By George H. Friedman*
For most of my fourteen years as FINRA’s Director of Arbitration, I perceived myself to be tilting at windmills trying to make the case that FINRA’s arbitration program was the fairest consumer arbitration program is existence. I won’t bore readers by repeating here the many facts backing up my assertion. They are set forth at length in my March 2015 SAC guest blog post, CFPB Issues Final Report on Arbitration, Telegraphing a Ban or Limits on Arbitration. Should SEC follow Suit? (the short answer was “No”). Every so often, a critic of the forum would begrudgingly acknowledge that the arbitration program was pretty fair compared to other consumer programs, but there was always a “but” attached to the compliment (“but arbitration should not be mandatory; but there should always be an option; but the industry arbitrator should be eliminated…”).
October 7th brought sweet vindication, albeit almost three years after I retired from FINRA. How so? In revealing its intended rulemaking on mandatory use of predispute arbitration agreements (“PDAAs”) in contracts for consumer financial products and services, the Consumer Financial Protection Bureau (“CFPB”) said “We propose that consumer financial arbitration programs should look just like FINRA’s arbitration program.” OK, they didn’t officially say that, but they might just as well have.
To review, Dodd-Frank section 1414 bans outright PDAAs in residential mortgage contracts, and section 1028 directs the CFPB to study the use of PDAAs in consumer financial products and services and later report to Congress. On March 10th the Bureau issued its Final Report to Congress. Dodd-Frank also vests authority in CFPB to develop regulations banning, limiting, or conditioning PDAA use (SEC has similar rulemaking authority but has not yet exercised it). At a field hearing on arbitration in Denver on October 7th the CFPB announced that it would begin the rulemaking process.
Surprise! Mandatory Arbitration is OK for now, but no Class Action Waivers
To me, the proposal’s key takeaways are: 1) a ban on class action waivers (described by CFPB as a “free pass” for companies); 2) no ban for now on predispute arbitration agreements; and 3) further study and data collection of consumer financial arbitration (also possible publication). A pre-hearing statement on the CFPB Website summarizes the intended rulemaking as follows: “The proposals being considered would not ban arbitration clauses in their entirety. However, the clauses would have to say explicitly that they do not apply to cases filed as class actions unless and until the class certification is denied by the court or the class claims are dismissed in court. The proposals under consideration would also require that companies that choose to use arbitration clauses for individual disputes submit to the CFPB the arbitration claims filed and awards issued. This will allow the Bureau to monitor consumer finance arbitrations to ensure that the process is fair for consumers. The Bureau is also considering publishing the claims and awards on its website so the public can monitor them.”
FINRA Class Action Rule Referenced but not followed entirely
In support of the proposed CAW ban, CFPB’s 34-page outline references on page 17 FINRA’s Rule 2268(f), and Rule 12204(d). The latter provides that an industry party “may not enforce any arbitration agreement against a member of a certified or putative class action with respect to any claim that is the subject of the certified or putative class action until: the class certification is denied; the class is decertified; the member of the certified or putative class is excluded from the class by the court; [or] the member of the certified or putative class elects not to participate in the class or withdraws from the class …”
I was somewhat surprised to see that CFPB’s proposal apparently will not allow a consumer to opt out of a class action and pursue an individual arbitration, as the FINRA Code of Arbitration Procedure for Customer Disputes does. I’m not sure if that was done on purpose or was an oversight.
Data Gathering and Possible Publication
The third prong of CFPB’s intended rulemaking is collecting data on arbitration claims and awards, and possible publication of same. Sounds somewhat like FINRA’s program. A wealth of statistical data is already published on the FINRA Website, and of course arbitration awards have been publicly available for free on the Website for years. While FINRA doesn’t yet publish detailed data on its caseload, as AAA and JAMS do, it certainly could if the SEC were to require this as part of its own Dodd-Frank arbitration rulemaking.
What will CFPB do about Mandatory Arbitration?
What are the next steps in the rulemaking process? CFPB, the Office of Management and Budget, and the Small Business Administration Office of Advocacy will convene a Small Business Review Panel “to consider the potential impact of the proposals the Bureau is considering on small businesses. Following completion of the Panel process, consideration of the Panel’s recommendations, and other stakeholder outreach, the Bureau expects to commence rulemaking.” A list of discussion issues for the small business representatives can be found here.
The intended data and award collection is meant to give the CFPB a basis for deciding what to do eventually about mandatory arbitration. In an article I published last summer, What’s a Regulator to Do? Mandatory Consumer Arbitration, Dodd-Frank, and the Consumer Financial Protection Bureau, I made a proposal on the mandatory PDAA issue. Specifically, I suggested in my ABA article that CFPB should write rules that impose conditions on the use of PDAAs in contracts for consumer financial products and services – but not ban PDAAs outright (so far, they are listening). Specifically, I said the CFPB rules should provide: a) in a consumer contract, any predispute arbitration agreement must be clearly identified, optional, and separately signed or clicked by the customer; and b) a customer cannot be denied goods or services if the customer declines the arbitration option.
When should the customer get this choice? I wrote, “the customer should have a choice about whether to submit disputes to arbitration, but this choice should be made when the contract is signed. Requiring all parties to agree to arbitration after a dispute arises – could actually harm customers because businesses offering services would sometimes decline to arbitrate, making the dispute resolution process unpredictable for the customer.”
It’s still a good plan.
What will SEC do?
CFPB will evidently steer clear of SRO arbitration, leaving that to the SEC as Dodd-Frank seems to contemplate. In prepared remarks, CFPB from Director Richard Cordray said that the rules if approved “would apply generally to the consumer financial products and services that the Bureau oversees, including credit cards, checking and deposit accounts, certain auto loans, small-dollar or payday loans, private student loans, and some other products and services as well.”
I don’t see CFPB’s action spurring calls for SEC to exercise its Dodd-Frank authority to ban PDAAs. Why not? Read on….
The bottom line for now is CFPB will be proposing what is essentially the current state of affairs in securities arbitration: 1) PDAAs are allowed; 2) CAWs are not enforceable; and 3) awards and other program statistics are public. After years of futile, frustrating windmill tilting, I can finally give two things a rest: 1) the federal agency charged with ensuring protection of consumers of financial products and services is proposing an arbitration system that looks remarkably similar to the one I directed for 14 years; and 2) my beloved Mets are back in the postseason. Things are looking up!
*George H. Friedman, an ADR consultant and Chairman of the Board of Directors of Arbitration Resolution Services, Inc., retired in 2013 as FINRA’s Executive Vice President and Director of Arbitration, a position he held from 1998. In his extensive career, he previously held a variety of positions of responsibility at the American Arbitration Association, most recently as Senior Vice President from 1994 to 1998. He is an Adjunct Professor of Law at Fordham Law School. Mr. Friedman serves on the Board of Editors of the Securities Arbitration Commentator. He is also a member of the AAA’s national roster of arbitrators. He holds a B.A. from Queens College, a J.D. from Rutgers Law School, and is a Certified Regulatory and Compliance Professional (Wharton-FINRA Institute).
See http://www.indisputably.org/?p=4234 and http://www.investmentnews.com/article/20120905/FREE/120909978. Also, FINRA’s arbitration program got high marks when measured against the “arbitration fairness index” created by Professor Tom Stipanowich, a leading authority in the arbitration field.
 I admit I was surprised that CFPB’s proposal does not ban predispute arbitration agreements for now. I had thought a CFPB ban on PDAAs was a foregone conclusion.
 20:4 ABA Dispute Resolution Magazine 4 (Summer 2014). See also The Arbitration Fairness Act: a Well-intentioned but Potentially Dangerous Overreaction to a Legitimate Concern, 2013:1 Securities Arbitration Commentator 1 (June 2013).