Weaning Wall Street Off Forced Arbitration Clauses

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Financial institutions are so peeved with the real prospect of limiting forced arbitration in their fine-print contracts with customers.

The industry had instituted a clever ploy, created by its corporate lawyers, to insert requirements in companies' standard terms and conditions for lending and banking products that would eliminate their customers’ right to sue.

The take-it-or-leave-it contracts force customers to resolve disputes in private arbitration instead of in court. Most financial services contracts also prohibit customers from joining together in class actions.

And the scheme has been successful for a while. Industry players have evaded and sidestepped responsibility for risky, predatory or illegal practices. Meanwhile, the individuals they harm have been deprived access to their rightful remedies.

The CFPB issued a proposal to limiting forced arbitration by eliminating its worst aspect, the terms that prohibit class actions.  The financial industry, accustomed to its illicit practice that only seems to benefit, well, the financial industry, now seems taken aback by the CFPB’s announced plans to limit forced arbitration and revoke Wall Street's get-out-of-jail-free card.

The considerations that led to this action were careful and deliberate. It began with a study on forced arbitration launched in 2012 and completed three years later. The Bureau’s massive 728-page report, a thorough examination of the issue, resulted from the collection and analysis of an incredible amount of data, as well as feedback from the public, consumer groups and industry groups.

The CFPB study made clear that terms that prohibit consumers from joining their claims together are an unreasonable burden on consumer rights. Small-dollar losses that are prevalent in financial services, such as illegal charges, hidden penalties and abusive interest rates, are not heard because it is not cost effective for most people to pursue these claims on their own in private arbitration. They would be better off banding together to seek remedies and accountability for wrongdoing.

The rule will be significant in restoring remedies for millions of consumers, but it won’t eliminate forced arbitration. Companies will still be able to force arbitration in individual cases. So the agency has also proposed to collect and publish data  related to individual forced arbitration, which will shine a light on the practice. This hopefully will be the last step before weaning the financial industry off forced arbitration altogether.