COMMENTARY: A kinder, gentler arbitration process for U.S. financial consumers

NEW YORK (Thomson Reuters Regulatory Intelligence) - For Richard Cordray, the Obama-administration appointee who still leads the Consumer Financial Protection Bureau, the Wells Fargo bogus account fiasco is the public relations gift that keeps on giving.

Graduates from the law school hold up gavels in celebration during their commencement at Harvard University in Cambridge, Massachusetts May 27, 2010.

Wells Fargo’s customers had tried to “have their day in court” and sue over the bank’s opening of fake accounts in their names. The bank, however, invoked mandatory arbitration provisions in the contracts that the customers assented to when they opened real accounts. Mandatory arbitration provisions in consumer contracts require aggrieved customers to waive their rights to pursue class action claims and instead to resolve their disputes through individual arbitration, which many consumers perceive as biased in favor of companies.

The scandal would appear to give Cordray the momentum to formally issue a controversial rule proposed by the CFPB in May, 2016 to ban class action waivers in consumer financial services contracts. Republicans in Congress who oppose the rule, however, have the simple majority needed to reverse any ban under the Congressional Review Act, which would then preclude the CFPB from issuing substantially similar regulations without new statutory support. Also, recent Supreme Court rulings give great deference to the Federal Arbitration Act, which provides companies wide latitude to structure mandatory arbitration provisions that prevent consumers from pursuing class action litigation.

Given the obstacles, reforming the consumer arbitration process itself might be a more productive way for the director to spend the rest of his term, which expires in mid-2018 under the agency’s politically disputed structure, than by pushing through a final CFPB rule that bans the waivers.

One path to reform is to work with banks to voluntarily remake arbitration with some of the features that consumers seem to like about litigation, but without sacrificing factors that make arbitration generally less expensive and time consuming.


The proposed CFPB rule aims to give the agency the power to collect and publish certain records relating to arbitral proceedings to allow the agency to take action if the records warrant. A more transparent approach, however, might be to eliminate the CFPB filter and make consumer arbitration open to the public, no more or less open than civil litigation. In the Wells Fargo case, the abuses did not come to public light until many years after the problems started. Public arbitration would shine a light on problems before they spread.

A public forum would allow arbitrators to decide cases in plain sight, but without sacrificing the speed that has become a hallmark of the procedure. Like private arbitration, public arbitration would be conducted without the drawn-out tangle of legal motions or the requirement to follow the rigid rules of civil procedure. Public arbitration would also facilitate fastidious record-keeping that would support additional reforms.


A second reform addresses the perceived bias of arbitrators in favor of banks. Business-to-business contracts frequently allow each side of the dispute to select an arbitrator from the specified pool. Alternative Dispute Resolution providers like the American Arbitration Association (AAA) and JAMS can do more to recruit arbitrators with a more consumerist bent, but giving consumers more flexibility in choosing an arbitrator from the current pool might make arbitration more palatable.


A third reform aims to mitigate the psychological impact of finality. It would allow consumers to appeal an arbitration decision to a panel of arbitrators. The grounds for judicial review under federal and state law are very narrow. A court cannot vacate an arbitration decision based on the merits of the decision; it can only vacate if the decision results from egregious arbitrator conduct.

Regulators lack the power to force banks to submit to appellate review, but banks could voluntarily agree to submit to non-judicial appellate review under rules similar to the ones that arbitration providers already have in place to give companies peace of mind in business-to-business transactions.

For example, AAA and JAMS rules allow the appeal of arbitration decisions by either party to an appellate arbitral panel that would apply a standard of review similar to the standard that appellate courts apply when reviewing lower court decisions. And the arbitral appellate process doesn’t have to be slow; the rules aim to complete appeals within a couple of months.


There is of course no guarantee that any of these proposals will improve outcomes for consumers. Any solution meant to solve a problem can be gamed. For example, another solution would allow banks to arbitrate, but only up to a specified number of cases or dollar threshold. After that, claimants would be free to pursue class action litigation or class action arbitration. Banks, however, could creatively classify the cases in a way that works to keep the cases out of court for as long as possible.

There might also be unintended consequences to these proposals. For example, banks might reprice their services to offset an increased cost of compliance. This might open up opportunities for non-banks to offer similar services with less oversight from regulators.


In November, 2016, several banks proposed a compromise with the CFPB that would allow arbitration requirements to remain in place when regulators have intervened regarding the conduct in question, or the company has notified regulators and pursued voluntary corrective action. The premise is that in such cases, the presumed function of class-action suits as a backstop for protecting consumer rights is not needed.

In their proposal, the banks have shown willingness to compromise, even if only to preempt unilateral CFPB action. Therefore, banks also realize that the current situation is as bad for banks and their shareholders, as it is for consumers. This is a great chance for bureaucrats and politicians on both sides of the aisle to offer solutions that show that they mean business when they say they want to fight for their constituents.

--Proposed rule to ban class action waivers: here

(Lawrence Hsieh is a senior legal editor for the Practical Law division of Thomson Reuters and author of the Corporate Transactions Handbook. The views expressed here are his own.)