Teletext Holidays is being investigated after hundreds of customers complained they had been denied a refund over cancelled trips.
The Competition and Markets Authority (CMA) said it has now launched an investigation under consumer protection law.
Some customers who had submitted a complaint reported that they had been promised a refund for their package holiday by a certain date, but this was later pushed back.
Under the Package Travel Regulations, any customers who booked a package holiday are protected and should be refunded their money within 14 days, depending on the reason for the cancellation.
CMA chief executive Andrea Coscelli said: “We understand that the pandemic is presenting challenges for travel businesses, but it is important that the interests of consumers are properly protected and that businesses comply with the law.
“We’ll be engaging with Teletext to establish whether the law has been broken and will take further action if necessary.”
The announcement follows significant action by the CMA in relation to holiday cancellations during the pandemic.
In December, it launched a probe into airlines following concerns they had breached consumer rights by failing to offer cash refunds for flights passengers were lawfully unable to take.
The CMA has written to more than 100 package holiday firms to remind them of their obligations to comply with consumer protection law, and has since secured refund commitments from several holiday firms.
These include Love Holidays, Lastminute.com, Virgin Holidays, TUI UK, Sykes Cottages and Vacation Rentals.
What are my rights?
Customers who have had flights and holidays cancelled due to the pandemic have reported being offered vouchers or credit notes instead of a full refund.
Many have also complained they have been unable to claim a refund online, or get through to customers services on the phone to arrange for a refund.
However, while travel companies are entitled to offer alternatives to a refund, such as a credit note, in the event of cancelled bookings, they must also offer the option of a cash refund within 14 days.
When booking a package holiday you are protected by law, meaning if your trip is cancelled, package travel regulations entitle you to get your money back.
If you would prefer a full refund over a voucher or credit note, this must be processed by the company within 14 days and your money remains backed by the government’s Atol scheme while you hold your booking, even if the departure date has passed.
This means you will still get your money back even if the company goes bust, which is not necessarily the case if you accept a voucher.