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Democracy Works Again: Second Company in Two Weeks Drops Threat to Customer Rights

Democracy Works Again: Second Company in Two Weeks Drops Threat to Customer Rights

Steve Rhodes via photopin cc

By Aidan O’Shea

Communications Specialist

Another corporation has just noticed you’d like to keep your basic legal rights, please.

For the second time in as many weeks, a company’s attempt to rip away a fundamental right from consumers ended after consumers made their voices heard.

Two weeks ago, General Mills dropped a forced arbitration clause – language that says that its customers can’t sue it or take it to court if they believe the corporation has cheated or injured them, and in some cases bans classes of wronged consumers from suing collectively – following damning news coverage and a wave of angry customer feedback. A bizarre element of General Mills’ policy was that a mere click onto its website could sometimes constitute “consent” to waiving the right to go to court.

Then, on April 24th, the brokerage Charles Schwab & Company agreed to pay a $500,000 fine to the financial industry’s self-regulatory institution, the Financial Industry Regulatory Authority, for violating that body’s rules prohibiting bans on customers bringing class-action lawsuits alongside other investors who feel they have been similarly wronged. From 2011 through last year, Schwab included a clause in its customer-account agreements prohibiting clients from joining class-action suits against the company, and forcing the dispute into the financial industry’s arbitration system instead.

But this is not just a rare case of self-regulation producing meaningful change, it is a victory won for the public, by the public.

A big reason Charles Schwab is stopping its effort to get around this regulation, a Schwab spokesman said, is that the firm “heard clearly that a number of our clients and members of the general public have strong feelings about maintaining access to class-action lawsuits.”

Though companies often appear contrite and sensible in issuing statements on why they’ve abandoned forced arbitration and class-action bans in contracts, those statements usually follow a period of tooth-and-nail fighting to preserve these powerful tools. As recently as February, it looked as though Schwab was going to get its way when a FINRA panel ruled class-action bans conflicted with recent U.S. Supreme Court interpretations of the Federal Arbitration Act, a decision now overruled by FINRA’s board of governors.

So what’s so important about investors having access to class-action lawsuits against the firms that manage their money? Limiting customers to individual lawsuits or steering them to a pro-industry arbitration process would have meant nothing less than carte blanche to make riskier and more deceitful choices with investors’ money. If a financial services company were to cheat its customers out of money in a systematic way, most victims would not have the money to pursue the litigation on their own, but participants in class actions would, because those suits are by their nature less expensive for a wronged individual. If that systematic cheating seems like a farfetched scenario, consider why Schwab fought FINRA’s fine for two years after it was originally levied, despite only $500,000 being at stake.

Last year, Public Justice Staff Attorney Amy Radon noted that just before Schwab began its fight against class actions, it had “recently spent $320 million to resolve investor claims of state and federal securities law violations, which arose after the Securities and Exchange Commission found that executives at Schwab misled investors about the risks of one of the company’s funds, and committed fraud.”

Public Justice Senior Attorney Paul Bland sees the April 24th ruling against Schwab as a relief for many investors.

“If there are no penalties for lying to the public in ways that falsely manipulate securities prices, then everyone’s IRA or 401(k) is a lot more at risk,” Bland said.

Massachusetts Secretary of the Commonwealth William Galvin called FINRA’s previous pro-Schwab decision “akin to giving every rogue broker-dealer the green light to steal from their customers in small dollar amounts.”

Corporations presumed that you didn’t care about your rights. You showed them otherwise this month. Keep it up, it’s working.