Time to end mandatory arbitration

For years, lawmakers have been trying to eliminate mandatory arbitration clauses in legal agreements covering consumer, employment, antitrust and civil rights claims, as well as agreements between investment professionals and their clients.

[More: Virginia poised to ban mandatory arbitration clauses for state-registered advisers]

Legislation introduced this year in both the House and Senate once again seeks to ban forced arbitration clauses in a wide range of legal documents — from content licenses to employment contracts. The practice of mandatory arbitration has over time been widely adopted by brokers and investment advisers. The latest bill, the Investor Choice Act, would prohibit them from strong-arming clients to pursue claims in a private forum.

The reasoning behind the arbitration clause, as it pertains to brokers and financial advisers, is that it spares firms and their customers the cost and inconvenience of a lengthy court battle in the event of a dispute.
That’s admirable. There’s nothing inherently wrong with an arbitration system to resolve disputes. In some cases, such a system can offer quicker relief than the courts.

[More: House, Senate bills would ban mandatory arbitration in broker, adviser client contracts]

But the crux of the issue is about more than convenience, speed or cost. It’s about preserving a right guaranteed by the U.S. Constitution — the right to have one’s day in court. By forcing arbitration, customers are precluded from creating or joining class actions to address disputes. This denies claimants with limited resources their right to band together and fight on a more level playing field.

Aggrieved customers also forego the benefit of judicial oversight and authority. The bench has the full weight of the U.S. government behind it to enforce judgments. That matters. The Financial Industry Regulation Authority Inc. has been wrestling for some time over the question of how to ensure that investors who win arbitration cases actually get paid. Too often, firms that lose their case simply go out of business, leaving investors out of luck.

Removing the yoke of mandatory arbitration wouldn’t mean that claimants couldn’t use arbitration if they so chose. In some cases, claimants might opt to decide on that venue.

[More: Leading expungement attorney accuses Finra staff of trying to influence arbitrators]

But requiring investors to relinquish their legal rights in advance of any future dispute is fundamentally wrong. It removes choice. It should always be up to investors to decide how, when and where they want to pursue a legal remedy.