February 14, 2012 update: The change in terms described here goes into effect tomorrow. It’s not too late to switch banks.
If you enter into an agreement with a company, and that company does something to wrong you, most of the time you can avail yourself of the American judicial system to correct the problem. This happens frequently, with both individual lawsuits and class action lawsuits. For example, Bank of America is dealing with several lawsuits stemming from shady fee practices and other policies enacted by Countrywide Financial, a company Bank of America acquired.
Deal of the Day: Earn 1.00% APY on an FDIC-insured savings account at Ally Bank.
In order for bank to protect themselves from problems and major expenses like these is to take away their customers’ rights to a trial with a jury or a judge. This is legal, and you don’t even need to sign these rights away. Companies can change these terms of your banking agreement, and your continued patronage implies that you agree and are willing to waive your rights for the benefit of remaining a customer.
I make it a point to thumb through the mailed statements because banks will occasionally update terms and change fees, and it’s easy to miss this information if I were to only check my account online or in my Quicken software. A few days ago, I received my statement from Wells Fargo in the mail, and discovered a notice informing me that by remaining a customer at Wells Fargo beyond February 15, 2012, I would never be able to be included in a class action lawsuit or sue the bank myself. Any disputes would go through a binding arbitration process.
Binding arbitration has its benefits. It is often less costly, and businesses can generally get a sense for the result before moving forward. The benefits, plainly one-sided, end there.
Binding arbitration is usually detrimental to consumers. The costs for an individual often outweigh the potential reward, and potential rewards are low because binding arbitration often favors the large company over the individual, unlike juries and most judges. It’s easy to see why arbitrators favor big businesses; arbitration is a business, and if they favor a large corporation, that corporation will likely bring more business to the arbitrator.
A consumer initiating arbitration through the American Arbitration Association, the administer Wells Fargo identifies in its new terms, would be subject to fees, such as:
- $250 for telephone consultation if the claim is less than $75,000, higher otherwise
- $750 for in-person consultation of the claim is less than $75,000, higher otherwise
- Up to $125 in additional fees if the claim is less than $10,000, up to $375 if the claim is less than $75,000, higher otherwise
The business would be subject to fees higher than those listed above for the consumer, but the total expense for a corporation could still be considerably less than dealing with a lawsuit. Not every arbitration organization follows the same pattern for fees, though. In some cases, the consumer could spend more money initiating arbitration than filing his or her own suit.
Also a detriment to the consumer, arbitrators are not required to follow an established process. This uncertainty can limit the consumer’s ability to argue. For example, arbitration does not include a discovery process, making it difficult for consumers to present evidence to support their cases. Also, the consumer does not have the ability to choose the arbitrator. The business selects the arbitrator, so it’s clear that this could easily be a biased approach to settling a disagreement.
Binding arbitration is reviled so much that Congress has been inspired to take action to determine whether binding arbitration clauses can be considered legal — in cellular phone contracts, only. So far, this effort has failed to produce any results beneficial for the consumer.
Bank of America and other banks have been the subject of a class action lawsuit alleging they have forced customers into mandatory binding arbitration agreements. The Supreme Court has ruled 5 to 4 in favor of companies’ options to put binding arbitration into customer agreements.
What a consumer can do about binding arbitration clauses
I’ve been a customer of Wells Fargo or its predecessors for most of my life. I’ve had my primary checking and savings accounts at this bank. But with this change, I am not wasting any more time in moving my money out of this bank. It’s not that I anticipate having any problems that require a lawsuit or arbitration, and if I am included in any class action lawsuit, I don’t expect to gain much.
Businesses and employers force binding arbitration on customers when the customers or employees are in a weaker position than the larger entity. For example, with unemployment high, many Americans feel lucky to have jobs. They’re willing to waive rights in order to be employed, and most do. Most customers will be unaware that by continuing to hold their accounts they waive their rights. Others will be aware and not consider this to be an issue worthy of going through the process of closing their accounts. Very few will use this as an incentive to move money elsewhere.
Banking institutions are everywhere, however, and customers have choices. For example, I could move all of my money held at Wells Fargo to Chase Bank. At one point, Chase included binding arbitration in its customer contracts for credit cards but has recently abandoned this approach. There is always a danger that the terms will change, particularly as more big banks want to protect the revenue they earn from fees. With a Chase branch within walking distance to me, this move makes sense, but it still isn’t a perfect solution.
I would prefer to switch to a credit union, but I’ve researched my options many times, and there are no credit unions convenient for me. Additionally, one of the largest and most popular credit unions, USAA, is as bad as Wells Fargo when it comes to members’ rights: USAA requires customers to waive their rights to a trial by judge or jury, just like the bank I intend to leave.
I’ll be moving my money out of this bank as soon as possible.
If you decide to move your business to a company that does not limit your rights, be sure to let the company know exactly why it is lowing your business. Unfair fee practices and binding arbitration could be only two of many reasons you’d be better off being a customer elsewhere.
Read the entire Wells Fargo notice below.
Updated September 24, 2015 and originally published December 23, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.