Waiving Class-Action Rights – The Battle Continues

Class Action

Can financial institutions require clients to waive their class-action rights? The U.S. Supreme Court answered this question in the affirmative in a 2011 decision, but now the matter may be under judicial review. The outcome could change the nature of litigation involving financial services in this country.

At the heart of the issue is a first party’s right to file a complaint as part of an injured class versus the counterparty’s right to demand arbitration before legal proceedings.

For over 25 years customer agreements with securities brokerages have routinely required investors to arbitrate instead of litigating in civil court. Despite this standard requirement, however, the industry’s self-regulatory body, the Financial Industry Regulatory Authority (FINRA) has issued specific rules explicitly enabling investors to join class action suits.

In the last few years certain financial institutions have started challenging FINRA’s authority to override their right to arbitration. At least one firm has started requiring their customers to sign agreements expressly relinquishing their right to file a complaint as a part of class action prior to arbitration. The broker contends that FINRA has violated the company’s rights to contractually binding arbitration as granted under the Federal Arbitration Act (FAA).


In an interesting twist, a FINRA Hearing Panel, last week concluded that while the broker had indeed violated FINRA rules, the FINRA rules themselves were unenforceable because the rules violated the Federal Arbitration Act. FINRA has announced that it will appeal the ruling by the panel, so that matter may not yet be settled.

Arbitration vs. Class Action

The securities industry argues that arbitration is a speedy, fair, and low-cost process for investors. “The only ones hurt by this ruling are the plaintiffs’ lawyers,” said a spokesman for the Securities Industry and Financial Markets Association, an industry group, in a statement.

Consumer advocate groups contend that restricting class action rights is just another way for corporations to escape accountability. “If the broker-dealer has harmed a large group of people, they cannot combine their resources to go against the larger corporate entity,” said Christine Hines, consumer and civil justice counsel at Public Citizen, a Washington-based consumer advocacy group.

Which side will prevail is not clear, but the stakes are high. (It’s important to note that seven of the ten largest class action settlements of 2012 were paid by financial institutions, ranging from $100 million to $2.43 billion.) Will it become industry standard to restrict a customer’s class action rights or will FINRA prevail, rewriting the current interpretation of the Federal Arbitration Act?

If such restrictions become standard, securities investors may be largely barred from class action suits and litigation brought by investors in our country may be changed in a fundamental way.

Of course, no government regulator or enforcement agency is a party to customer service agreements—so none are barred under the FAA from bringing an action on behalf of consumers (even where the customers themselves would be barred from doing so).

And What About the Consumer Financial Protection Bureau?

Speaking of enforcement agencies, the new kid on the block, the Consumer Financial Protection Bureau, recently launched a public inquiry into how consumers and financial services companies are affected by arbitration and arbitration clauses. So it may have a dog in this fight as well.

About Richard Magrann-Wells

Richard is a Executive Vice President with Willis Towers Watson’s Financial Institutions Group based in Los Angel…
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