Opponents of mandatory arbitration agreements in financial services faced arguments in support of the practice from industry lobbyists at a Senate Banking, Housing and Urban Affairs hearing on Wednesday.
Committee chairman Sherrod Brown — who introduced the Arbitration Fairness for Consumers Act last week with 21 cosponsors in the Senate — argued that mandatory arbitration “takes away consumers’ rights and gives more power to corporations.”
According to Brown, consumers are often confused about the clauses, while corporations are in a position to “hand pick the arbitrator, who works behind closed doors.”
“Corporations know what they are doing — they choose the venue and the referee. That’s what we call gaming the system,” he said in a statement.
Allegations of bias in arbitrator selection have hit headlines with a recent court case in which a Georgia judge vacated a Financial Industry Regulatory Authority arbitration award in favor of Wells Fargo on the grounds that the selection process was “manipulated” by the company and its counsel.
Brown, meanwhile, also cited an Economic Policy Institute report that concluded that corporations that take consumers to arbitration prevail in 93% of the cases.
Paul Bland, executive director of Public Justice in support of banning forced arbitration, called the practice “a secretive, shadowy process that provides none of the openness of the public court system.”
“Through ending forced arbitration in this sector, Congress can ensure countless Americans are no longer denied their day in court and are no longer forced into a system where they are unlikely to prevail or, even if they do, to facilitate meaningful changes in how corporations and employers treat their customers and employees or compensate them for abuse,” according to Bland, who testified at the Senate committee hearing.
Ranking Senate committee member Pat Toomey, R-Penn., on the other hand, said in his prepared statement that the government shouldn’t “stop adults from entering into agreements and undermine their freedom of contract.”
“That’s not protection, that’s paternalism,” he added in the statement.
According to the Toomey, “any consumer in America who prefers to settle a dispute in litigation rather than arbitration has many opportunities to select a financial product that allows for that.”
Toomey cited 2015 data collected by the Consumer Financial Protection Bureau showing that 84% of credit card issuers and 92% of banks offering checking accounts don’t use mandatory arbitration agreements in contracts for those products.
“Moreover, the average recovery per consumer from class-action settlements was $32, while a consumer who prevailed in arbitration was awarded an average of $5,389,” the senator said in the statement.
Steven Lehotsky, a lawyer with Lehotsky Keller who testified at the hearing on behalf of the U.S. Chamber of Commerce said the group “strongly supports arbitration because it is a fair, less complicated, and lower-cost alternative to our overburdened court system.”
“Empirical studies show that consumers do as well or better in arbitration as in litigation. They prevail on their claims at the same rate or more frequently, and they recover as much or more when they prevail,” he added.
The American Securities Association likewise came out against any bans on mandatory arbitration clauses.
“ASA strongly opposes attempts to politicize arbitration in a way that will only benefit the trial bar, while American working families suffer from increased litigation, higher costs and greater dispute resolution delays,” ASA chief executive officer Chris Iacovella said in a statement.
In November, meanwhile, the House of Representatives' Financial Services Committee passed the Investor Choice Act, which would prohibit broker-dealers, investment advisors and issuers from including binding mandatory arbitration clauses in their customer agreements, as reported.
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