Banks keep saying over and over that arbitration proceedings, as opposed to class-action lawsuits, are the best way for consumers to handle disputes.
Yet faced with the prospect of no longer being able to deny consumers the right to sue them, the banking industry is expected to take the deliciously ironic step of suing the federal government.
At issue is a proposed rule from the Consumer Financial Protection Bureau that would prohibit financial-services firms from placing clauses in contracts stipulating that customers can only arbitrate disagreements. The clauses prevent customers from suing on an individual basis or from joining class-action lawsuits.
“Signing up for a credit card or opening a bank account can often mean signing away your right to take the company to court if things go wrong,” Richard Cordray, director of the federal agency, said after the proposed rule was announced this month. He called mandatory arbitration a "contract gotcha" that "denies groups of consumers the right to seek justice and relief for wrongdoing.”
Arbitration still could be required for individual grievances under the rule, but that's not a very big deal because few consumers file individual suits over small amounts. The big deal here is that financial firms no longer would be able to block consumers from coming together in class-action lawsuits.
The bureau is now receiving public comment on the rule, which has been in the works for months. If finalized, it probably would take effect next year.
The Republican head of the House Financial Services Committee has scheduled a hearing for Wednesday on whether the rule is in the public's best interest. Rep. Jeb Hensarling (R-Texas), the committee chairman, called the bureau's proposal "a big, wet kiss" to trial lawyers.
The banking industry, for its part, has yet to declare that a legal challenge is inevitable but is wasting no time in voicing opposition to what it sees as an unnecessarily heavy regulatory hand.
"Consumers will get less and pay more if the CFPB’s proposal to sideline arbitration and promote class actions is ultimately adopted," Rob Nichols, head of the American Bankers Assn., said in a statement.
Law firm Morrison Foerster, which advises banks on regulatory matters, concluded in a note to clients last week that if the final rule is similar to what's now on the table, "it seems likely that the proposed rule will be challenged" in court.
Other law firms have reached a similar conclusion. "Now the main event begins," said Alston & Bird after the proposed rule was issued.
Morrison Foerster said banks would focus their challenge in part on the ideas that "consumers have a choice as to whether they want to enter into an arbitration agreement" and that "the procedures in arbitration and judicial proceedings are very similar."
Here's the thing, though: Consumers don't and the procedures aren't.
Christine Hines, legislative director for the National Assn. of Consumer Advocates, said consumers have no real choice when every service provider in an industry requires mandatory arbitration.
She also pointed out that in arbitration, it's the company, not the consumer, who picks and pays for the arbitrator -- and the vast majority of rulings favor businesses.
"Industry claims would be laughable if the issue wasn’t so serious," Hines told me. "Bank customers will have meaningful choice when they can choose how to resolve disputes after they arise, not when arbitration is forced on them in the corporate fine print."
She added: "It is supremely ironic that they want to sue an agency for seeking to restore people’s ability to exercise the same right."
Although the U.S. Supreme Court has given its seal of approval to arbitration clauses, the Consumer Financial Protection Bureau was empowered by the financial reform law enacted in 2010 to study and regulate their use by financial firms. This includes banks, credit card issuers, car-leasing companies and debt collectors.
The proposed rule wouldn't affect nonfinancial businesses that also routinely use arbitration clauses, such as phone companies, pay-TV providers and rental car firms.
A study by the bureau last year found that "very few consumers ever bring -- or think about bringing -- individual actions against their financial service providers either in court or in arbitration." It concluded that "class actions provide a more effective means for consumers to challenge problematic practices by these companies."
A separate study by the advocacy group Public Citizen in 2007 found that over a four-year period, arbitrators ruled in favor of banks and credit card companies 94% of the time in disputes with California consumers.
Banks and other critics of the proposed rule are correct when they observe that some lawyers abuse the class-action system.
A 2014 settlement over the marketing of Duracell batteries, for example, awarded lawyers in the case about $5.7 million, while the more than 7 million class members were each eligible for awards of just $6 to $12. In March, the Supreme Court declined to hear an appeal of the settlement.
Still, abuse of the system doesn't mitigate that class actions remain consumers' most powerful tool in addressing and curbing unfair business practices.
If arbitration is such a preferable alternative to litigation, as banks insist, there should be little difficulty persuading people to make that choice. But it should be a choice, not a done deal foisted on consumers.
I put that to the American Bankers Assn., asking how the industry would feel about allowing customers to decide for themselves the manner in which a dispute will be resolved.
Nessa Feddis, the association's senior vice president for consumer protection and payments, replied that this would be a nonstarter. It's one system or the other, she said.
If class actions are permitted, Feddis said, “banks are unlikely to retain arbitration as an option because of costs." She said that "it’s not economical" for banks to continue covering arbitration fees if class actions are also part of the picture.
Thus, in another ironic twist, the industry appears ready to spend millions of dollars pursuing legal action aimed at keeping its legal costs down.
Who says bankers have no sense of humor?
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