In April 2011, four months after Shariar Jabbari opened two accounts with Wells Fargo, bank employees used his personal information to open two more accounts without his knowledge or consent, transferring $100 to each of them from one of his legitimate accounts. A few months later, five more accounts were fraudulently created in his name. As we now know, under pressure to meet sales quotas and generate fees for the bank, Wells Fargo employees created upwards of 2 million fraudulent accounts over the course of several years. Last September, the bank was fined $100 million by the Consumer Financial Protection Bureau (CFPB), and earlier this year it agreed to a $110 million settlement to resolve several class-action lawsuits against it.
But back in 2015 when Mr. Jabbari tried to sue Wells Fargo, the bank argued that the case should be dismissed because of a clause in its contracts requiring all disputes against it to be dealt with in private arbitration. These “forced arbitration” clauses, which are intended to prevent consumers from enforcing their rights and keep corporate wrongdoing secret, are increasingly showing up in contracts for everything from telephone service to nursing homes. Wells Fargo started adding them to its contracts in 2012, after Mr. Jabbari opened his accounts and the unauthorized accounts were created – and just as news of the fraud was beginning to emerge. Nonetheless, a California court ruled that Mr. Jabbari’s claim and those of other victims who had banded together to sue the bank had to go to arbitration instead. The consumers appealed, and the bank settled with them on the very day that the CFPB announced its enforcement action.
These weren’t the only consumers who were blocked from suing Wells Fargo. Consumer Attorneys of California provides other examples and background information about how the bank used forced arbitration to try to avoid being held accountable for its illegal actions.
Businesses that put forced arbitration in their contracts claim that it’s for consumers’ benefit. As a study that the CFPB conducted about the use of arbitration in disputes involving financial products and services showed, however, few consumers choose to go to arbitration, especially when the amounts in dispute are relatively low, and in the vast majority of cases the arbitrators find in favor of the companies. This isn’t surprising given the fact that the companies often set the terms of arbitration and choose the arbitrators. Furthermore, companies that make repeated use of these services essentially support them, tipping the scales even further to their advantage. And because the decisions usually aren’t made public, companies can use arbitration to conceal systemic problems such as those at Wells Fargo. Another important point is that lawsuits often succeed in changing corporate behavior, which protects other consumers from being similarly harmed in the future. Arbitration doesn’t do that.
California lawmakers are considering a bill, SB 33, which would help to restore consumers’ rights. If passed, any provision in a contract between a consumer and a financial institution that waives the consumer’s ability to sue or complain to a government agency about fraud or identity theft would only be valid if the consumer knowingly and voluntarily agreed to it, in writing. Crucially, the consumer could not be required to agree to this in order to get the product or service.
CFA endorses SB 33 and also supports the CFPB’s proposed rules to prohibit clauses in financial service contracts that prevent consumers from bringing class-action suits. Those rules, which have not been finalized, are under attack from some members of Congress. In our view, forced arbitration denies justice to victims of fraud and abuse and should be banned from all consumer contracts.