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Authorities Reconsider Consumer Arbitration Clauses

When a consumer signs a contract that includes a pre-dispute arbitration clause, they forfeit their legal right to file an individual or class-action lawsuit against the other party. These clauses require consumers to let arbitrators, rather than judges or juries, settle disputes that range from financial fraud to wrongful death. However, federal authorities continue to question the fairness of mandatory arbitration, and a new report reveals its effect on consumers who use financial services.

Protecting Financial Consumers

The Supreme Court upheld the legality of arbitration clauses in 2012, but regulations continue to evolve. The Dodd-Frank Act prohibits these clauses in mortgage contracts, and the Financial Industry Regulatory Authority (FIRA) recently updated the federal arbitration rules that affect investment brokers. Now, the Consumer Financial Protection Bureau (CFPB) is considering new rules for consumer financial companies too.

Banks, credit card companies, and other financial service providers almost always include these clauses in their service contracts. After launching a public inquiry and conducting a lengthy financial study of these clauses, the CFPB published a report that revealed the financial impact of this widespread legal practice.

According to the report, arbitration clauses don't lower prices for consumers as claimed. Instead, they limit consumers' ability to choose their providers and seek financial relief for wrongdoing. Unfortunately, the majority of consumers are unaware that they signed away their rights at all. Even among those who think they understand arbitration clauses, less than half have accurate information, and less than a quarter actually know whether their contract included such a clause.

Proposing New Federal Laws

This isn't the first time federal authorities have questioned the fairness of forcing consumers to forego the benefits of courtroom litigation. In February 2015, a Minnesota congressman sponsored a bill that would add a new prohibition to the Securities Exchange Act of 1934. This ban would prevent investment advisers, dealers, and brokers from forcing investors to agree to pre-dispute arbitrations.

Two months later, a Minnesota senator joined forces with a Georgia congressman to sponsor a bill that would ban consumer arbitration clauses. The Arbitration Fairness Act of 2015 would give investors, consumers, and employees the right to challenge any unfair practices in court, regardless of a company's desire to arbitrate instead. Arbitration would still be an option, but according to the proposed law, consumers wouldn't have to decide until a dispute was already underway.

Right now, arbitration clauses give consumers a different choice: give up the right to sue, or pass on the opportunity to open a bank account, accept a new job, activate a cell phone, get a new credit card, or whatever else is contingent on the terms of their contract. Financial contracts aren't the only kind that still legally restrict consumers' legal options, though. Some arbitration clauses are actually religious in nature, and they may shed light on the motivations behind mandatory arbitration.

Learning from Other Arbitration Clauses

When a Florida man died after leaving a Christian substance abuse program, his family couldn't uncover the truth because of a religious arbitration clause in the contract he signed during the admission process. This clause waived any right to file a lawsuit, even to allege wrongful death, and deferred all disputes to a "religious tribunal" bound only by the authority of the Bible.

Similar clauses have prevented legal action against a hardwood flooring company in Washington, a high-end vacation rental company in North Carolina, a fishing tournament in Hawaii, and a private school in Louisiana. The Church of Scientology also avoided lawsuits for six decades by forcing members and former members to appear before a tribunal of Scientologists.

These contracts are often upheld as legally binding in an effort to protect religious freedom. However, if both parties don't share the same religious values, scripture-based clauses may actually infringe on this freedom by forcing plaintiffs to participate in a religious activity. Instead, religious arbitration clauses often work like any other, granting not freedom but control over the legal process.

Prohibiting arbitration clauses would actually give consumers more freedom. It would also improve the quality of services available to them. For example, decreased job security and increased competition would make the arbitration process more transparent and unbiased. Instead of depending on the companies who require and pay for their services, arbitrators wouldn't work unless they could convince both parties their services were a better choice than litigation.

In a world without these clauses, banks and other financial companies would also have more legal accountability to their customers. After all, avoiding fraud is the best way to prevent customers from hiring an investment fraud attorney in the first place. Instead of sneaking clauses into contracts, companies would rely on other ways to avoid big payouts, such as raising their customer service standards, making their fees and interest rate policies more transparent, forgiving debts, and granting refunds.

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