Congress and the Consumer Financial Protection Bureau have been fighting over the principle of mandatory arbitration - the idea that companies can make consumers sign away their right to take disputes to court. CFPB proposed a rule to ban this practice, and Congress on Tuesday night struck it down.
This is a bad result, though not because the CFPB rule, as it stood, was the right approach. Adequate and effective redress for consumers should indeed allow for litigation - but with legal rules well-suited to that purpose, which the U.S. doesn’t have. Congress should have left the CFPB rule in place and combined it with tort reform.
At issue are clauses - typically inserted in the fine print of contracts for credit cards, mobile-phone service and more - requiring consumers to pursue any disputes in private arbitration, rather than in a court of law. In some markets, consumers have no real choice but to accept them.
There’s a stronger case for mandatory arbitration than you might think, because class-action lawsuits under the current rules do have serious drawbacks. Frivolous actions often benefit lawyers more than the consumers they’re representing.
This imposes costs on businesses and consumers alike. Arbitrations are often capable of producing better results - but they also have no juries, no rules of evidence and have been known to go terribly wrong. Above all, mandatory arbitration denies consumers recourse in cases where arbitration won’t suffice.
The right response from Congress would have been to leave the CFPB rule in place and reform class-action law, bringing it more in line with other developed nations. This would entail curbing the practice of including plaintiffs who haven’t agreed to participate, placing limits on damages and fees, and allowing judges to make the losing side pay the opponent’s legal costs. Companies and their customers could then be left to choose the appropriate venue for resolving their dispute: the courts, arbitration or mediation.
In merely striking down the CFPB rule, Congress has voted to leave a broken system unrepaired and consumers at risk.