Ed's Blog

A Bloomberg columnist is reporting that the securities industry's self-regulatory organization known as FINRA has fired 3 arbitrators who ruled against BofA's Merrill Lynch (aren't they known as the "Thundering Herd" or something equally ridiculous?) and instead gave a $520,000 verdict in favor of a presumably grievously ripped-off investor (they rarely win).

It's time for both the SEC, for investors, and the CFPB, for consumers, to step up and use their Wall Street Reform and Consumer Protection Act powers to ban forced arbitration.

This Bloomberg report occurs just three years after Minnesota Attorney General Lori Swanson settled a lawsuit against a powerful arbitration company favored by credit card companies. It wasn't actually neutral. No, I am sure you are shocked, shocked to read that the arbitration company, National Arbitration Forum, was not actually a neutral third-party forum designed to lower the costs of dispute resolution. Actually, it was owned by a hedge fund with a business model designed to make money collecting debts. Page 11 of General Swanson's complaint (pdf) has a chart showing the way the NAF was related to a hedge fund and a web of debt collectors and credit card companies. The rest of the complaint will also shock you.

(By the way, I would be remiss if I didn't also mention that General Swanson just this year sued another debt collector that was part of a hedge fund owned by the same people (Chicago Tribune) for its practice of setting up shop as a gatekeeper/toll collector in hospital emergency rooms. More from the New York Times.)

Forced arbitration agreements are buried in nearly every non-negotiable consumer or investor boilerplate contract. Look at your bank account, credit card, HMO, rental car, telephone, health club, or even payday loan contract. You have given up your right to go to court. The Supreme Court of the United States  has even ruled that companies can bury bans on class action lawsuits inside the buried forced arbitration clauses.

By preventing consumers and investors from taking their legitimate problems with companies to the courts, forced arbitration clauses allow bad behavior to fester in the marketplace. Why should a company change shoddy practices if customers have no rights of redress?

Today, the temporary bans on forced arbitration in credit card company contracts affiliated with the NAF, which were imposed after the Minnesota investigation, have already expired or are expiring. And other firms that use the unfair terms in consumer contracts aren't bound by those bans anyway. More needs to be done for consumers. And if the allegations about FINRA in this Bloomberg columnist's report are true, it's also time for the SEC to step up to protect investors.

This is one area where Congress did the right thing. The 2010 Wall Street Reform and Consumer Protection Act gave the SEC, for investors (Sec. 921), and the CFPB, for consumers (Sec. 1028), powers to ban forced arbitration after studies were completed. CFPB has started its study. The SEC? Moving very slowly. Let's finish the studies and protect consumers and investors by banning forced arbitration. Let consumers and investors choose to go to arbitration only after a dispute has arisen. More from Public Citizen on forced arbitration, which harms workers as well as consumers and investors. And no, it is not more efficient, less costly or more fair than going to court. Actually, it is usually more expensive for consumers and investors, less transparent and without appeal. Arbitration limits the rights of aggrieved consumers and investors so much that it harms the overall marketplace for others, including fair-dealing firms.


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