Brian Smiley comments in Smart Money on investor choices.
In this great litigious nation, you can sue just about anyone – your doctor, your mechanic, even your dog walker. Just not your stockbroker. Angry brokerage customers – and these days, there are plenty of them – have long been forced to take their complaints before a panel of arbitrators, a process, critics say, that is far from consumer-friendly.
But that may be changing, and faster than anyone anticipated. Since the financial crisis began, the practice of forcing consumers into mandatory arbitration has come under increasing public and legal scrutiny. Most recently, Bank of America announced it would no longer force credit-card customers into arbitration if they had a dispute.
The move by banks and others to back away from arbitrations on credit-card conflicts has inspired calls for similar action regarding securities arbitration. Investor advocates have long complained about the process; now the issue has champions on Capitol Hill as well. “Forced arbitration is becoming less and less acceptable to the American public,” said Sen. Russ Feingold (D., Wisc.), a sponsor of the Arbitration Fairness Act, which would ban mandatory arbitration. “The customers of securities brokers deserve to have the option of taking disputes to court if they want to.”
Even some in the brokerage industry are starting to waver. Chase, which last month stopped sending new credit-card disputes to arbitrators, is reevaluating its use of arbitration in all areas, including its brokerage businesses, a spokesman for the bank says.
The problems with broker mandatory arbitration are nothing new, of course, but the financial crisis has drawn them back into the spotlight. Almost 4,500 complaints against brokers were filed through the end of July – an increase of 140 percent since 2007. For years, consumer advocates have argued that the process unfairly favors companies in part because one person on every three-member panel comes from the securities industry. The panel isn’t required to explain its rationale, either. When the process is over, all a customer gets is a “thumbs up” or a “thumbs down.” Less than half of the cases are decided in favor of the customer.
To be fair, compared to other kinds of consumer arbitration, securities arbitration is reasonably well-regarded. It’s run by the Financial Industry Regulatory Authority (FINRA), which is a regulatory body, not a for-profit company with conflicts of interest, as the Minnesota attorney general’s office alleged last month in a suit filed against National Arbitrator Forum, the nation’s largest credit-card arbitrator (the company has since stopped taking new arbitration cases). Securities arbitrators are trained and compensated for their time, and FINRA says arbitration has saved consumers time and money, compared to a long, expensive court case.
Even so, advocates say, customers should get to choose. “We’d like to go back to the days when an investor could compel a broker to arbitration, but he also had the choice to go to court,” said Brian Smiley, the president of the Public Investors Arbitration Bar Association. At the very least, he adds, the securities arbitration process should be more transparent and panelists should be impartial.
In Washington, the Obama administration has already called for an investigation into the fairness of mandatory securities arbitration as part of an overhaul of the nation’s financial regulation system. Feingold’s bill is in the Senate; its complement, sponsored by Hank Johnson (D., Ga.) is in the House. “If we are really changing the mandatory arbitration process, the securities side must change too,” said Johnson.
By Janet Paskin
