How Do We Stop Big Banks Like Wells Fargo from Avoiding Liability for Fraud?

September 23, 2016

Wells Fargo


Over the past five years, Wells Fargo opened more than 2 million bogus deposit and credit card accounts in its customers’ names without their knowledge or consent.  The practice let the company reap millions by charging its customers unwanted fees and allowed Wells Fargo employees to boost their sales figures and make more money.  And employees were discouraged from pointing out the fraud: when employees reported the practices to the ethics hotline, they were fired.

The thing is, Wells Fargo isn’t alone.  Thomas Curry, the head of the Office of the Comptroller of the Currency, told a Senate panel this week that the agency is investigating whether other banks have employed similar high-pressure sales tactics that led to fake accounts.

How are banks able to get away with this?

Mandatory, binding arbitration clauses with class action waivers.

These clauses, which are typically buried in the fine print of any customer agreement—be it for cable, a credit card, your cell phone, even for nursing home care—prevent you from suing the company in court for violations of the law or even fraud.

This is what happened to Wells Fargo customers who tried to hold the company accountable in court for opening up bogus accounts in their names: Wells Fargo moved to compel arbitration, and the customers’ cases were dismissed.  These cases—several of which were class action lawsuits—would have provided the necessary leverage individual customers need to fight the unlawful practices of a large bank like Wells Fargo.  Unfortunately, Wells Fargo’s customer agreement doesn’t even allow its customers to collectively arbitrate their claims, and each customer’s damages are typically too small to make pursuing the complaint in arbitration worthwhile.  The result?  Wells Fargo’s fraudulent practices went unchecked until recently, when the Consumer Financial Protection Bureau (“CFPB”) fined Wells Fargo $100 million for its widespread practice of opening these secret accounts.

Senator Elizabeth Warren recognized the problem with Wells Fargo’s arbitration clause: “If we had class action on this in 2010, 2009, 2008, the problem never would have gotten so out of hand.”

The CFPB released a study last year finding that arbitration agreements like Wells Fargo’s don’t provide a meaningful way to resolve disputes or provide customers with relief for unlawful practices.  Importantly, the study noted that consumers got far less relief from arbitration than class actions, and that, over a five-year period, at least $1.1 billion was paid or scheduled to be paid to at least 34 million consumers through class action settlements.  Based on this study, the CFPB has proposed a rule that would ban the use of mandatory, binding arbitration clauses with class action waivers in certain consumer financial services agreements.  This rule, according to the CFPB, would “incentivize companies to comply with the law to avoid group lawsuits.  Arbitration clauses enable companies to avoid being held accountable for their conduct.  When companies know they can be called to account for their misconduct, they are less likely to engage in unlawful practices that can harm consumers.”  And when companies do violate the law, class action lawsuits would provide consumers with “opportunities to obtain relief from the legal system that, in practice, they otherwise would not receive.”

The Wells Fargo scandal demonstrated to the public that the CFPB’s rule banning big banks’ arbitration practices is necessary to enforce the law and deter fraudulent practices.  I would encourage voters to remember that this coming November, as Republicans have repeatedly tried to undermine the efforts of the bureau.


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