back to the Air Europe collapse of 1991. Despite the outcry that followed, neither the British government nor the EU in Brussels has yet made any moves to protect scheduled airline passengers' money, much to the outrage of tour operators and travel agents, who were bonded to the hilt. Another British airline, Dan Air, came within a whisker of going bust in 1992 before British Airways picked up the pieces.

The risks are definitely increasing as airlines all over the world go private, free of government control but also of government support. Several US airlines are technically bankrupt, but continue to operate under US bankruptcy laws. New private airlines are starting all the time, while new state airlines in the former Soviet Union look particularly unstable. The British government has failed to act on a CAA proposal for a levy, partly because it would involve only British airlines' passengers, and British Airways objected. As little as £1 added to ticket costs for even a short period would soon build up a substantial protection fund, but there seems no likelihood of this happening in the short term.

But the risk of a scheduled airline collapsing is small enough for most travellers to accept, and the same is true for ferries and scheduled coach companies, who will often help out passengers if a rival collapses. Car rental companies pose a slightly greater risk, while the position of a private railway company that collapses holding customers' money is unknown - a point to consider in the wake of the privatisation of British Rail. And although hotels go into liquidation all the time, they nearly always stay open in order to keep some money coming in.

There sale of discounted scheduled air tickets was a grey area for a long time, but the CAA has now cracked down, requiring agents offering them to be covered by ATOLs unless they hand over tickets on the spot, immediately on receipt of payment. More recently, it has acted to make agents accept responsibility when an airline goes bust.

It gives them three options. They can offer insurance against the possibility of a scheduled airline failure - either free or by charging a premium on top of the fare. They may sign a formal guarantee that they will accept responsibility for customers if an airline goes under, re-booking them on alternative flights. Or they can opt to do neither. But if they do opt out, they must warn customers in all their paperwork and promotional material - and in suitably large print - that they part with money at their own risk. Independent travel arrangements are further safeguarded if you book through an ATOL-bonded agent.

Another way of safeguarding your money is to pay by credit card. This is increasingly popular, and is much more convenient when booking direct with travel suppliers in foreign countries, who may not even be subject to package travel regulations. Credit card companies are to some extent required by the Consumer Credit Act to ensure that the service paid for is provided. But like all legislation this is open to interpretation. The waters are further muddied by the fact that there are now about 40 organisations in the UK issuing credit cards, and their attitude towards refunds varies. If in doubt ask your bank, building society or whatever, especially when an expensive travel purchase is at stake.

Some banks see this as an opportunity to boost card usage: since 1992, for instance, Barclays which has guaranteed to protect anyone buying a flight or holiday in the UK with Barclaycard, for transactions of over £100 with a ceiling of £30,000. However, Barclays accepts no legal liability, and looks to the travel industry to take primary responsibility. Credit card companies tell customers to seek refunds from the CAA or ABTA in the first instance, but for non-packaged arrangements there are no bonds in place.

There are probably enough scenarios in this chapter to make even the most resolute traveller wonder if his or her money is safe, but in general the travel industry's record is good. If you pay in advance for a carpet, a cooker or almost any other consumer goods and the company goes bust, there is no equivalent to the CAA or ABTA to turn to. But the travel industry is, after all, selling dreams. A ruined holiday is more serious than not getting the carpet you wanted, and the sooner all travel arrangements are fully protected, the better.