A new Consumer Finance Protection Bureau rule banning "forced arbitration" clauses by financial companies was set to go into effect in 2018 -- until the U.S. Senate killed it last week. Here's what this means for consumers and their rights and why the Republican-controlled Senate voted against it.
A full transcript follows the video.
This video was recorded on Nov. 6, 2017.
Michael Douglass: Let's turn to our third story. In late October, the United States Senate voted to overturn a rule that had been made by the Consumer Finance Protection Bureau, or CFPB, to make filing class action lawsuits a lot easier for consumers. Again, thinking of this from a deregulatory cycle standpoint, this is a pushback against a bank regulation.
Matt Frankel: Right. It's worth mentioning, this rule hasn't gone into effect yet. Nothing is changing.
Douglass: Right.
Frankel: So, the rule would have made it difficult for banks, credit card companies, other financial companies, to prevent class action lawsuits if they did something wrong. A good example would be the Wells Fargo fake account scandal. When customers opened accounts at Wells Fargo, they signed what are called arbitration clauses that prevent them from joining in with other investors to sue the bank, and instead requiring them to solve their disputes through arbitration. Now that this rule has been thrown out, that's pretty much the only option. The Supreme Court ruled that these arbitration clauses are legal, but the Consumer Finance Protection Bureau was trying to amend that in the cases of banks, credit card companies, and such.
Douglass: Sure. And there are some interesting effects, knock-on effects, of this sort of thing with things like the Equifax (EFX 2.35%) data breach, for example.
Frankel: Right. When the Equifax data breach came out, they offered consumers a year of credit protection, but there was a clause in the sign-up form that said that consumers were not allowed to join class action lawsuits against Equifax if they accepted the help. They later wound up taking it down after there was a big backlash about it. But this is the type of thing that is not uncommon. These are just two high-profile incidents that we talked about. Actually, most people listening to this probably signed something saying they wouldn't join a class action lawsuit when they open to their own checking account. So, this isn't new, it's just new protection that was going to go into effect.
Douglass: Right. And, again, it's interesting, because it's not clear that we've begun a real deregulation. Certainly, there's been a lot of talk about it, and, again, the appointment of Jerome Powell, this turn back on the CFPB could be the very beginnings of a push back against what might be perceived to be some overreach. But it's hard to tell exactly whether that's actually beginning, or we're still going to stay where we are on regulation for a while.
Frankel: I was talking about how you can make a case toward removing certain regulations, but this is a good case to be made. A lot of frivolous class action lawsuits are filed against these companies. I know somewhat related example. I invested in a stock years ago and it wound up going down by 40% because I was wrong about the company. And I got 10 emails asking if I wanted to join a class action lawsuit against the company, even though they hadn't done anything wrong. The argument against it is, the only people who are benefiting from this are these trial lawyers who are suing. And there is some evidence that says through arbitration, consumers generally get better settlements than through class action lawsuits. So there's an argument to be made either way. I'm not saying whether it'll be a good rule or a bad rule. Just, there is an argument to be made that some regulations might be overstepping a little bit.
Douglass: Yeah, totally. And that's definitely part of this whole conversation. It's hard to predict whether one of these regulations would or wouldn't have been the right answer, because frankly, there's lots of real-world data and, as you pointed out, a fair argument to be made either way. For me, I'm more interested in seeing this within a broad landscape of banking.
