Banks, credit card issuers and other financial companies will be able to block customers from banding together to sue over disputes, after the Republican Senate narrowly killed a rule banning the firms from using “forced arbitration” clauses. Republican Vice President Mike Pence cast the tie-breaking vote. The prior rule prohibited major financial institutions from using fine print in buried in consumer contracts to block class-action lawsuits by consumers.
Customers now must agree to the clauses as a condition of opening accounts, saying they will take any disputes to closed-door arbitration instead of joining class-action lawsuits, where complainants band together to share litigation costs. The clauses are used for nearly every U.S. consumer product and service since the Supreme Court ruled them legal in 2011. Arbitration means customers have no recourse but to bring any disputes to private, arbitration panels. In general, that keeps the corporate wrongdoing shrouded in secrecy, and the costly arbitration process itself with limitations on discovery is often stacked against consumers.
Financial services companies have forced consumers to use arbitration in case of disputes because, as analysis has shown, arbitrators rule overwhelmingly in favor of corporations. As part of arbitration requirements, companies like banks have insisted that, to get service, consumers had to give up the right to a jury trial.
“Wall Street won and ordinary people lost,” Richard Cordray, the director of the consumer bureau, said in a statement. “It robs consumers of their most effective legal tool against corporate wrongdoing. As a result, companies like Wells Fargo and Equifax remain free to break the law without fear of legal blowback from their customers.”
Victims of the Equifax Inc. hack were outraged last month when the company included forced arbitration fine print in offering them free credit monitoring. At the same time, Wells Fargo & Co customers whose identities were used in last year’s phony accounts scandal have had difficulty suing the bank because they are bound by arbitration clauses in contracts they signed for legitimate accounts.
Arbitration clauses are now commonplace in the financial industry: About three-fourths of banks analyzed by Pew Charitable Trusts, for instance, had mandatory arbitration agreements in place.