Thursday 20 October 2016

US watchdog seeks change to let customers sue their bank

Published 05/05/2016 | 05:41

Many US customers unknowingly sign away the right to sue their bank
Many US customers unknowingly sign away the right to sue their bank

Americans will find it a lot easier to sue their bank if government regulators get their way.

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Many US customers have unwittingly signed away their right to sue their bank in court, because buried in the fine print of credit card agreements, mortgages and insurance policies are what are known as binding, or mandatory, arbitration clauses.

The clauses mean customers are generally required to take any disputes with a bank to a third-party mediator instead of going to court.

Now the nation's top consumer financial regulator, the Consumer Financial Protection Bureau (CFPB), is announcing a proposal to ban arbitration clauses, which would affect the entire financial industry and the hundreds of millions of bank accounts, credit cards and mortgages that Americans use.

But the CFPB's proposal does have a significant limitation - the ban would apply only when consumers wanted to create or join a class-action lawsuit.

Financial companies will still be able to force individuals to settle disputes through arbitration but cases where a lone customer wants to sue their bank are far less common.

"Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them ... (and) effectively denies groups of consumers the right to seek justice and relief for wrongdoing," said CFPB director Richard Cordray.

Under current rules, if a customer has a complaint over disputed charges or a particular practice a bank uses, they are required to go through a binding arbitration process. Consumer advocates say these arbitrators are often biased and routinely rule against consumers. There is often no appeal if a customer loses an arbitration ruling.

The financial industry has argued that arbitration is more efficient way for customers to resolve disputes with banks. And for the most part they are correct and many disputes are resolved outside of the formal arbitration process.

A study commissioned by the CFPB in March 2015 showed customers rarely used the courts to sue their bank for a small claim. However, when large numbers of customers were affected negatively by the same issue, the study showed arbitration clauses hinder the ability for customers to seek relief.

Critics of the CFPB's ban say the proposal will benefit only class-action lawyers and lead to gigantic pay days.

"The CFPB is proposing to give the biggest gift to plaintiffs' lawyers in a half century," said Lisa Rickard and David Hirschmann of the US Chamber of Commerce.

Congress directed the CFPB to study the issue of mandatory arbitration under the Dodd-Frank financial regulatory law. The CFPB announced an outline of its proposal in October, but had not laid out the exact details of what it planned to do.

Once the rules are published, the public will have 90 days to comment on the CFPB's proposal.

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