Time to rethink forced arbitration

Mandatory arbitration hit national headlines in April when congressional leaders proposed a ban on industry agreements that force investors to litigate claims outside of the traditional court system. 

The Investors Choice Act, put forward by Sen. Jeff Merkley, D-Ore., and Rep. Bill Foster, D-Ill., in their respective chambers, would end pre-dispute mandatory agreements in brokerage and investment advisory customer contracts. Barring investors from using the courts limits their legal options and harms investors, according to the lawmakers.  

Although similar proposals have been floated for almost 10 years, all have stalled.

Nonetheless, ending mandatory arbitration has become a top priority for consumer advocacy groups, like the Public Investors Advocate Bar Association and others, that claim investors should have the option of laying out their case before a judge or jury. Opponents argue the current process forces those claims to be heard in a less-friendly venue for investors, one that favors the large brokerage firms.   

The Financial Industry Regulatory Authority Inc. runs its arbitration system forums. In a response to a letter earlier this year from Sen. Elizabeth Warren, D-Mass., one of the co-sponsors of the bill, Finra said it does, in fact, place limits on the power of the mandatory arbitration clauses. For example, the self-regulator’s rules protect a customer’s right to band together with other claimants to pursue class-action suits in court. 

If the assigned arbitration venue “promotes fair, efficient, and economical dispute resolution for all parties,” as lobbyists like the Securities Industry and Financial Markets Association argue, then the industry shouldn’t have to force investors into using them in the first place. 

Proponents maintain, however, that mandatory arbitration spares firms — and their customers — the cost and inconvenience of lengthy court battles. Legal fees can most certainly eat into a hefty chunk of arbitrated settlements, but those sums could be far greater in a traditional court of law. And while forcing investors into arbitration seems restrictive, there is nothing inherently wrong with a venue that can offer cheaper, quicker relief for investors. 

Regulators generally agree about the importance of upholding a claimant’s ability to use the court system. 

“While arbitration has its place, it’s also important that investors … have an avenue to redress their claims in the courts,” SEC Chairman Gary Gensler said during his confirmation hearing before the Senate Banking Committee in April. 

But if Congress is going to bring an end to mandatory arbitration, the legislation introduced last week will have to get through an evenly divided Senate. Republicans can filibuster the bill that would require 60 votes for approval, and it’s not clear whether the legislation would be up for a special procedure that only requires a simple majority. 

While arbitrators may know the issues inside and out, it’s time to consider putting an end to forced arbitration and letting the public decide where they prefer to air their grievances. If private venues really are the most cost-effective and convenient option, then customers will use them regardless. And if they decide arbitration isn’t in their best interest, they should have their day in court.