Equifax, the company that exposed the private financial data of 143 million Americans, is set to report earnings today. Are investors worried about the consequences? Not at all.
“Megabreach creates opportunity,” according to a Wells Fargo securities researcher. He should know: His employer, or at least its retail banking arm, has been suffering its own credibility crisis after it created millions of fake accounts to get more fees out of its customers. Yet Wells Fargo’s stock price is higher than when the scandal broke in 2016, even though an additional 1.4 million fake accounts were uncovered in August 2017.
Another reason his analysis rings true is what happened last night on the floor of the US Senate: Republican lawmakers voted, along with their colleagues in the House, to give financial institutions the ability to force their customers to settle disputes in private arbitration—not in the courts, and not in a class-action lawsuit with other wronged customers.
Perhaps the most pernicious aspect of the forced arbitration clause is that most consumers don’t even realize they are giving up their day in court when they sign on the dotted line.
“A business would never enter into an agreement like this, whether with suppliers or other companies,” Prentiss Cox, a University of Minnesota Law Professor, says. “They would never waive their right to go to court, when they don’t even know what the dispute is.”
Since a 2011 Supreme Court decision affirmed that corporations could mandate arbitration, the practice has become standard in many industries. This summer, the Consumer Financial Protection Bureau (CFPB)—a new agency set up in the wake of the financial crisis—struck a blow for consumers by ruling that the companies under its supervision must nonetheless answer their complainants in court. The Senate vote last night will overrule the CFPB, if president Donald Trump signs off on it.
For an idea of how important this decision is to Equifax, consider that it spent years lobbying alongside other credit-rating companies to be exempted from the CFPB’s rule. Its first reaction to the massive breach of its data was to encourage customers to enroll in its credit-monitoring service—for which the small print included a requirement to settle any disputes in arbitration, rather than in court. After lawyers, including the New York State attorney general, cried foul, Equifax clarified that it would not try to enforce that clause over the data breach.
Wells Fargo, too, bowed under public pressure and agreed to face a class-action suit from the people it fraudulently billed. If companies decide to face the courts only when public outcry grows large enough, there is hardly a guarantee of fair treatment. Research on arbitration shows that vanishingly few consumers come out on top; in one study of four years of arbitration in California, 94% of rulings favored the financial institution.
Equifax does most of its business selling people’s credit histories to other financial companies. Its consumer segment is fairly small, so any dent to its reputation probably won’t dent its profits much. Wells Fargo has paid out several hundred million dollars in civil and regulatory penalties, including a $140 million settlement in a class-action lawsuit. For both companies, top executives retired with tens of millions of dollars in cash pay-outs; hardly an incentive for improvement. And Washington is signaling that it sees no need for things to change.
Contrast this with Yahoo, which revealed earlier this month that every one of its user accounts—all 3 billion of them—were compromised in a 2013 data breach. It had previously admitted to only 1 billion, prompting a class-action lawsuit, which Yahoo tried and failed to get thrown out of court. If Yahoo were a bank and not an internet company, its users would have needed the company’s permission to sue it.
Additional reporting by John Detrixhe