The mandatory arbitration clause is a standard feature of consumer financial services and products contracts. Under these clauses, which are non-negotiable and often buried in the contract’s fine print, customers agree that in lieu of suing their mortgage lender, stockbroker, or financial advisor, they will submit their disputes to binding arbitration. Consumers who fail to closely read their contracts are surprised to learn that the arbitration takes place in an out-of- state jurisdiction before an arbitrator (or panel of arbitrators) they had no role in selecting.
Overall, financial service companies value the insulation from litigation that arbitration clauses afford them. Unsurprisingly, arbitration clauses are greatly maligned by self-professed consumer advocates. They are also the scourge of trial attorneys, who have long sought their abolition. However, notwithstanding the efforts of the plaintiff’s bar, mandatory arbitration clauses have withstood recurrent legal challenges. But the prayers of consumer advocates and plaintiffs’ lawyers may soon be answered by President Barack Obama in the form of his sweeping Federal Regulatory Reform (“FRP”) plan, which indicates that the days of mandatory arbitration could be drawing to an end.
Sixty-two pages into the FRP lies a pro-consumer jewel that calls for the creation of a new Consumer Fraud Protection Agency (“CFPA”). Among the proposed powers of this new agency would be the “authority to restrict or ban mandatory arbitration clauses” in consumer financial services and products contracts. The CFPA would be “directed to gather information and study mandatory arbitration clauses . . . to determine to what extent . . . they promote fair adjudication and effective redress” on behalf of the consumer. In situations where a clause did not “promote fair adjudication,” the CFPA would have the power to “establish conditions for fair arbitration,” or simply ban them altogether “in particular contexts.” The only “particular context” example provided is mortgage loans. Therefore, there will be heated (and predictably partisan) debate over what constitutes a “particular context” as the FRP moves through Congress.
The FRP revisits mandatory arbitration ten pages later where the plan recommends empowering the Securities Exchange Commission “with the clear authority to prohibit mandatory arbitration clauses in broker-dealer and investment advisory accounts with retail consumers.”
The abolition of mandatory arbitration clauses in consumer financial services and products contracts will be cheered by consumer advocates. Their ban will also be a boon to plaintiff’s attorneys eager to tap a new vein of consumer discontent. Therefore, we can expect both groups to throw their considerable support behind President Obama’s proposed CFPA. Notably, the FRP gives no consideration to how financial services companies will react to an increased risk of litigation. Furthermore, one must question the logic of a plan that will burden the courts with the added litigation that a ban on mandatory arbitration will invariably spur – the cost of which will be transferred to the taxpayers.
In sum, President Obama’s FRP, and the CFPA it aims to empower, has all the trappings of another government bailout; this one of consumers miffed at their mortgage lenders, stockbrokers, and financial advisors from whom they are eager to extract a pound of flesh. Therefore, the financial services sector, and the counsel who serve them, should be wary of President Obama’s proposed CFPA and the power it will have to ban mandatory arbitration. They will be wise to marshal their forces in opposition to the CFPA as the FRP winds its way through a Congress that has shown itself increasingly receptive to legislation hailed as “pro-consumer.”
Should you desire a full text of the Financial Regulatory Reform plan, or have any questions regarding the issues of mandatory arbitration, please contact any one of our Commercial Litigation or Financial Institutions and Creditor’s Rights and Liabilities Practice Group.
