Recent headlines have described the horror of the GOP siding with Wall Street and attacking consumers’ rights. Headlines such as “Republican senators vote to protect banks and credit card companies from being sued by US citizens”, “Senate kills rule that made it easier to sue banks”, and “Republicans help banks by scrapping pro-consumer rule”. Social media exploded once again with claims of Trump and the Republicans helping the rich at the expense of the poor. But beyond the headlines, what actually happened?
Many financial institutions include binding arbitration clauses in their contracts for products such as bank accounts or credit cards. These clauses prevent customers from suing through the court system, instead requiring private arbitration. On the 10th of July, the Consumer Financial Protection Bureau (CFPB) issued a new rule banning these clauses, instead restoring the “consumers’ right to file or join group lawsuits”. The media frenzy began when Congress overturned this regulation under the Congressional Review Act, and again when President Trump signed Congress’ bill just this past week. Perhaps a more fitting headline would be “Republicans overturn rule which would ban individuals from consensually entering into contracts with private arbitration clauses”, but that forms a less compelling narrative.
But is this really an attack on consumers’ rights? The CFPB outlines three primary reasons for their ruling. Firstly, they argue that these clauses deny consumers their day in court. They state that “only about 2 percent of consumers with credit cards surveyed said they would consult an attorney or consider formal legal action to resolve a small-dollar dispute.” However, their own study does not show that this is affected in any way by private arbitration clauses. In fact, that two percent includes customers without arbitration clauses!
Secondly, the CFPB claims that private arbitration allows corporations to avoid large payouts. While it is true that group lawsuits resulted in payouts of over $1 billion over the five year period, while private arbitration resulted in only $360,000 over two years, the group lawsuit payments were spread over a much larger number of recipients. In fact, private arbitration payments averaged $4,615 per consumer, while group lawsuits averaged only $29 per consumer.
The CFPB’s third reason is that class action lawsuits are more successful at forcing corporations to change illegal or harmful behaviour. They cite the fact that of the class action cases they studied, 53 settlements included some form of behavioural change on the part of the corporation. However this is out of 419 settlements – only 13%. Settlement details for private arbitration are not available, and a comparable figure is not given. It is entirely possible for settlements in private arbitration to include behavioural relief.
The evidence supporting a ban on binding arbitration is weak at best, even by the CFPB’s own study. They have also chosen to ignore the positive aspects of private arbitration. Private arbitration is generally faster and cheaper. Its simpler process means that more consumers can represent themselves, avoiding the 25-35% fee usually taken by the attorneys in a class action lawsuit. It also allows greater privacy for both parties. These are significant advantages, and leave many consumers better off than they would be under litigation.
It would seem then that the better option is to allow consumers and corporations to decide the matter themselves, rather than still greater overreach by the federal government into the financial sector. If a consumer wishes to retain the right to sue, they can choose a financial institution which allows it, as only 43% currently have binding arbitration clauses. Should a bank desire to prohibit lawsuits, they can include such clauses in their contracts and accept that consumers may choose to use other banks. The idea that government must involve themselves in every financial decision an individual makes is in firm opposition to the principles of liberty, and is an ugly hangover from the Obama administration.
The Republicans aren’t taking away your right to sue, they’re protecting your right to sign whatever contract you please.
* Ryan Green works in media production in Auckland, New Zealand, and is strongly pro-liberty and personal freedom. You can follow him on Twitter @RyanGreen_NZ