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  • Ashley N. Baker

House Votes to Block Anti-Arbitration Rule That Would Hurt Consumers and FinTech

In a proposed regulation that would limit the use of arbitration agreements as a means to settle consumer disputes, the Consumer Financial Protection Bureau (CFPB) justifies its advocacy of the class action process through its own study, which, upon further examination, was no more than a data-filled, 728-page Trojan Horse.

Many faulty reasons for the CFPB’s reliance on class action can be found in the study’s obscured and often irrelevant statistical analysis. After all, the CFPB is a “data-driven agency” — as long as they are doing the driving, that is.

Once the CFPB’s Trojan Horse is set aside, the Bureau’s arguments for the anti-arbitration rule [pdf] become less of a factual interpretation and more of a logical fallacy. This begins with the CFPB’s evaluation of the pros and cons of arbitration agreements and class action litigation.

Fortunately, the rule was recently struck down in the House of Representatives. However, there are a few points points we should keep in mind in light of any new rulemaking:

The CFPB ignores differences in arbitration and class action in providing consumer relief.

Arbitration agreements, as the Chamber of Commerce noted, are effective in obtaining consumer relief on claims that would be impossible to pursue through litigation. A claim must be large enough to secure representation from a class-action attorney. Additionally, the claim must be granted a class certification.

Another reason for the use of arbitration agreements is that many consumer claims are far too specific and too individualized for the class action process.

What is the purpose of a class action suit? The efficacy of a class action suit is less related to the settlement and more related to its ability to threaten companies with bad publicity for abusing a large number of consumers.

According to the CFPB’s October 7, 2015 announcement of its anti-arbitration proposal, class action suits are intended to achieve a deterrent effect:

"When companies can be called to account for their misconduct, public attention on the cases can affect or influence their individual business practices and the business practices of other companies more broadly. Proponents of class action suits argue that class action suits can be successful even if the relief amount rewarded to consumers is insubstantial."

In this sense, class action holds companies accountable for widespread harm that would typically go unnoticed. It serves as a very public deterrent for bad behavior and can force a company to change its products or services for the better.

Class action litigation and regulatory agencies are both designed to monitor corporations.

Class action suits can be used to reduce government regulation as it provides the private sector with an opportunity to take up the oversight function. But the CFPB, as a regulatory agency, has no interest in reducing regulations.

If not used to reduce government regulation, perhaps class action could be used to supplement regulatory enforcement. This role, however, is directly disputed by the findings of the CFPB’s study. The Bureau’s study found that fewer than 9% of regulatory enforcement actions occurred as a result of class action.

There is an intrinsic link between regulatory agencies and class action. The CFPB was designed to monitor the exact type of activity that would be the subject of a successful class action claim: business misconduct that affects a large number of consumers.

The CFPB already has examination authority, a consumer complaint database, and a vast degree of enforcement authority of its pre-existing regulations. With this amount of enforcement power, the threat of a class action suit is insubstantial in deterring wrongful conduct.

Accordingly, the efficacy of class action is fundamentally at odds with the very existence of the CFPB. The broad-reaching regulatory authority of the CFPB, combined with the Bureau’s enforcement authority, undermines any claim that class action plays a significant role in consumer protection.

If class action suits were effective in monitoring businesses for fraud and other types of widespread harm, there would be no need for an agency such as the CFPB.

Through the anti-arbitration rule, the CFPB is endorsing a process that’s ineffectiveness lead to the Bureau’s very creation.

This reasoning isn’t just illogical — it creates yet another instance of regulatory agency overlap with the powers delegated to our three branches of government. Regulatory overreach doesn’t seem to need a logical justification.

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