Customers Want to Join Together to Hold Financial Institutions Accountable

Customers Want to Join Together to Hold Financial Institutions Accountable

When seeking to resolve bank disputes, consumers want accountability and fairness. But they do not see enough of either in mandatory binding arbitration, the nearly universal process now used to settle these conflicts. In a recent survey, The Pew Charitable Trusts asked consumers their opinions about mandatory binding arbitration. One issue in particular rankles them and is now under scrutiny by regulators: the ubiquitous inclusion in arbitration agreements of language that bars customers from pursuing their claims against a financial services company as part of a class action.

Consumers who have similar claims do not want to be deprived of the ability to join together and take legal action. In essence, they are acknowledging what Judge Richard Posner of the 7th U.S. Circuit Court of Appeals wrote in a 2004 decision: “The realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30.”

As Judge Posner recognized, class action is the only reasonable way to deal with harms that are individually small but affect a large number of people and add up to a great deal of money collectively. In Pew’s survey, conducted in December 2015, fewer than 1 in 4 consumers (23 percent) said they probably would take some kind of legal action if they were involved in a dispute with their bank. A significantly higher number (39 percent) said they probably would not pursue a legal remedy.  Most said the main reasons they would not take legal action are that the length of time and the amount of money at stake simply did not warrant the effort. Not surprisingly, survey respondents earning less than $50,000 a year said the cost of hiring an attorney was the primary deterrent to taking legal action.

But while consumers may be reluctant to go to court in bank disputes, our survey results show they believe strongly in preserving their right to sue, including the ability to do so as a class in order to have greater leverage in holding companies legally accountable for their actions. Fully 91 percent of consumers support having the right to join a class-action lawsuit; 90 percent say they should be able to have their case heard by a judge and jury; and 90 percent feel they should have the option of appealing a legal decision—which is exceedingly difficult with mandatory binding arbitration.

The Consumer Financial Protection Bureau (CFPB) is expected to put forward new rules soon that will add greater balance to an arbitration process that has failed to provide sufficient protection for the customer. The CFPB should act on this matter promptly, in particular by following through on the proposition it made in October 2015 to ban the practice of forbidding class actions.

Without action by the CFPB, binding arbitration clauses—and the constraints they place on consumers—will continue to have the potential to cause harm. For the past three years, Pew has done annual studies of the checking account practices of the nation’s 50 largest banks. Of the 32 large banks whose practices we reviewed, the proportion of banks that require binding arbitration rose from 62 percent in 2013 to 66 percent in 2015. 

In Pew’s first examination of checking account disclosures, in 2013, about half of the banks did not require customers to waive their right to join a class-action suit. In the most recent survey, that number has dropped to one-third.

Taken together, the evidence is more than compelling: It is time for reform. Arbitrations and individual court cases are not very common, and current restrictions on class actions further tie consumers’ hands. The CFPB can change this for the better. Consumers need—and definitely want—greater accountability.

Thaddeus King is an officer with The Pew Charitable Trusts’ consumer banking project in Washington.

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