Federal regulators are taking a closer look at those restrictive contract provisions that force consumers to arbitrate disputes — barring them from suing a company individually or joining a class-action lawsuit.
And it doesn’t look as if officials are buying into the business world’s claim that such provisions are in consumers’ best interest.
“If you were to look in your wallet right now, the chances are high that one or more of your credit cards, debit cards or prepaid cards would be subject to a pre-dispute arbitration clause,” said Richard Cordray, director of the Consumer Financial Protection Bureau.
“The terms are not subject to negotiation,” he pointed out. “Like the other terms of most consumer financial products, they are essentially ‘take it or leave it’ propositions.”
Many businesses prefer arbitration because settlements are limited and because professional arbitrators, whose fees are typically paid by the company in a dispute, tend not to bite the hand that feeds.
A 2007 report by Public Citizen found that over a four-year period, arbitrators sided with credit card companies 94 percent of the time in disputes with California consumers.
Consumer advocates have long argued that it’s unfair to deny people the right to sue or to band together in class actions, which are often the only effective way of addressing relatively small claims.
The U.S. Supreme Court ruled in a 5-4 decision in 2011 that businesses — phone companies, credit card issuers, cable operators — can include arbitration clauses in their service contracts. The ruling specifically involved AT&T but applied to all companies.
The same financial reform law that created the bureau in 2010 gave it the authority to “prohibit or impose conditions or limitations on the use” of arbitration clauses for credit cards, checking accounts and other financial contracts. That’s what regulators are finally getting around to considering.
Cordray said a preliminary investigation revealed that “few consumers use arbitration at all, at least when compared to the number of consumers involved in lawsuits and class actions.”
One reason, he suggested, is that many consumers might not find it worth their time to arbitrate relatively small sums of money.
Out of tens of millions of people subject to arbitration clauses in contracts for financial services, only 900 used arbitration from 2010 to 2012, investigators found.
The U.S. Chamber said “prohibiting or regulating arbitration will harm consumers more than it would benefit them.”