ASIC sues eToro over 'volatile' investment


ASIC has launched legal proceedings against eToro, alleging breaches of design and distribution obligations regarding its contract for difference (CFD) product.

The case focuses on the appropriateness of eToro's target market, and the screening test used by the online investment platform that assessed whether a retail client fell within the target market for its CFD product.

ASIC alleges eToro's target market for its CFD product was far too broad for such a high-risk and volatile trading product where most clients lose money. The regulator also claims that the screening test was wholly inadequate to assess whether a retail client was likely to be within the target market.

asic is suing etoro

ASIC deputy chair Sarah Court says: "ASIC is concerned eToro's screening test inappropriately exposed clients to the CFD product. Providers need to ensure clients are receiving products that are consistent with their needs and the design and distribution obligations are being met."

An eToro spokesperson says: "eToro AUS is considering the allegations filed by ASIC in these proceedings and will respond accordingly. There is no impact or disruption of service for clients of eToro AUS and no material impact on eToro's global business.

"These proceedings relate to the time period October 5, 2021, to July 29, 2023. eToro AUS is now operating with a revised target market determination in place for CFDs."

ASIC considers that eToro's conduct is likely to have resulted in a significant number of retail clients being exposed to the CFD product that was unlikely to be consistent with their investment objectives, financial situation and needs, resulting in significant risk of consumer harm.

The regulator alleges that between October 5, 2021 and June 14, 2023, almost 20,000 eToro clients lost money trading CFDs.

"ASIC is disappointed by the alleged lack of compliance in this case, given eToro's market penetration and the depth of its brand awareness, both in Australia and globally," Court says.

"Our message to industry is that 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."

Further addressing the issue, the eToro spokesperson says: "As a business which is regulated by financial authorities in multiple jurisdictions around the globe, eToro is committed to being compliant with applicable rules and regulations in all the jurisdictions in which we operate. We pride ourselves on working in close collaboration with regulators to ensure consumer protection while also balancing the need for access for individual investors."

ASIC is seeking declarations and pecuniary penalties from the court.

The data for the first case management hearing is yet to be scheduled by the court.

ASIC has previously taken administrative action to protect consumers from high-risk CFD trading, not suited to their financial circumstances, including stop orders against Saxo Capital Markets and MitradeGlobal.

This article first appeared on Financial Standard

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Andrew McKean is a journalist at Financial Standard. He covers superannuation, wealth management and financial advice. Prior to this he has worked freelance for not-for-profit organisations and corporate educators. Andrew has a Bachelor's degree in journalism and non-fiction writing from Macquarie University. Connect with him on LinkedIn or Twitter.