A few weeks ago the Consumer Financial Protection Bureau (CFPB) issued a new regulation restricting the use of mandatory arbitration clauses. If you don’t know what a mandatory arbitration clause is, you’re not alone. You’re just one of the millions of people who don’t read every word of every legal agreement you sign. And that’s why mandatory arbitration clauses have taken off in popularity.
Terms of Service and User Agreements
Every time you open a bank account, apply for a credit card or enter into any sort of financial agreement, you’re asked to sign a ream of paperwork. Many people just sign on the dotted line without reading through everything, because who has the time to read all that fine print? In the CFPB’s mind that has allowed companies to take advantage of consumers. When consumers sign terms of service (ToS) or end user license agreements (EULAs), they very rarely know that they are signing up for.
A few companies have pointed that out through humorous additions to their agreements. One company put a clause in their EULA offering $1,000 to the first person to email them. Only after 3,000 people had agreed to the EULA did one man finally email the company and win the money, demonstrating how few people actually read and understand the agreements they sign. Another company set up a fake Wi-Fi hotspot and required people to agree to give up their first-born child in order to access the Internet. Not surprisingly, people signed up since they didn’t bother reading the terms of the agreement.
Greater Use of Mandatory Arbitration
Financial firms have taken advantage of this by introducing mandatory arbitration clauses into their agreements. Thus, in order to benefit from the services offered by the institution, customers must waive their right to file a lawsuit against the company or take part in class-action lawsuits. Any disputes between the customer and the company must be settled in arbitration, not in court.
Financial institutions increasingly prefer arbitration because it’s cheaper than going to court. They also claim that it’s better for consumers since jury awards in class-action suits often go overwhelmingly to trial lawyers and not to consumers. CFPB’s rule only states that financial institutions cannot forbid class-action suits, leaving them free to insist otherwise on arbitration. But with so many consumers failing to read the terms of their agreements, those arbitration proceedings could be stacked against consumers.
In a free market, whatever two parties agreed to should be outside the ability of government to interfere to change the terms. But since banking isn’t a free market, with entry significantly restricted due to government regulation, incumbent financial institutions wield far more power than they otherwise would be able to, allowing them to bend consumers to their will.
Whether it’s a good idea for the CFPB to step in and use its own muscle to counteract that is perhaps questionable but certainly open to debate. But consumers need to take greater responsibility by reading the agreements they sign and, if they dislike such one-sided agreements, raise a stink with businesses who try to push them around.