Americans for Financial Reform Protest Forced Consumer Arbitration

May 18, 2016

On May 18, 2016, I received an email from the "Americans for Financial Reform," ("AFR") concerning that day's House Financial Services Subcommittee on Financial Institutions and Consumer Credit hearing involving the Consumer Financial Protection Bureau ("CFPB"): "Examining the CFPB's Proposed Rulemaking on Arbitration: Is it in the Public Interest and for the Protection of Consumers?"  AFR submitted a Statement to the subcommittee and I urge all serious market participants to read the May 18, 2016 AFR Statement.

As set forth in AFR's Statement:

[O]n May 5, the Consumer Financial Protection Bureau (CFPB) proposed a rule to restore consumers' right to join together to hold corporations accountable when they break the law. The CFPB's proposal would limit the financial industry's use of forced arbitration, a tool to shield corporations from accountability by burying fine print in take-it-or-leave-it contracts to block consumers from challenging predatory practices such as hidden fees, fraud, and other illegal behavior.

. . .

In forced arbitration, consumers lose the right to argue their case before an impartial judge and jury. Instead financial companies are able to hire a private arbitration firm of their choosing to decide the dispute, and consumers have little opportunity to develop evidence or appeal a bad decision. Nearly all forced arbitration clauses rip consumers off by prohibiting participation in class actions - which both bars them from talking about their experiences in arbitration and shields corporate misconduct from public scrutiny.

. . .

Before proposing this rule, the CFPB spent three years examining the effect of forced arbitration on consumers in financial services, under the directive of Section 1028(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 1028(b) further authorized the CFPB to "prohibit or impose conditions or limitations" on the use of forced arbitration clauses under its jurisdiction if the Bureau finds it in the public interest and for the protection of consumers.

[S]ome key findings:
  • In 2010 and 2011, only 9% of consumers who brought affirmative claims obtained relief in forced arbitration - the 32 consumers who prevailed recovered an average of 12 cents per dollar claimed. 
  • In contrast, 93% of companies obtained relief in forced arbitration - recovering an average of 98 cents per dollar claimed. 
  • Without the option to join together in a class action, only 25 consumers with claims of less than $1,000 pursued arbitration annually. 
  • In contrast, consumers received $2.7 billion of gross relief in class actions from 2008-2012 - $2.2 billion of which went straight to consumers after attorneys' fees and litigation costs - with 34 million consumers receiving a cash payment.
Bill Singer's Comment

As readers of the Blog know, I am an adamant and long-standing opponent to mandatory arbitration in the financials services community. As such, I applaud AFR's Statement and efforts to derail what they call "forced" arbitration. I join in support of that anti-mandatory-arbitration push despite having some reservations about CFPB and some concerns about some of the constituents that form AFR. 

As my published commentary underscores, I am disposed to a libertarian discipline when it comes to government and I am unequivocally antagonistic to big government, overblown bureaucracies, and the seemingly endless expansion of both. Which should explain my concern about CFPB in terms of its somewhat redundant regulatory powers and mandates , many of which have previously been delegated to other governmental actors. Similarly, at times, I find myself in disagreement with AFR's approach, which often strikes me as seeking more laws, more rules, more regulations, and more bureaucrats -- for me, the problem at hand is the failure to effectively regulate because we are hampered by inept and conflicted regulators who seek out self-serving, favorable press with far more enthusiasm than they seek out the malefactors and miscreants who prey upon the investing public. 

Despite my reservations, I applaud AFR for entering the fray and seeking justice for beleaguered public investors. I urge all serious investors to read the AFR Statement and to press your political representatives to derail forced arbitration.  My sense is that the "fix" is in and the effort to reform mandatory arbitration will fail, yet again. Notwithstanding, it's a battle worth waging.