In a July 2017 rule, the Consumer Financial Protection Bureau (CFPB) “prevented financial institutions from including forced-arbitration language in contracts for things like credit cards and car loans.”  That upset the financial services industry, because in their experience, compulsory arbitration is often the faster and less costly choice for resolving disputes when compared with participation in class action litigation.  Now the president plans to block the rule.

To make sense from this, we will take the consumer’s perspective.

Attorneys, especially those in the class action wing of the tort bar, lobbied the CFPB to ban compulsory arbitration.  They claimed that litigation was often a better avenue for consumers and therefore consumer access to class action litigation needed to be preserved.  The Senate took the position that “lawsuits were not beneficial to consumers” and it agreed to overturn the CFPB rule banning compulsory arbitration.

Neither the financial services industry nor the class action attorneys have a clean record in protecting consumers.  Days after admitting to a shameful cyber-breach affecting 143 million consumers, Equifax altered its contracts with consumers, limiting dispute settlement to mandatory arbitration.  Equifax correctly anticipated a deluge of damages incurred by consumers, mindful that arbitration could constrain those legal costs and damages.

The class action attorneys and their representatives in Congress came out in force, shedding crocodile tears for the consumer.  Among the preposterous claims they offered is that class action litigation produces a better financial outcome for the consumer.  The truth is that sometimes it produces a decent outcome (e.g. Tobacco litigation), sometimes it fails, and too often the attorneys pocket a fortune while consumers are offered the equivalent of cents-off coupons.

In a class action suit against Sony, the settlement proposed by the plaintiff’s attorney and Sony would give 80% of the $2.85 million award to the plaintiff’s attorneys and 20% to Sony’s victims.  The 20% came as a $55 maximum per claimant.  To qualify, the claimant had to produce copious legal documents, attest to both their intentions at the time of original purchase almost a decade ago, and to their subsequent use pattern after the purchase.  About 25% of claimants were unsuccessful at producing the required bale of documentation.

The Judge in the Sony case pointed out that few costs should have been incurred because little discovery had been done, the case had barely started before the settlement was proposed, the requirements imposed on the claimants were unreasonably burdensome, and their attorneys were victimizing the claimants a second time.

Some class action suits produce an unfair outcome for consumers.  They are not the social justice nirvana portrayed by the tort bar and its toadies.  It is no surprise that Congress is considering reforms to curb the worst class action abuses.

When an attorney offers to represent the consumer “on contingency” (i.e., for 33% to 40% of the eventual award), sometimes the case succeeds, but sometimes it fails, leaving the attorney and the victim without reimbursement.  There is no ideal dispute resolution.

Still, consumers deserve the freedom to exercise any of the options they might choose when they feel abused.  We do not need sanctimonious support from a self-serving class action bar nor from Congress pretending it knows best what consumers must do.

Indeed, in dispute resolution, financial services firms should not be allowed to foreclose consumer’s choice of a suit or arbitration.  However, it is rational to allow firms to charge more for their services, or offer less service when consumers choose options (such as class action dispute resolution) that cost the firm more.  Conversely, class action settlements should be controlled in a manner that thwarts greedy attorneys from hogging monetary awards.