The Consumer Financial Protection Bureau has made its biggest move since it was inaugurated in 2010. On May 5, the CFPB proposed regulation that would prohibit the use of arbitration agreements in consumer financial products. These are clauses that are packed into the small print, preventing consumers from filing or joining class actions against the firm. These arbitration agreements are valuable to firms as shields against what they regard as frivolous lawsuits, and the proposed regulation has already been labeled a “serious blow to Wall Street.”

The CFPB’s proposed action is widely supported by consumer groups. They believe that arbitration agreements block consumers’ access to courts andstack the deck of justice, giving firms a free pass to deceive and take advantage of consumers. Consumers tried in the past to fight against arbitration agreements by asking courts to strike them down as unfair. They were initially successful. Some courts—especially in California—agreed with the complaints and held that class-action waivers contained in the arbitration agreements are “unconscionable” (the technical legal term for “extremely unfair.”)

But in a landmark decision in 2011, the United States Supreme Court—in a majority decision written by the late Justice Antonin Scalia, along the 5-to-4 conservative/liberal split—overruled the California decisions and held that lower courts may no longer refuse to enforce arbitration agreements. Unless the arbitration forum itself is biased against the consumer (as some have previously been), the agreement to arbitrate should be enforced. The Supreme Court based its decision on a 1926 federal law—the Federal Arbitration Act—that instructed courts to treat arbitration agreements favorably and enforce contracts to arbitrate.

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