Last week, United States Representative Keith Ellison introduced the Investor Choice Act of 2015 (H.R. 1098), a bill to end pre-dispute mandatory or “forced” arbitration agreements and ban prohibitions on class action lawsuits in customer service contracts between investment advisers and broker-dealers and their clients.
“Working Americans shouldn’t have to sign away their rights in order to work with a financial advisor or broker dealer to build a secure retirement,” Rep. Ellison said. “An investor’s right to recover monetary damages through legal action is critical. The Investor Choice Act helps level the playing field. Working Americans will be more eager to invest their hard earned dollars when we give them more rights in the financial marketplace. By removing unfair advantages, we can create jobs and strengthen our economy while enabling families to build a secure retirement.”
Class action prohibitions and pre-dispute mandatory arbitration contracts require investors to submit to arbitration if they feel wronged, surrendering their right to seek recourse in a court or in front of a jury. Since such agreements are required prior to a dispute even occurring they compel investors to unconditionally waive these rights even before the facts and circumstances of a dispute are known.
The Investor Choice Act would not in any way limit or restrict the ability of investors to voluntarily agree to arbitrate any disputes with their broker or investment advisers, should they wish to do so after the facts and circumstances of the dispute are known.
According to the Bill, Investor confidence in fair and equitable re- course is essential to the health and stability of the securities markets and to the participation of retail investors in such markets.
Brokers, dealers, and investment advisers hold powerful advantages over investors, and mandatory arbitration clauses, including contracts that force investors to submit claims to arbitration or to waive their right to participate in a class action, leverage these advantages to severely restrict the ability of defrauded investors to seek redress.
Investors should be free to choose arbitration to resolve disputes if they judge that arbitration truly offers them the best opportunity to efficiently and fairly settle disputes, and investors should also be free to pursue remedies in court should they view that option as superior to arbitration.
Accordingly, the Bill seeks to declare it unlawful for any broker, dealer, funding portal, or municipal securities dealer to enter into, modify, or extend an agreement with customers or clients of such entity with respect to a future dispute between the parties to such agreement that (1) mandates arbitration for such dispute; (2) restricts, limits, or conditions the ability of a customer or client of such entity to select or designate a forum for resolution of such dispute; or (3) restricts, limits, or conditions the ability of a customer or client to pursue a claim relating to such dispute in an individual or representative capacity or on a class action or consolidated basis.’’
Consumer Financial Protection Bureau Study
Similarly, today, The Consumer Financial Protection Bureau released a study indicating that arbitration agreements restrict consumers’ relief for disputes with financial service providers by limiting class actions. The report found that, in the consumer finance markets studied, very few consumers individually seek relief through arbitration and the courts, while millions of consumers obtain relief each year through class action settlements.
According to the Study, “tens of millions of consumers are covered by arbitration clauses. The CFPB looked at arbitration clauses in six different consumer finance markets: credit cards, checking accounts, prepaid cards, payday loans, private student loans, and mobile wireless contracts.”
Fifty three percent of credit card issuers include arbitration clauses. Forty four percent of banks and credit unions include arbitration clauses in their checking account agreements, those who do represent 44 percent of insured deposits. In the private student loan market, 86 percent of the largest lenders include arbitration clauses in their contracts. Ninety nine percent of the market of mobile wireless include arbitration clauses.
Where such a clause exists, either side can generally block lawsuits, including class actions, from proceeding in court. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) mandates that the CFPB conduct a study on the use of pre-dispute arbitration clauses in consumer financial markets. The Dodd-Frank Act also prohibits the use of arbitration clauses in mortgage contracts. And it gives the Bureau the power to issue regulations on the use of arbitration clauses in other consumer finance markets if the Bureau finds that doing so is in the public interest and for the protection of consumers, and if findings in such a rule are consistent with the results of the Bureau’s study.
On average, roughly 32 million consumers were eligible for relief through class action settlements in federal court each year: Bureau research across consumer finance markets generally found that larger numbers of consumers are eligible for financial redress through class action settlements than through arbitration or individual lawsuits.
At least 160 million class members were eligible for relief in federal consumer finance class actions over the five-year period studied. The settlements totaled $2.7 billion in cash, in-kind relief, expenses, and fees – with roughly 18 percent of that going to attorneys’ fees and expenses.
For checking accounts alone, class action settlements over three years totaled over $600 million for at least 19 million consumers.
Arbitration Clauses: A Barrier to Class Actions
The CFPB found that it is uncommon for a company to try to force an individual lawsuit into arbitration but common for arbitration clauses to be invoked to block class actions. For example, in cases where credit card issuers with an arbitration clause were sued in a class action, the companies invoked the arbitration clause to block class actions 65 percent of the time.
Over three quarters of those who said they understood what arbitration is acknowledged they did not know whether their credit card agreement contained an arbitration clause. Of those who thought they did know, more than half were incorrect about whether their agreement actually contained an arbitration clause. Among consumers whose contract included an arbitration clause, fewer than 7 percent recognized that they could not sue their credit card issuer in court.
Consumers do not consider arbitration clauses while credit card shopping: In selecting a credit card, consumers do not consider whether there is an arbitration clause. When asked to list all the factors they had considered in choosing their current credit card, not a single consumer mentioned arbitration or dispute resolution as factoring in the decision.
Guiliano Law Group
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