The Financial Industry Regulatory Authority (FINRA) has decided to appeal to its appellate body – the National Adjudicatory Council – against The Charles Schwab Corporation ( SCHW - Analyst Report ) . The decision comes after a FINRA hearing panel approved Schwab’s demand to ban class-action lawsuits.

The hearing panel had approved the ban citing it as consistent with the Federal law and the latest Supreme Court analysis of the Federal Arbitration Act. Also, the panel found that though limiting customer’s class action and arbitration rights is against the FINRA rules, it is also in conflict with Federal Arbitration Act, and hence cannot be enforced.

Schwab succeeded in getting the approval for the ban, but on the other hand the hearing panel disallowed its demand to block arbitrators from uniting individual arbitration claims into group hearings. Moreover, the panel penalized Schwab $500,000 for including the group ban in its client contracts. This was a partial win for FINRA.

It all started last year with Schwab revising its customer agreements to incorporate a class-action waiver condition requiring that all disagreements between the brokerage firm and its clientele be arbitrated. This was in contradiction of the FINRA guidelines.

The ruling will profoundly influence the entire industry and is a blow to the FINRA. Schwab is likely to seek dismissal of pending class-action lawsuits. Other brokerage firms, including TD Ameritrade Holding Corporation ( AMTD - Analyst Report ) , E*TRADE Financial Corporation ( ETFC - Analyst Report ) and Interactive Brokers Group, Inc. ( IBKR - Analyst Report ) , may also follow similar suit.

If other brokerage firms start following the suit, it would raise severe investor protection concerns. It is likely to prevent consumers from following class-action litigation due to inability of FINRA’s dispute-resolution forum to handle these types of cases. Moreover, it would strip customers of their right to pursue smaller claims.

We believe that FINRA’s action to appeal against the ban of class-action lawsuit is well justified and is totally in the interest of the consumers.

Schwab carries a Zacks Rank #2 (Buy).