It depends.

There are 2 aspects to the regulations. One is the duty of care towards the passenger. BA's instruction to rebook a night in the hotel and send them the bill and cover his incidental expenses means they've satisfied that part of it.

The other part is the subsequent downgrade from F > CW. If they'd rebooked on AA but only in (say) J or Y then they'd still be liable here. This is not 'get-outable of' except under 'extraordinary circumstance', and that does not apply here.

There is also another area to do with how long is it before a delay becomes a cancellation. This is messy and is currently waiting for a ruling from the ECJ so if the OP wanted to go down this path s/he would be in for a long wait.

However, my view of the regs is that if an airline treats you fairly and reasonably in terms of duty of care and subsequent service recovery, then you don't need to (and shouldn't) use them. My view is that they are there to use when the airline is being unreasonable.

BAH