(Reuters) - California is one step away from allowing state residents to sue financial institutions for fraud, rather than letting banks force customers to settle disputes in arbitration, after the state legislature gave final approval on Tuesday to a bill inspired by last year's Wells Fargo scandal.
The bill, passed by the Democratic-controlled legislature, now requires the approval of Governor Jerry Brown, a Democrat, who is expected to sign it into law shortly.
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.
Mandatory 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 (N:WFC) to court over last year's disclosures 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 U.S. Consumer Financial Protection Bureau released a rule this summer ending forced arbitration clauses for banks and credit cards, but the rule is not retroactive and does not apply to Wells Fargo customers in the phantom accounts scandal, even those recently revealed as alleged victims.