CFPB Proposed Rule Aims to End Forced Arbitration in Class Actions for Financial Products and Services

On May 5, 2016, the Consumer Financial Protection Bureau (CFPB) proposed a new rule that consumer contracts with arbitration requirements must include a notice to consumers that class actions can be brought to court because they are not affected by arbitration requirements. As the CFPB only has jurisdiction over consumer financial products, the proposed rule grants consumers the right to file or participate in class action lawsuits concerning financial products and services.

Today, companies generally include arbitration requirements in consumer contracts, “forcing” consumers to waive their rights to bring or participate in a class action lawsuit. By signing the contract, often without reading the fine print, consumers “consent” to resolve any future dispute with the company in arbitration proceedings. Additionally, companies choose the arbitration company named in the contract. As arbitration proceedings are outside of the legal system, it is private, without a right to appeal, public review, judge, or a jury to ensure a fair and just outcome. Further, arbitrators do not need to take the law or legal precedent into account in making decisions.

In 2015, the CFPB study concluded that “arbitration agreements are being widely used to prevent consumers from seeking relief from legal violations on a class basis, and that consumers rarely file individual lawsuits or arbitration cases to obtain such relief.” See  CFPB Proposed Rule 1040 here. Congress directed the CFPB to study pre-dispute arbitration agreements under the Dodd-Frank Wall Street Reform and Consumer Protection Act to protect consumers and the public interest, CFPB crafted proposed rule 1040 so that consumers can file or participate in class actions concerning financial products and services. Therefore, as some companies primarily use arbitration clauses to prevent class action lawsuits, the proposed rule may motivate companies to stop using arbitration clauses in consumer contracts altogether.

To submit your comment on CFPB Proposed Rule 12 CFR 1040, identified by Docket No. CFPB-2016-0020 or RIN 3170-AA51, use any of the following methods:

  • Email: Include Docket No. CFPB-2016-0020 or RIN 3170-AA51 in the subject line of the email.
  • Electronic: Follow the instructions for submitting comments.
  • Mail: Monica Jackson, Office of the Executive Secretary, Consumer Financial Protection Bureau, 1700 G Street, NW., Washington, DC 20552.
  • Hand Delivery/Courier: Monica Jackson, Office of the Executive Secretary, Consumer Financial Protection Bureau, 1275 First Street, NE., Washington, DC 20002.

3 Common Consumer Securities Arbitration Claims

What is Securities Arbitration?

Different from lawsuits with a judge and jury, arbitration allows parties to resolve disputes through a neutral third-party called an arbitrator who has knowledge in the areas of disagreement. Arbitrations are now frequently used by commercial businesses as a fast and inexpensive process to resolve complicated disputes.

The Financial Industry Regulatory Agency (FINRA) is a regulatory agency that oversees the securities industry. Every brokerage firm, their representatives and stock brokers are all registered with FINRA. Under the registration agreement, brokers are bound by the FINRA Code of Arbitration Procedure to arbitrate disputes with customers and further, a customer can force brokers to arbitrate disputes.

The Top 3 Common Consumer FINRA Claims:

  1. Unsuitable Investments
    FINRA rules require that your broker must have a reasonable basis to believe that a transaction or investment strategy that your broker recommends is suitable for you. Sometimes called “Know Your Customer” rules, your broker must know the particulars of your finances. Using industry knowledge and litigation experience we can help determine if you were victimized by unsuitable investments.
  2. Churning
    Churning occurs when a broker buys and sells securities in an account mainly for the purpose of generating commissions that benefit the broker. It may not matter if the trades are profitable for you if they were undertaken for the purpose of generating commissions. We can help evaluate whether you were a victim of account churning and what amount of damages you suffered as a result.
  3. Mutual Fund Abuses
    It is widely understood that mutual funds are not suitable for use as short term trading vehicles but that may not stop an unscrupulous broker. Sometimes a mutual fund held for several years can be the subject of abuse because of back-end loads — fees charged where mutual fund shares are sold before they have been held for a certain length of time. Other abuses can come from failing to advise a customer about breakpoints for certain dollar amounts of investment transactions. If any of these things happened to you, you may be able to recover from the broker or his firm.

For more information or to schedule a consultation, please email me at or call (718) 404-6668. I look forward to working with you!

This material may be viewed as attorney advertising and does not constitute legal advice. This information does not create an attorney-client relationship between you and the author. This article strictly represents the personal views of the author on the date it was written and such views are subject to change without notice.