Will arbitration replace class actions in investor disputes?

judge-e1436288505356Recently, the Consumer Financial Protection Bureau has been trying to implement mandatory arbitration of individuals against businesses rather than allowing class actions. When signing up for financial products, most contracts waive the customer’s right to participate in class-action lawsuits against the company. By law, brokerage firms are not allowed to include such statements in agreements under the Financial Industry Regulatory Authority laws. FINRA states that investors can either follow through with arbitration (taking direct action) or become part of a class action.  An investor’s decision to opt-out or stay a part of the class is generally based on the size of their loss.

Investors that have suffered a large loss don’t always consider the option of pursuing direct arbitration. An investor can potentially recover significantly more in a private action compared to what they would recovery by joining the class. The opt-out option is generally a quicker process compared to the length of a class action which may take years to be resolved. FINRA does give the option to request hardship waivers for arbitration filing fees which are scaled to the size of the claim. Investors can also represent themselves or receive assistance from securities arbitration clinics. Investors should be wary of whether the firm or broker they are dealing with is regulated by FINRA because if they are not registered, investors may not have access to FINRA’s arbitration arm.

Read more about arbitration vs class actions in investing here.

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