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The finance industry faces a steep, uphill battle in trying to convince the Consumer Financial Protection Bureau that the long-standing use of arbitration agreements is beneficial for consumers.
March 10 -
Advocates of mandatory arbitration say that it is cheaper than litigation and just as fair to consumers. Both claims are suspect.
May 13 -
Even if arbitration does turn out to be beneficial for many consumers, Americans should not lose their constitutional right to a day in court without being aware that they are doing so.
January 22 -
A recent study intended to measure Americans' understanding of arbitration clauses asked the wrong questions. The more germane issue is whether arbitration produces better outcomes for consumers than court and class action litigation.
December 23
Today's consumers have a wide variety of choices to meet their specific financial needs. Thanks to this robust competition, if a consumer is dissatisfied with a product or company, many other providers will be happy to step in and provide superior service. In those rare cases where a dispute arises between providers and customers, arbitration has quickly become the most popular and reliable way to resolve conflicts in a cost-effective and timely manner.
Arbitration is cheaper, faster and more flexible than litigation for both consumers and financial institutions. When given the choice, consumers often choose arbitration. This is why many financial services contracts pre-select arbitration as the means for addressing commercial disputes. If consumers prefer not to have a mandatory arbitration clause, they can choose from one of the many other products that do not require it.
But a recent arbitration
Arbitration is preferable to lawsuits for many reasons. First, class-action lawsuits result in millions of dollars in legal fees but provide little or no benefit to consumers. According to the CFPB's own numbers, an average class action lawsuit member received just $6.29, while the lawyers leading the case received millions. Typically, arbitration results in much higher returns for consumers. The CFPB's data establishes that consumers won 47 cents on the dollar in arbitration cases where they received a recovery, as opposed to the minimal payments received by class action participants. Banning mandatory arbitration clauses will deprive consumers of these benefits.
Moreover, arbitration is a far smoother process than taking lawsuits to court. Unlike trials, which must be scheduled into busy court calendars, arbitration hearings can be scheduled more easily and during non-business hours. Arbitration does not require consumers to hire an attorney and doesn't include many of the burdensome practices of a lawsuit, including an extensive "discovery" period with interrogatories, depositions, and the accompanying witness and document preparation requirements. The result, as illustrated in the
Finally, the CFPB arbitration study does not take into account any of the potential harm that service providers may experience if arbitration is eliminated. For example, the CFPB study fails to address the costs of defending against frivolous class action lawsuits. Companies that save money on defending nuisance lawsuits can pass those savings on to their customers.
Arbitration is an important and economically efficient means of resolving commercial disputes. That is why many financial services contracts choose to use arbitration as an alternative to expensive, ineffective, and time-consuming litigation. Before moving forward, the CFPB should consider the unintended consequences of restricting or eliminating arbitration for U.S. consumers, who could ultimately lose an important avenue for addressing conflicts.
Jason Oxman is chief executive of the Electronic Transactions Association,
the global trade association representing more than 500 payments and technology companies.