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WASHINGTON, June 27 (Reuters) - California took another step on Tuesday toward allowing state residents to sue financial institutions for fraud, rather than letting banks force customers to settle disputes in arbitration, as a bill inspired by last year's Wells Fargo scandal passed a key Assembly committee.
The bill has already passed the state Senate. The full Assembly, the legislature's lower chamber, is expected to approve it in a vote toward the end of August, after the summer recess.
Under the bill, judges could override contract clauses that require customers to settle disputes through arbitration in cases where a bank commits fraud using customers' personal information. Arbitration clauses, which have become standard practice since a 2011 U.S. Supreme Court decision, make consumers agree not to sue in the future as a condition of purchasing products or services.
Clauses inserted into Wells Fargo account-opening agreements have blocked customers from taking the third-largest U.S. bank to court over last year's revelations that it opened millions of accounts without customer knowledge. Regulators fined the bank $190 million for the alleged deceit, of which $5 million was to be paid to customers.
The Consumer Attorneys of California backs the state's legislation, and said customers have been trying to sue over the issue since 2013, three years before regulators acted.
"By forcing customers into secretive arbitration, Wells Fargo kept the scandal out of public view, allowing the fraud to mushroom while the bank evaded full accountability," it said in a statement.
Republicans and others say class actions, where people band together to share resources in a single lawsuit, only benefit lawyers who reap high fees and suck up time and money. Consumer-rights advocates portray arbitration as a fixed game where companies hire and pay arbitrators to ensure disputes are settled in their favor.
Momentum to do away with the clauses led the U.S. Consumer Financial Protection Bureau to propose a federal rule last year requiring companies to let customers join class actions. That proposal has stalled in the face of opposition from Republicans, who now control both Congress and the White House. (Reporting by Lisa Lambert; Editing by David Gregorio)