October 9, 2015 – On Wednesday the Consumer Financial Protection Bureau (CFPB) announced a proposal to publish rules that would “ban consumer financial companies from using ‘free pass’ arbitration clauses to block consumers from suing in groups to obtain relief," according to their website. What this means, in short, is that banks, credit card companies, lenders, and broker dealers will not be able to force consumers to sign away their legal rights to take part in class-action lawsuits.
Typically, these clauses are added to contracts to shield companies from lawsuits and lower their legal costs, as signers would not be able to file claims in federal courts and instead would hav to resolve disputes individually through privately appointed arbitrators.
According to NBC News, arbitration clauses have “long been a target of consumer advocacy groups which say they curb legal rights,” while Wall Street banks and similar advocates have historically opposed efforts to curb these sorts of contracts.
These clauses have often been misrepresented as protecting consumers from the necessity of going to court to settle disputes, which is why the CFPB is strongly considering taking action against the kinds of contracts that allow companies to avoid accountability to their customers and consumers.
At a hearing for the bureau in Denver, Colorado, CFPB Director Richard Cordray said, “The essence of the proposals we have under consideration is that they would get rid of this free pass that prevents consumers from holding their financial providers directly accountable for the harm they cause when they violate the law.”
Consumer advocacy groups and legislators have urged the Securities and Exchange Commission (SEC) to write a similar rule, although it has not done so yet, despite the powers bequeathed upon it and the CFPB to restrict or ban arbitration clauses in light of the 2010 Dodd-Frank Wall Street Reform (Dodd-Frank) Act.
The proposals that the Bureau is considering come after a March study which found that “few consumers actually seek individual relief through arbitrations” even though millions are eligible for group settlements.
The benefits of the proposals would include a day in court for consumers, deterrent effects, and increased transparency, to name a few.
An outline of the proposals under consideration is available at the CFPB's website.
Lynch, Sarah. “U.S. consumer watchdog wants partial ban on arbitration clauses.” Reuters. Reuters, 7 October 2015. Web. 8 October 2015.