ASIC Initiated Court Action Against EToro For CFD Violations

The Australian Securities and Investments Commission (ASIC) has initiated legal action against eToro Aus Capital Limited, the popular online investment platform, in the Federal Court over its alleged mishandling of contract for difference (CFD) products. ASIC's case is built around accusations of a breach in eToro's design and distribution obligations and failure to adhere to license obligations to operate efficiently, honestly, and fairly.

The core of the case revolves around the appropriateness of eToros CFD target market and the adequacy of the screening tests it employed to determine whether a retail client fell within the target market for the CFD product.

According to ASIC, eToros target market for the CFD product was inappropriately broad, given the inherently high-risk nature and volatility of the trading product. The investment watchdog claims that most clients end up losing money on these trades, which raises questions about the effectiveness of the screening tests. ASIC alleges that these tests were grossly insufficient in determining whether a retail client was likely to be an appropriate fit for the CFD market.

The regulator has expressed concerns that eToros alleged misconduct could have resulted in a significant number of retail clients being exposed to the CFD product, an investment vehicle that may not have aligned with their financial goals, situation, and needs. This could potentially lead to a substantial risk of consumer harm.

The Commission further alleges that between 5 October 2021 and 14 June 2023, almost 20,000 of eToro‘s clients suffered financial losses from trading CFDs. It is also noted that eToro’s website itself states that a whopping 77% of retail investor accounts lose money when trading CFDs with eToro.

In light of the ongoing case, ASIC Deputy Chair Sarah Court delivered a clear message to the industry: “CFD target markets should be narrowly defined given the significant risk that retail clients may lose all of their deposited funds. CFD issuers must comply with the design and distribution regime and cannot simply reverse engineer their target markets to fit existing client bases.”

She expressed disappointment at the alleged non-compliance, considering eToro's substantial market penetration and widespread brand recognition, both in Australia and internationally.

Further, ASIC alleges that eToro failed to ensure the financial services provided under its license were done so efficiently, honestly, and fairly. The accusations center on the platforms alleged use of a screening test to determine whether to issue the CFD product to retail clients, which ASIC argues may have inappropriately exposed clients to the high-risk CFD product.

ASIC has turned to the court, seeking declarations and pecuniary penalties against eToro. As of now, the date for the first case management hearing has not yet been scheduled by the Court.

To stay informed and updated on the latest news about this case, you can download and install the WikiFX App on your smartphone. You can download the App here: https://www.wikifx.com/en/download.html. Stay tuned as we continue to keep a keen eye on developments in the ASIC vs eToro proceedings and what it means for the future of online investment platforms and CFD trading.