The open comment period on the Consumer Financial Protection Bureau’s proposed guidance on arbitration agreements is set to come to a close Monday.
The guidance – proposed in early May – would prohibit financial companies from including mandatory arbitration clauses in contracts with consumers as a way to block class-action lawsuits, which would direct customers into private negotiations to resolve disputes.
The rule was proposed following a study conducted by the CFPB in March 2015, which determined that “very few consumers ever bring – or think about bringing – individual actions against their financial service providers either in court or in arbitration.” The study also claimed that where mandatory arbitration clauses are in place, companies are able to use those clauses to block class actions.
Since the proposed rule’s release, it – and the study — has been criticized by industry groups like the American Financial Services Association, which claimed that consumers are actually better served by arbitration agreements.
“In 60% of class actions studied by the CFPB, consumers received no remuneration at all,” AFSA wrote in a statement in May. “In the 15% of cases where consumers received monetary compensation in class actions, they received an average of just $32.35, after waiting an average of 24 months. In contrast, consumers who prevailed in arbitration agreements, on average, received $5,389. The real winners in class action lawsuits are plaintiff’s attorneys who divided approximately $424 million in fees.”
The Consumer Bankers Association also publicly disagreed with the arbitration guidance, claiming that one reason for the disparity in consumer recoveries from arbitration versus class actions, is the percentage taken by class action attorneys, who on average take on 21% from their clients’ cash recoveries, while some take as much as 63%.
“It is unfortunate this pre-baked proposal is political rather than substantive,” CBA President Richard Hunt said in a statement. “Given arbitration’s benefits for consumers and banks alike, CBA will continue its efforts to ensure a final rule does not end up eliminating this alternative dispute resolution process,”
The proposed rule has already drawn nearly 2,500 comments in the federal register, which the CFPB will take into consideration before issuing a final guidance.
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