LoveHolidays has agreed to to refund over £18m to 44,000 customers who had holidays cancelled over coronavirus.
Its move follows action by the Competition and Markets Authority, which received hundreds of complaints.
The regulator said that LoveHolidays had told customers asking for a refund that they would only receive one for their flights once the firm received money back from the airlines.
LoveHolidays has now committed to repay customers in full by March 2021.
So far £7m has been refunded to 20,000 customers.
Under the Package Travel Regulations, online travel agents are legally bound to refund customers for package holidays cancelled due to coronavirus, regardless of whether or not the agent has received money back from suppliers, for example airlines.
Following CMA intervention, LoveHolidays has now signed formal commitments – known as undertakings – that ensure these customers receive all their money back.