With spotlight on consumer confusion, harm, some think SEC will be swayed to quicker action reviewing brokerage contracts

InvestmentNews (March 10, 2015 9:07 am) -- A new study of arbitration in the financial services sector by the Consumer Financial Protection Bureau could spur the Securities and Exchange Commission to take a look at such clauses in brokerage contracts.

On Tuesday, the CFPB released a report that asserts that consumers are hurt by mandatory arbitration provisions in contracts involving credit cards, checking accounts, prepaid cards, payday loans, private student loans and mobile wireless services.

The study shows that between 2010 and 2012, 1,847 arbitration disputes were filed across the six categories. In the 1,060 cases filed in 2010 and 2011, consumers received a combined total of less than $175,000 in damages and less than $190,000 in debt forbearance.

“Tens of millions of consumers are covered by arbitration clauses, but few know about them or understand their impact,” CFPB Director Richard Cordray said in a statement.

The study could lead to CFPB rulemaking. The agency does not have jurisdiction over investment advisers and brokers, but its report could influence the SEC, observers said.

The Dodd-Frank financial reform law empowered the SEC to end mandatory pre-dispute arbitration, a provision in nearly all brokerage contracts and an increasing number of investment adviser customer agreements. The Financial Industry Regulatory Authority Inc., the industry-funded broker-dealer regulator, runs the arbitration system used to settle investor and broker disputes with financial companies.

“The fact that the [CFPB] report has been issued and shines a spotlight on consumer financial arbitration will bleed over to the SEC and what it might do with its Dodd-Frank authority regarding arbitration,” said George Friedman, a former director of Finra arbitration.

The Public Investors Arbitration Bar Association, an opponent of mandatory arbitration, hopes that the CFPB report will give interagency momentum to the SEC review. In the nearly five years since the enactment of Dodd-Frank, the SEC has said little about mandatory arbitration.

“It should be very influential over the SEC,” said Joe Peiffer, PIABA president and managing partner at Peiffer Rosca Wolf Abdullah Carr & Kane. “Retail investors are consumers. It's just a different type of consumer.”

One of the CFPB conclusions resonates with Mr. Peiffer: that consumers know little about mandatory arbitration.

“They have no idea that they have an arbitration clause,” he said. “When you sign a brokerage contract, it's like closing on a house. You sign a zillion different documents.”

The Finra arbitration system has been criticized for favoring financial firms over investors. Proponents say arbitration allows investors to get relief faster and less expensively than through the court system.

Mr. Friedman said Finra's arbitration treats consumers better than others'.

“Finra's system has many, many safeguards that make it a fairer system,” he said.

For instance, Finra serves the claim on the financial firm for the investor, hearings are sited near where investors lived when the events in dispute occurred and all-public arbitration panels have become the default for Finra cases. In addition, investors can pursue class action suits instead of arbitration, an option Finra reinforced in a case involving the Charles Schwab Corp.

Finra has established an arbitration task force that is looking at how to improve the system. At the top of its agenda is a review of the “mandatory nature of arbitration.”

Mr. Peiffer hopes the CFPB report also will give a boost to a bill recently introduced in Congress that would end mandatory arbitration in advisory contracts. The bill will be at the top of PIABA's agenda during its Capitol Hill day on March 27.