A U.S. regulator wants to restrict banks from using arbitration clauses that prevent unwitting consumers from filing group lawsuits, setting up another clash with the financial services industry.
The Consumer Financial Protection Bureau said Wednesday it was starting a rulemaking process that could make financial firms more accountable to consumers. The proposals the CFPB is considering wouldn’t entirely ban arbitration clauses, but would make them more difficult for companies to impose.
Wording buried in many contracts for credit cards and bank accounts deny consumers the right to take part in group lawsuits, according to the CFPB. That allows the companies to avoid giving consumers bigger payouts, the agency said in a statement.
“Many violations of consumer financial law involve relatively small amounts of money for the individual victim,” CFPB Director Richard Cordray said in prepared remarks on Wednesday in Denver. “Group claims often are the only effective way consumers can pursue meaningful relief for harms that can add up to large amounts of money for financial providers.”
The start of the rulemaking process is likely to be a point of contention between the agency and financial firms that say the CFPB burdens it with costs that sometimes are passed to consumers. Business groups including the U.S. Chamber of Commerce have argued that arbitration prevents unnecessary lawsuits and leads to lower consumer prices because companies will charge less if they don’t face the risk of litigation.
“A CFPB ban on pre-dispute arbitration helps only one group: class action plaintiffs’ lawyers,” the Chamber of Commerce’s Center for Capital Markets Competitiveness said in a statement. “Consumers will have fewer avenues and a longer process for resolving their disputes.”
The CFPB, a signature achievement of Senator Elizabeth Warren, a Massachusetts Democrat, was created in 2010 under the Dodd-Frank Act to regulate mortgages and credit cards.
The agency is “inclined to significantly curtail the use of mandatory arbitration clauses” for credit cards and deposit accounts, Isaac Boltansky, an analyst in Washington with Compass Point Research & Trading, said in a note Monday. Such rules “could ultimately result in higher operational and litigation expenses for impacted companies.”
When credit-card issuers have faced suits seeking class-action status, companies invoked arbitration clauses to keep squabbles out of court almost two-thirds of the time, according to a study released by the CFPB in March. The agency was required to complete the study under Dodd-Frank before issuing new regulations.