Financial Advisor (March 9, 2022) – A new bill introduced by Sen. Sherrod Brown, chairman of the U.S. Senate Banking, Housing and Urban Affairs Committee, would prohibit broker-dealers and other financial institutions from using forced arbitration clauses against consumers who want to seek restitution.

The “Arbitration Fairness for Consumers Act,” which has 21 co-sponsors, would ban pre-dispute arbitration agreements and class-action waivers in contracts for consumer financial products or services. Under the bill, such agreements would become invalid and unenforceable.

“I’m not saying ban arbitration, I’m saying ban forced arbitration,” said, Brown said at a hearing. The veteran lawmaker, an Ohio Democrat, also said that arbitration is costly and that consumers rarely prevail.

Almost all broker-dealers, registered investment advisors and banks require customers to sign arbitration clauses prohibiting them from seeking a jury trial or joining class-action lawsuits. Instead, investors are required to use an arbitration forum to settle disputes.

According to a report by the Economic Policy Institute cited by Brown, when corporations take consumers to arbitration, companies win 93% of time. When it’s consumers taking companies to arbitration, the consumers win only 9% of the time.

“If Wells Fargo hadn’t snuck forced arbitration clauses into its contracts, maybe regulators and law enforcement officials could have discovered the bank’s illegal account-opening practices earlier, saving consumers thousands of dollars and massive headaches,” Brown said.

On the securities front, the win rate for customers is dismally low, according to the latest arbitration numbers from the Financial Industry Regulatory Authority (Finra), a private self-regulatory organization that runs the largest arbitration forum for the broker-dealer industry.

Consumers win only 37% of cases that go to an arbitration hearing. Some 59% of cases were directly settled by the parties involved, and 11% were settled through mediation.

On top of the dismal win ratio, nearly one out of every five dollars awarded to investors goes unpaid, according to the Public Investors Advocate Bar Association (PIABA).

“In 2019 alone, over $19 million of awards went unpaid. This represents nearly 20% of all monetary damages awarded that year,” said Christine Lazaro, director of the Securities Arbitration Clinic at St. John’s University’s law school. (Lazaro is also the former president of PIABA.)

Some lawmakers argue, however, that arbitration has its advantages. One of them is Sen. Patrick J. Toomey, a Pennsylvania Republican and ranking member of the Banking, Housing, and Urban Affairs Committee. At the hearing on the legislation, he called arbitration “a fair, cost-effective process for resolving disputes outside of court, which generally leads to better outcomes for consumers than litigation.”

Protecting consumers “doesn’t require the government to stop adults from entering into agreements and undermine their freedom of contract. Nor does it require the government to micromanage the terms of contracts,” Toomey said.

Paul Bland, executive director of Public Justice, a nonprofit that fights forced arbitration clauses in court, said in testimony yesterday that arbitration “is a secretive, shadowy process that provides none of the openness of the public court system.”

Congress has already banned forced arbitration in mortgage contracts and in lending for armed services members and their families. Both steps “have been enormously beneficial to consumers,” Bland said.

At the end of the day, “consumers—not corporations—should be able to decide whether they want to go through the public court system, through mediation, or through arbitration,” Chairman Brown said at the hearing.

Among the co-sponsors of the Senate bill were Democrats Elizabeth Warren and Edward Markey of Massachusetts, Richard Blumenthal of Connecticut, Alex Padilla of California, Ron Wyden of Oregon, Sheldon Whitehouse of Rhode Island, Mazie Hirono of Hawaii, Amy Klobuchar of Minnesota, Dick Durbin of Illinois, Cory Booker of New Jersey and Kirsten Gillibrand of New York. Vermont independent Bernie Sanders is also a co-sponsor.

Finra announced in February that it had hired the law firm of Lowenstein Sandler to conduct a review of its arbitration system in the wake of a controversial court ruling that found Wells Fargo was able to game the system by tilting the selection of arbitrators in its favor.

The judge in the case overturned Wells Fargo’s victory in the case, finding that the bank’s lawyer had a secret agreement with Finra to block some arbitrators from hearing the case.

Finra CEO Robert Cook said in a statement that the regulator takes these concerns very seriously and “recognizes the importance of maintaining trust in the system and is committed to ensuring the [Dispute Resolution Services] arbitration forum is operated in a fair and neutral manner.

There are no regulators overseeing arbitration for registered investment advisors, so there are no statistics about client wins in private arbitration forums, PIABA President Michael Edmiston said.