Finra arbitration claims decline — for now

Fewer brokerage customers are filing arbitration claims, but that trend may reverse later this year thanks to the steep market downturn.

The number of customer claims declined to 369 cases in the first quarter of this year compared to 523 in the same period last year, a 29% drop, according to Financial Industry Regulatory Authority Inc. statistics through March. Finra runs the dispute resolution system for the brokerage industry.

Overall arbitration cases — customer as well as intra-industry disputes between brokers and financial firms — totaled 632 in the first quarter compared to 776 in the first quarter of 2021, a 19% drop.

“If the trend holds, the 632 arbitrations filed for the quarter straight-lines to about 2,500 yearly arbitration filings, a weak year by any measure,” George Friedman, editor in chief of the Securities Arbitration Alert, wrote in a recent blog post. “Time will tell.”

As the year goes on, the number of arbitration cases is likely to spike as a result of current market volatility. The market turmoil didn’t cause a surge of arbitration filings in the first quarter because it typically takes a while for market events to result in arbitration filings, Friedman said.

“Cases don’t materialize for months,” said Friedman, a former director of Finra arbitration. “Over the course of the year, customer filings will go up. People tend to fight when they’re losing money, not so much when they’re making money.”

An arbitration lawyer is also anticipating an upward trajectory in arbitration cases.

“It’s the calm before the storm,” Adam Gana, a partner at Gana Weinstein, said of the first-quarter arbitration statistics. “There will be an influx of filings, and I believe case numbers will go back up by year-end.”

Gana said he was surprised by the decline in arbitration cases so far this year because his firm, which represents customers in disputes with brokerages, “is busier than ever.” He attributes the increase in business to an uptick in risky investment products that harm investors.

“Even in up markets, terrible products are sold to clients,” Gana said.

One area where arbitration claims are climbing is cases involving disputes between registered representatives and brokerages, and between brokerages, or intra-industry cases. Those disputes totaled 263 in the first quarter compared to 253 last year.

That increase is likely due to the shrinking number of brokerages and reps, which has been captured in Finra’s recent Industry Snapshot survey. When reps are fired or jump to new firms, it can be fertile ground for an arbitration claim.

“Those are going up because of industry upheaval,” Friedman said.