The Regulation doesn't do that. There is a bit of governing circumstances in the IDB provisions, about asking for volunteers, but that is almost against the grain It doesn't do much in terms of saying how airlines should operate. Broadly the Regulation ensures passengers are treated fairly, and in that respect offers a reimbursement mechanism for downgrades. For delays, cancellations and IDB, it's a compensation mechanism. So I am reading across here: to some degree: airlines get penalised for cancellations (etc) to discourage that behaviour, but for downgrades the extent of customer protection is a reimbursement mechanism, which is far from generous for shorter distance downgrades: 30%. On many Club Europe to EurotTraveller examples, this would be £5 to £10, so a straight fare refund would actually throw up a lot more money, particular if it's subject to APD.

For your second paragraph, then I don't think that's a matter of dispute in a sense - BA will always offer a later service with the booked class of cabin, the one exception being where an equipment change means that First is not an option. But even there, they will allow a move to another airport where First is still available. I am sure you are right on the contractural side, it just doesn't need to go that way.