Investors vs. Brokers
The scandal over aggressive sales practices at Wells Fargo, where employees allegedly opened millions of fake accounts without customers’ consent, has put a spotlight on so-called “forced arbitration” used by banks in disputes.
Arbitration provisions in contracts prohibit customers from suing a bank. Critics say the “fine-print” restrictions block Wells Fargo customers who were harmed from pressing legitimate claims in court.
Mandatory arbitration also is used by the securities industry to resolve investors’ disputes with their brokers and brokerage firms. The same criticisms are made: The closed-door proceedings are said to be often biased and unfair to investors.
The panels of arbitrators hearing cases are organized by the Financial Industry Regulatory Authority, Wall Street’s policing body. There are two kinds of arbitrators: non-public, people associated with the industry, and public, those without industry ties and from any background. The number of public arbitrators fell by 638, or 18 percent, from April to December 2015.
A FINRA task force has recommended changes to make the process more impartial and transparent. They include actively recruiting new arbitrators, improving their training and considering releasing more information to the public.