According to the ruling, issued by a Financial Industry Regulatory Authority panel, Charles Schwab’s move to ban class-action lawsuits is in line with federal law. In 2011, Charles Schwab modified customer account agreements to prohibit class-action lawsuits. The company also moved to change how arbitration cases are consolidated. FINRA argued Schwab’s move violated FINRA’s own regulations by limiting clients’ rights to file a lawsuit.
The hearing panel agreed that FINRA’s rules were being violated, according to Reuters (2/21/13), but found that FINRA’s rules are in conflict with the Federal Arbitration Act. The panel’s decision could pave the way for other financial firms to revise their customer agreements. FINRA has since decided to appeal the decision, which now sits with the National Adjudicatory Council.
In 2010, Schwab settled a class-action lawsuit alleging misleading marketing of one of its funds. That lawsuit was reportedly settled for $235 million. In the recent hearing, the FINRA panel fined Schwab $500,000 for its attempt to bar arbitrators from consolidating individual claims. The panel found Schwab had no such right.
Many financial firms have client agreements that require customers to go through arbitration to settle a dispute. There are some concerns that by requiring arbitration, rather than allowing a lawsuit to be filed, customer rights are being severely limited.
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By requiring arbitration to settle a dispute, before the nature of any potential dispute is known, clients’ rights are limited.
Although there are some benefits to FINRA arbitration - including reportedly shorter hearings than in court and binding decisions - there have been concerns raised that FINRA arbitration panels favor financial firms and businesses over individual investors.