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Forced Arbitration: The Story of Lost Rights in the Fine Print

At this point, I’m sure you have heard something about Wells Fargo and their ghost account scandal. But, as a refresher, back in September it was revealed that employees at the bank fraudulently opened up 2 million customer accounts without customers’ knowledge of, or approval to do so. These phony accounts earned the bank unwarranted fees and allowed its employees to boost their sales figures exponentially, granting them more money in the process.

It was said that employees went as far to create phony PIN numbers, and fake email addresses, to enroll customers in online banking services, and, as a result, after this jig was up and the bank was found out, the company had fired 5,300 employees relating to this shady behavior.

“The scope of the scandal is shocking,” reported CNN, “An analysis conducted by a consulting firm hired by Wells Fargo concluded that bank employees opened over 1.5 million deposit accounts that may not have been authorized. The way it worked was that employees moved funds from customers’ existing accounts into newly-created ones without their knowledge or consent, regulators say. The CFPB described this practice as ‘widespread.’ Customers were being charged for insufficient funds or overdraft fees — because there wasn’t enough money in their original accounts.”

Additionally, Wells Fargo employees had also submitted applications for well over 565,000 credit card accounts without their customers’ knowledge or consent. Roughly 14,000 of those accounts incurred over $400,000 in fees, including annual fees, interest charges and overdraft-protection fees.

Due to all of this, Wells Fargo was hit with the largest penalty in CFPB history; agreeing to pay $185 million in fines, along with $5 million in refunds to its customers.

Of course, new CEO Tim Sloan came out and apologized to the bank’s customers, ranking restoring trust in the bank as his “immediate and highest priority.” “We’re committed to getting it right,” Sloan said confidently, only before admitting that “it could get a little bit worse before it gets better.”

The biggest problem with this case, however, is not the amount of money, nor is it the loss of faith in the bank, but instead, the general lack of protective mechanisms given to those affected by this situation.

Though Sloan preached about restoring trust with his customers, it is unclear that his actions align with his promises. As customers proceeded to bring their claims to court, they were surprised to learn that the bank had put in an arbitration clause in the fine print of their contract. Hence, customers were obligated to fight to get what they are owed in front of an arbitrator, instead a normal judicial proceeding.

Forced arbitration is an issue that legislators have been dealing with for years now; trying to change these unfair practices that support corporations, but inevitably harm the everyday consumer from bringing an action in court. “If we had class action on this in 2010, 2009, 2008, the problem never would have gotten so out of hand,” said Senator Elizabeth Warren, a Democrat from Massachusetts, while questioning regulators about the practice.

When mandatory arbitration rules are inserted into account-opening agreements, they prohibit customers from joining class actions or suing the bank in court. Instead, the agreements require individual, closed-door arbitration, which further supports the larger corporations, and absolutely cripples the individuals’ chances to succeed under law.

Arbitrators are not required to have any legal training and they need not follow the law. Though expertise in the field is required, it still unjustly removes the entire legality of the situation. Court rules of evidence and procedure, which tend to neutralize imbalances between the parties in court, do not apply. There is limited discovery making it is much more difficult for individuals to have access to important documents that may help their claim. Arbitration proceedings are secretive. There is no right to public access. In addition, Arbitrators do not write or publish detailed written opinions, so no legal precedent or rules for future conduct can be established. Their decisions are still enforceable with the full weight of the law even though they may be legally incorrect. This is especially disturbing since these decisions are binding, so victims have virtually no right to appeal an arbitrator’s ruling.

While arbitration clauses are said to be justified on the grounds that they are “voluntary,” this is hardly true. Arbitration clauses are usually outlined in tiny print, buried in documents and paragraphs and written in legalese that is incomprehensible to most people. Moreover, these clauses are mandatory, meaning that people are compelled to agree to arbitration even before a dispute arises (i.e., “pre-dispute.”). Because entire industries are inserting these arbitration terms into contracts, there is usually little choice but to agree to them. In other words, “consent” is not voluntary, at all.

Arbitration agreements also may preclude some from bringing a class action, a practice recently upheld by the U.S. Supreme Court (AT&T vs. Concepcion), getting injunctive relief (to stop misconduct), or from collecting punitive damages or attorney fees.

As noted above, however, politicians and lawmakers alike are working to rid consumer of these constraints. For example, just last Wednesday, December 7, Lake County News published an article disclosing that State Senator Bill Dodd had recently introduced legislation to protect victims of mass fraud and identity theft.

The article stated that the introduction of this legislation is directly tied to the Wells Fargo scandal, as the bill would help the victims by eliminating the use of forced arbitration clauses in contracts (in this case, that were fraudulently created).

“It’s unacceptable for consumers to be blocked from our public courts to recover damages for fraud and identity theft. Allowing victims their day in court not only allows them to recover, it can prevent more victims by putting an end to illegal business practices,” said Dodd. “With quick federal action on this issue unlikely, it’s critical that California lead the nation to prevent these abuses.”

Dodd’s bill has already gained support from the Consumer Federation of California, the Consumer Attorneys of California, and other consumer advocates. The bill will receive its first committee hearing early next year, and just last week U.S. Sen. Sherrod Brown (D-Ohio) and Representative Brad Sherman (D-Calif.) introduced a federal bill with a similar aim to give customers the ability to go to court to recover damages from fraudulently created accounts.

Time will tell whether following the arch of the Dodd bill, there will be more and more acts which comply with this no-arbitration-movement. If it does, it could have a significant impact on evening the score for individual consumers and lessening the power of banks and corporations alike.

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