SB 33: Arbitration agreements covering bank fraud are out

While the federal government rolls back consumer protections that previously allowed victims of financial fraud to sue in civil court, California remains a bulwark in the effort to hold banks and big business accountable for harm resulting from the wrongful conduct of corporations.

Senate Bill 33, authored by Sen. Bill Dodd (D-Napa), prohibits financial institutions from forcing customers to give up their legal rights to adjudicate claims in court when a bank commits fraud or identity theft.

In 2013, it was revealed that Wells Fargo employees created at least 3.5 million fraudulent bank accounts and credit cards in order to satisfy unrealistic sales quotas set by management. The targets of this conduct were often vulnerable consumers: young adults opening their first bank accounts; small businesses; non-English speaking immigrants; and unsophisticated elderly customers.

When customers attempted to sue over fees and other damages incurred as a result of the bank's conduct, Wells Fargo successfully argued that private arbitration agreements in customers' legitimate bank accounts are applicable even to claims for damages arising out of fraudulently created bank accounts.

Wells Fargo, like many financial institutions, forces consumers to give up their right to sue in court when they sign up for bank accounts. Courts generally uphold these arbitration clauses and compel plaintiffs to engage in private arbitration. Private arbitration is disfavored by consumers because it is conducted behind closed doors, and because the arbitrator's fees are usually paid for by the business seeking to resolve the dispute through arbitration.

Senate Bill 33 precludes forced arbitrations in lawsuits against financial institution for claims arising out of accounts that were created by fraudulent, illegal, or otherwise surreptitious means. It applies to chartered banks, credit unions, loan companies, federal depository institutions, and investment advisors registered with the SEC.

SB 33 was signed into law by Gov. Jerry Brown in October 2017, and took effect on Jan. 1, 2018. It was co-sponsored by the Consumer Attorneys of California, State Treasurer John Chiang, and the Consumer Federation of California, and received the support of a litany of pro-consumer organizations.