Mandatory arbitration reform on the docket at CFPB

Experts in the financial industry question what spillover effect it will have on such clauses for brokers

Oct 7, 2015 @ 1:47 pm

By Mark Schoeff Jr.

A consideration by the Consumer Financial Protection Bureau to reform mandatory arbitration for disputes involving credit cards and bank accounts caused some to question whether the move would put pressure on financial regulators to ban the process under securities law.

The CFPB announced Wednesday it is considering proposing rules that would curtail arbitration clauses that prohibit class-action lawsuits. They also will require firms to submit data about arbitration claims and awards.

Although the agency doesn't have jurisdiction over securities laws, its action on arbitration could influence the Securities and Exchange Commission.

Under the Dodd-Frank financial reform law, the SEC has the authority to ban mandatory arbitration clauses, which appear in almost every contract between clients and financial advisers. The SEC has not addressed the topic.

The fact that the CFPB will not propose a ban on mandatory arbitration, though, caught some experts by surprise.

“At this point, I don't believe there would be a groundswell to do anything under Dodd-Frank,” said George Friedman, a former Finra director of arbitration and owner of an eponymous arbitration consulting firm. “It would be different if the [CFPB] were preparing an outright ban on arbitration.”

Earlier this year, the CFPB released a report about mandatory arbitration that looked as if it was the pre-cursor for a rule that would end the practice. Instead, the agency is taking a more targeted approach.

“If it's going to have an impact on the SEC at all, it will be in directing the SEC more toward disclosure, transparency and improvements to arbitration clauses on the securities side,” said Rick Ryder, editor of Securities Arbitration Commentator.

In an outline of its proposal, the CFPB cited Financial Industry Regulatory Authority Inc. rules that prohibit financial firms from banning class actions by investors.

Finra last year rebuffed an attempt by Charles Schwab & Co. to put a class-action waiver in its arbitration clauses.

“The position taken by the Consumer Financial Protection Bureau makes it look like Finra made the right decision,” said Benjamin Edwards, an assistant professor of law at Barry University. “They are leaders on the issue of prohibiting class-action waivers.”

Although legislation has been introduced by Rep. Keith Ellison, D-Minn., to end mandatory arbitration, Republicans resist the idea. The CFPB move takes more wind out of the sails of that effort.

Instead of banning arbitration, the CFPB appears to want more disclosure, according to Mr. Ryder.

“It's always good to rely on disclosure as long as you can, and let the market make up its own mind,” said Mr. Ryder, a former director of arbitration at the National Association of Securities Dealers, Finra's predecessor.


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