On Tuesday the Consumer Financial Protection Bureau announced a “public inquiry” into how the financial services industry uses mandatory arbitration clauses as shields from consumer lawsuits. This is an important first step in protecting consumers and returning access to the court system for those harmed by corporate interests.
The main purpose of mandatory arbitration is to prevent the creation of a class of plaintiffs by forcing individual consumers to pursue claims on their own, even if the underlying and offensive corporate behavior is common among an entire group of individuals. Think of it as a de-facto ban on the class action lawsuit and one that has been very successful. Without the threat of damages from a class-action recover corporations are free to defraud customers with little incentive to change.
“Arbitration clauses are found in many contracts for consumer financial products,” said CFPB Director Richard Cordray. “We want to learn how arbitration clauses affect consumers, and how effective arbitration is in resolving consumers’ issues. This inquiry will help the Bureau assess whether rules are needed to protect consumers.”
For purposes of conducting the study, the Bureau is asking the public about the following areas of concern:
• The prevalence of arbitration clauses in consumer financial products and services;
• What claims consumers bring in arbitration against financial services companies;
• If claims are brought by financial services companies against consumers in arbitration;
• How consumers and companies are affected by actual arbitrations; and
• How consumers and companies are affected by arbitration clauses outside of actual arbitrations.
Companies that use pre-dispute arbitration clauses claim that arbitration is faster and cheaper than litigation, and at least as fair. Others disagree, noting that consumers may not realize that they have waived their right to a trial because of an arbitration clause. And even if consumers understand arbitration clauses, these clauses may still have significant impacts that warrant study by the CFPB.
Comments on the Request for Information must be submitted by June 23, 2012. After the Bureau completes its study, it will assess whether imposing conditions or prohibitions on arbitration clauses would better protect consumers and serve the public interest.
Christine Hines, Consumer and Civil Justice Counsel for Public Citizen was pleased with the news. “We expect that any fair examination of forced arbitration will conclude that the practice is devastatingly harmful to consumers. The most critical step, then, will be for the CFPB to ban forced arbitration, ensuring that arbitration is always voluntary for consumers – not a kangaroo court or a tool for law-breaking corporations to insulate themselves from accountability.”
With the one year anniversary of the devastating AT&T v. Concepcions decision and corporations continuing to fleece customers with next to no consequence.
Photo from Casey Serin via flickr.