A new era in the U.S. financial world is coming, and Sen. John Kennedy can change the lives of millions of people. Back in July 2017, the Consumer Financial Protection Bureau released the last version of the Consumer Financial Protection Agency regulation. This rule would prevent financial institutions from including legal language in the fine print of contracts to limit the ability of customers to join class-action lawsuits. This legal provision would have tremendous effects on the future of banking in the U.S. since numerous class-actions could be proceeded by attorneys to help injured consumers such as in the Equifax and Wells Fargo cases.
Arbitration can be defined as a form of alternative dispute resolution that forces two parties to resolve a dispute through the use of private, paid arbitrators and that bars them from access to courts. This rule prohibits financial service companies from inserting mandatory-arbitration clauses in the contracts they offer to their customers. Such clauses have been widely used in recent years by financial institutions.
Many consumer advocates and legal experts recommend allowing consumers to have the right to join class actions because most of the disputes between consumers and banks deal with small-dollar amounts. However, the U.S. Senate is now poised to vote to undo the CFPB arbitration rule, using the same legislative tool the House exploited in July when they voted (231-190) in favor of the pro-arbitration resolution sponsored by Rep. Keith Rothfus, R-Pa. The Congressional Review Act is a 1996 law that allows Congress to vote on resolutions to repeal new regulations within a limited time period with a simple majority.
Why is Sen. Kennedy a key vote? With a slim 52-48 majority, Republicans can only afford to lose two votes in the Senate. While Sen. Lindsey Graham, R-S.C. has stated he would vote against the CRA measure, other senators, including John Kennedy, have not made a stand. He is now under scrutiny, and both consumer and bank advocates are looking for votes that will likely affect the lives of millions of people.
In April 2017, Kennedy introduced the Reforming Finance for Local Economies Act aiming to help local community banks and credit unions by removing them from the scope of the Dodd-Frank regulations.
“They were not responsible for the 2008 financial crisis,” Kennedy said. “However, they are wrongly bearing the brunt of the regulatory burden imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Our community financial institutions need to get back to doing what they do best, which is helping our local economies grow.”
Huge compliance costs led “more than 1,700 U.S. banks to close since 2010.” The main effects of these foreclosures are obviously a more limited access to capital for entrepreneurs and job losses.
The recent scandal that affected Equifax could have changed his mind. The company had, in the wake of the data breach, required affected consumers to forfeit their right to join a class action lawsuit against the company in order to receive credit protection. The firm eventually backpedaled when the CFPB revealed the legal trick, and Sen. Kennedy declared “Equifax needs to be transparent with the public, and that includes ensuring that consumers understand what legal recourses they may be giving up simply by trying to protect themselves from the repercussions of the breach.”
There are three points that need to be addressed to understand why class action should be preferred over arbitration and therefore why Sen. Kennedy should approve the CFPB’s arbitration rule.
The first advantage of the class action is the pooling. Unlike arbitration, which is an individual process, a class action allows consumers to gather their complaints under the same flag. This changes everything when it comes to deciding whether or not it is worth complaining for a few dollars. It is the basics of negotiating power: you will have more credibility and more weight if you are associated to thousands of other consumers than if you are alone.
“Many scholars who study complex litigation worry that class action waivers in arbitration agreements potentially allow banks and other large corporations to avoid being held accountable by consumers,” LSU Law Professor Margaret S. Thomas said. “Small-dollar harms may tend to go unremedied unless they are aggregated in class actions. The availability of class actions thus leads to increased enforcement of consumer rights.”
The second advantage of the class action is that a class action needs to be certified by a federal judge to go forward, and any settlement must be approved as fair to the class. On the other side, arbitration requires private arbitrators and can be overturned by courts in very limited cases; it is a non-regulated, private process.
“Class action rules currently require courts to oversee settlement terms to ensure fairness to the class,” Thomas said. “Congress could address the tendency of some courts to approve class actions settlements through a precise reforms capping attorney’s fees at some fixed percentage of the recovery, while preserving the ability of consumers to join together in suits.”
Thirdly, the arbitration process tends to be a secret process while a class action is a public procedure that provides transparency to stakeholders: consumers, associations, media and the general public. Thomas underlines that “we have a venerable First Amendment constitutional tradition presuming a public right of access to court proceedings and civil records. No such access exists in arbitration — this can keep matters of public concern from being reported by the press.”
It is crucial that consumers could have a free choice when it comes to decide whether class action or arbitration is the best process to assert their rights. Here, binding arbitration clauses included in contracts are no longer sustainable as they contradict one of the basic principles this country has been built on: freedom of choice.
Nevertheless, Stephe Waguespack, the president and CEO of the Louisiana Association of Business and Industry, pointed out that he is “hearing from a lot of banks — community banks especially — here in Louisiana that, if the arbitration language isn’t allowed to go forward, you’ll see a rash of class-action lawsuits coming in.”
Such a statement echoes what the executive vice president of the American Financial Services Association recently declared about the Equifax case. “Nobody knows any of the facts yet, but the plaintiff bar didn’t waste any time. From our perspective, arbitration is most beneficial … both in terms of the consumer and the business being able to address the individual complaint,” Bill Himpler said.
There is a legitimate fear the implementation of the CFPB’s arbitration rule would bring about a surge in the number of class actions filled out by attorneys and as a result an increase in terms of legal costs supported by financial institutions. Therefore, financial industry needs now to turn this threat in a new opportunity and a few things can be recommended.
Compliance within financial institutions is a recent function that has been created in the 2000s and there is no doubt that this the CFPB’s rule will create new jobs in compliance departments to avoid what happened with Wells Fargo. Over the last few years, people working in such units have gained significant exposure, working hands in hands with the front and middle offices. They acquired new skills that put them at the forefront of the day to day operations. These are the people financial institutions need to invest in right now to prevent in the future any wrongdoings that could trigger class actions.
Hence, this is also an opportunity for a broad range of financial advisors such as Deloitte, KPMG, Ernst & Young and PricewaterhouseCoopers to offer compliance packages and dedicated trainings to senior compliance officers. They would provide tailored and efficient internal procedures that will improve the compliance-awareness of financial institutions and likely prevent any breach of data such as in the Equifax case. Thanks to this new arbitration rule, there is no doubt the financial industry will be well equipped, more resilient and their customers well served.
Edward d’Espalungue is a guest columnist for The Daily Reveille.