Date: 13-Apr-2018
The Consumer Financial Protection Bureau, which serves as a consumer watchdog, recently adopted a rule that would prohibit financial firms from forcing customers into arbitration when there are disputes. Legal experts say it’s likely to kill arbitration as a conflict-resolution practice in the financial industry and make it easier for consumers to bring class action suits.
“If the rule survives congressional review and a likely court challenge, it would harm both consumers and financial institutions, and increase the burdens on an already underfunded court system,” says Stephen Newman, a partner at the law firm Stroock & Stroock & Lavan.
Here’s what you need to know.
The rule got little attention between when it was proposed in May 2016 and now. As written, it would make it harder for companies to block groups of people from going to court to fight a business practice. “Allowing consumers to band together as a class prevents companies from overcharging, engaging in fraud or deception, or otherwise harming consumers,” says John Risvold, a lawyer at The Collins Law Firm. “Barring consumers from banding together often means that it is too expensive to pursue the wrongdoing they experienced in court.”
Risvold offered a hypothetical example of a cell phone company that overcharges hundreds of consumers by small amounts, such as $5, every month for a year. “Each individual might not hire a lawyer and sue the cell phone company over $60,” he says. “But if this overcharging affected 50,000 customers, the group can afford a lawyer and the costs of suing the cell phone company.”
Businesses and business groups object to this approach on several fronts. For example, Newman says, the rule’s reporting requirements undermine the confidentiality and privacy benefits of arbitration. In addition, the requirement to allow class actions makes the arbitration process too risky for companies to keep their existing programs in place. “The informality of arbitration makes it very difficult for a defendant to present a formal defense, in particular when the claim is based on an allegation of a technical violation,” he says. “The speed of arbitration also makes it difficult to present a formal defense.”
Finally, appellate review of arbitration awards is extremely limited, Newman says. “Again, this is to promote faster time to resolution, but when dealing with a very large or complex claim, such as in a class action, lack of an effective right to appeal is very dangerous.” The CFPB rule “tips the balance” against arbitration toward formal court processes for most companies, Newman says.
The rule, expected to have wide populist appeal, is scheduled to take effect in March 2018, but Republicans in Congress are looking to reverse it. They have introduced legislation that would overturn it with a vote in the House and Senate under the Congressional Review Act, which allows Congress to undo regulations by a simple-majority vote within 60 days after a rule is published in the Federal Register. With Republican majorities in both houses, overturning the rule appears a possibility.
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