Investigations by FTN have uncovered the possibility that the UK Civil Aviation Authority (CAA) may be failing in a statutory duty to provide financial oversight of UK flying schools, potentially increasing the financial risk to students enrolling on flight training programmes.
As has been recently reported in FTN, two major UK Approved Training Organisation (ATOs) have collapsed over the last couple of months and in both instances, students have been left stranded part way through their training. More worryingly, FTN understands that many of these individuals have also lost significant sums of money that they had deposited upfront for their training programmes. The student’s financial losses across the two ATOs (Tayside Aviation and FTA Global) are believed to reach up to £3 million with individual losses as high as £65,000.
The UK CAA require new ATOs to prove financial stability ahead of gaining approval to conduct training programmes. The information which the CAA say that applicants must submit to them includes a current balance sheet, a three-year business plan with month-by-month breakdown of projected income and expenditure, and a signed statement from company accountants confirming that the business is a ‘going concern’ and that there is no reason it won’t meet its forecast business plan.
Once an ATO is approved, the CAA states that it then provides no ongoing financial oversight. The CAA has previously told FTN: “Our approval of a flight school means it complies with all safety requirements and is able to provide training to an agreed standard. However, as we do not regulate the ongoing financial viability of flying schools or clubs, our approval to conduct flight training does not imply any certification of financial stability.”
However, investigations by FTN have revealed the distinct possibility that the CAA does have a duty to monitor the ongoing financial viability of ATOs.
When the UK departed the European Union and the European Union Aviation Safety Agency (EASA), it adopted EU aviation regulations into UK law. One of these regulations, named ‘Part-ARA’ details the regulator’s ongoing oversight responsibilities of ATOs. The supplementary material for this regulation, known as the Acceptable Means of Compliance (AMC), includes a stipulation that the regulator (in this case the CAA) should include in its audit or inspection of an ATO “evidence of sufficient funding”.
According to EASA: “AMCs are non-binding standards adopted by EASA to illustrate means to establish compliance with the Basic Regulation and its Implementing Rules. The AMCs issued by EASA are not of a legislative nature. They cannot create additional obligations on the regulated persons, who may decide to show compliance with the applicable requirements using other means. However, as the legislator wanted such material to provide for legal certainty and to contribute to uniform implementation, it provided the AMC adopted by EASA with a presumption of compliance with the rules, so that it commits competent authorities to recognise regulated persons complying with EASA AMC as complying with the law.” [FTN underlining – Ed]
Individual states can file alternative ways in which to meet the governing regulation instead of using the AMC provided by EASA. These options are called Alternative Means of Compliance (AltMoC) and allow a state to differ in its approach to meeting regulations. AltMoCs must be approved by EASA and then made available to all other member states. FTN is unaware of any AltMoC to the relevant regulation (ARA.ATO.105) being issued by EASA before the UK left the EU and took EASA regulations with it.
It is, of course, problematic for non-lawyers to interpret the law. Nevertheless, it seems reasonable to consider that an organisation which does not comply with an AMC is not complying with the regulation it applies to.
If it is confirmed that the CAA does in fact have a statutory duty to monitor the ongoing financial viability of ATOs then the question is whether it will actually make any difference? For example, a former ATO director told FTN that they once inadvertently sent financial statements to the CAA that were four years out of date, an error which the regulator subsequently failed to spot.
With the sudden collapse of Tayside Aviation in April and FTA-Global in May, there have been calls within the industry for a new level of financial protection for students. One of the most discussed measures is that the CAA (or an appointed ombudsman) should prevent ATOs from using advance payments from student to pay their current costs. ‘Deferred Income’ is a term sometimes used when a company takes pre-payment for a product or service which is to be delivered at a later date. As long as that money is held as a deposit, and only accessed when required to deliver the product or service, then there should be no financial risk to the customer. However, if that advance payment or deposit is spent immediately to cover existing costs then there is a risk that a company may not be able to deliver its contracted duties at a later date. This risks leaving the customer out of pocket and unable to recover their money. One of the most common methods of avoiding such a scenario is to set up an ‘escrow’ account between customer and service provider, which releases funds to the provider at a pre-agreed rate and returns funds to the customer if the goods or services are not delivered. Another other option, of course, is to pay as you go.
The practical implementation of such measures raises concerns that imposing financial constraints on ATOs could negatively impact those schools which are currently operating on a deferred income basis. As any flying school operator will attest, the flight training industry is a volatile marketplace. Driven chiefly by airline demand the professional flight training industry is exposed to fluctuations in training demand and any number of factors can turn a buoyant market into a recession. Onerous financial constraints imposed on ATOs at the wrong time could inadvertently lead to some companies ending-up in financial trouble, despite operating successfully up until that point.
What does seem to be clear is that while the CAA is unlikely to have a magic wand to prevent ATOs from failing, it arguably has the authority – and maybe a duty – to enact procedures to prevent students from losing their investment if a flying school folds.
Combined student losses at Tayside Aviation and FTA-Global are believed to be as high as £3 million.
There is also the reputational image of the UK flight training industry to consider. The UK has an enviable reputation for delivering worldclass training, but it is also a tough place in which to operate. Multiple factors including the weather, VAT levied on flight training programmes, fuel prices, a new dual licence training regime post-Brexit, a lack of student recognition from Government, lack of apprenticeships, etc, all make the UK a challenging place to run a flight training school. It could potentially become an unattractive place to invest one’s training fund if no form of financial protection can be provided.
There is precedence for enacting tighter financial controls on ATOs as demonstrated in Australia. Having witnessed more than one school collapse and take students’ deposits with it, FTN understands that the Australian Civil Aviation Safety Authority (CASA) now requires ATOs to establish escrow account type arrangements with their customers. Will the UK CAA choose to do the same?
As part of the investigation into regulator oversight responsibilities, FTN asked the CAA to respond to the specific point regarding the ‘Part-ARA’ regulation and associated AMC. Responding just before this edition went to print, the CAA declined to address the question directly, instead reiterating that it does not currently provide financial oversight of ATOs.
Glenn Bradley, Head of Flight Operations at the CAA told FTN: “We recognise that that when flight training organisations enter a period of financial distress this can be particularly concerning for all those who have paid monies to that organisation, including students who are, themselves, due to undertake flight training courses.
“Our oversight of flight training organisations is limited to ensuring each organisation complies with specified safety requirements, including, suitable training to an agreed safety standard.
“We have no direct regulatory oversight of the financial health of a flight training organisation, or of the individuals operating within that business. To help protect student’s financial investments we do publish information and guidance on a dedicated webpage for those searching for flight training organisations.”
The CAA did not rule out the possibility of financial oversight of ATOs in future, but did advise that it would require the Department for Transport to “consider amending existing legislation” and that “any changes to the scope of the CAA’s role and functions would likely require a process of developing and consulting on new draft regulations, new regulatory guidance, training for CAA inspectors and the establishment of a framework for regulatory oversight and assurance of the initial and ongoing financial resilience of flight training organisations.”
With the CAA declining to comment at this stage on the existence, or absence of AMC1-ARA.ATO.105 in current UK legislation, the picture is somewhat opaque. But what can be inferred is that should the CAA be compelled to provide financial oversight of ATOs, either through existing or amended legislation, then it seems probable that it will require additional resources from Government in order to deliver it.
