NEW YORK -- If government regulators get their way, it's going to become a lot easier to sue the bank.
By and large, U.S. bank customers have signed away their right to sue their bank, often without being aware of it. Buried in the fine print of credit card agreements, bank accounts and insurance policies are what are known as binding, or mandatory, arbitration clauses. It means customers are generally required to take any disputes with a bank to a third-party mediator instead of going to court.
The nation's top consumer financial regulator wants to put a stop to that. The Consumer Financial Protection Bureau proposed a rule Thursday that would ban arbitration clauses, which would affect the entire financial industry and the hundreds of millions of bank accounts, credit cards and other financial products that Americans use.
The Consumer Financial Protection Bureau's proposal does have a significant limitation. The ban would only apply when consumers want to create or join a class-action lawsuit. Financial companies will still be able to force individuals to settle disputes through arbitration; however cases in which a lone customer wants to sue his or her bank are far less common.
"Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them ... [and] effectively denies groups of consumers the right to seek justice and relief for wrongdoing," said Consumer Financial Protection Bureau Director Richard Cordray in prepared remarks.
Cordray spoke about the proposal at a hearing Thursday in Albuquerque, N.M., where advocates on both sides were expected to weigh in.
Under current rules, if a customer has a complaint over disputed charges or a particular practice a bank uses, they're required to go through a binding arbitration process. Consumer advocates say these arbitrators are often biased and routinely rule against consumers. If a customer loses an arbitration ruling, oftentimes it cannot be appealed.
The financial industry has argued that arbitration is a more efficient way for customers to resolve disputes with banks.
A study commissioned by the Consumer Financial Protection Bureau in March 2015 showed that is very likely the case. It showed customers rarely used the courts to sue their bank for a small claim. However, when large numbers of customers were negatively affected by the same issue, the same study showed arbitration clauses hinder the ability for customers to seek relief.
"The proposed rule ... is an enormous step forward toward restoring the right to band together with others who have been harmed to redress grievances through the courts," said Nan Aron, president of the Alliance for Justice, an organization of roughly 100 politically liberal advocacy and consumer groups.
Opponents and critics of the Consumer Financial Protection Bureau's ban say the proposal will only benefit class-action lawyers and lead to gigantic paydays.
Congress directed the Consumer Financial Protection Bureau to study the issue of mandatory arbitration under the Dodd-Frank financial regulatory law. The Consumer Financial Protection Bureau announced an outline of its proposal in October, but had not laid out the exact details of what it planned to do.
Once the rules are published, the public will have the usual 90-day period to comment on the proposal. The proposed rule, if adopted, would go into effect next year.
The financial industry is expected to fight the proposal. All the major financial industry lobby groups announced their opposition to it in prepared statements Thursday.
"Arbitration has long provided a faster, better, and more cost-effective means of addressing consumer disputes than litigation or class action lawsuits," said Richard Hunt, president of the Consumer Bankers Association, whose membership is mostly large regional and national retail banks. "The real winners of today's proposal are trial attorneys, not consumers."
Business on 05/06/2016