WASHINGTON (Reuters) - A new U.S. rule aimed at restoring consumers’ ability to band together to sue financial companies has survived its first challenge, as a top banking regulator on Monday said he would not petition for it to be suspended.
The Consumer Financial Protection Bureau’s rule abolishing “mandatory arbitration clauses” was released on July 10, and was immediately threatened by Republicans in Congress and President Donald Trump’s administration.
Acting U.S. Comptroller of the Currency Keith Noreika publicly argued with CFPB Director Richard Cordray, appointed by former President Barack Obama, a Democrat, over whether the rule could endanger the banking system.
Many had expected Noreika to ask colleagues on the Financial Stability Oversight Council consisting of the country’s chief financial regulators to stay the rule. But in Monday’s statement he said he was unable to complete a thorough review of the rule in time to make a petition.
“Nothing so far diminishes my concerns that the rule may adversely affect the institutions within the federal banking system and their customers,” Noreika said, adding it “may have unintended consequences” such as increased costs.
The CFPB declined to comment. Still, Noreika backing down was a victory for the independent agency, which spent years researching and writing the rule.
The rule bans companies from requiring customers to sign an agreement when opening new accounts that they will not join a group lawsuit, or class action, in the event of a dispute. Instead they must take disputes to secret arbitration.
Critics of the rule say class actions mostly benefit lawyers, while arbitration is quick, cost-effective, and renders large awards for complainants.
Supporters, though, say citizens are entitled to a day in court and companies often hire the arbitrators, rigging the process against the customers. They also say public proceedings are effective at ending bad corporate behavior.
“The rule is a well thought-out response to the serious consumer harm of forced arbitration,” said Brian Marshall, policy counsel for advocacy group Americans for Financial Reform.
Noreika’s threat is not the only one levied against the regulation. But it was the first time a stay from the oversight council was seriously considered to dismantle a rule.
Noreika added he hopes congressional efforts to kill the rule succeed. Even though the House of Representatives passed a resolution repealing it earlier this month, Republicans hold a slimmer majority in the Senate and will struggle to gather enough votes for a similar resolution, analysts said.