Hunton Retail Law Resource

On July 11, 2017, the Consumer Financial Protection Bureau (“CFPB”) adopted a final rule that bars financial firms from forcing consumers into mandatory arbitration clauses as a condition of opening an account. The rule has two main components:

• Prohibition on mandatory arbitration clauses. The rule prohibits financial firms from using mandatory arbitration agreements that bar a consumer from filing or participating in a class action concerning the covered financial product or service.
• New disclosure requirements. The rule requires providers involved in an arbitration pursuant to a pre-dispute arbitration agreement to submit specified records relating to arbitral and court proceedings, such as initial claims and counterclaims, answers to claims and counterclaims and awards issued in arbitration. The CFPB will post these records on its website beginning July 2019.

The rule applies only to financial companies regulated by CFPB; exemptions include: (1) employers when offering consumer financial products or services as an employee benefit; (2) entities regulated by the SEC and the Commodity Futures Trading Commission; (3) broker dealers and investment advisers overseen by state regulators and (4) state and tribal governments that have sovereign immunity from private suits.

The rule is set to take effect 60 days following its publication in the Federal Register, and applies only to contracts entered into more than 180 days thereafter. It seems certain, however, that it will be challenged in court and via the Congressional Review Act, which gives Congress 60 legislative days to disapprove of it by a simple majority vote. Unless application of the rule is stayed by the courts or disapproved by Congress before its effective date, businesses subject to the rule that currently have mandatory arbitration provisions in their contracts will have to take steps to modify their contracts to comply with the rule or risk regulatory sanctions. Modifying contracts will require substantial lead time, so affected companies should begin now to inventory consumer contracts to determine whether they include binding arbitration clauses, and develop contingency plans.

Although the rule does not apply retroactively to existing contracts, it could substantially increase the future risk of class actions against financial service providers, such as banking and credit card companies.