The Australian Securities and Investments Commission (ASIC) has taken online investment platform eToro Aus Capital Limited to court over the appropriateness of its target market for contract for difference (CFD) products, alleging breaches in the company's design and distribution obligations.
A CFD is a leveraged derivative contract that allows a client to speculate in the change in value of an underlying asset.
The corporate watchdog alleges eToro’s target market for the CFD product was far too broad for such a high-risk and volatile trading product where most clients lose money, and that the screening test was wholly inadequate to assess whether a retail client was likely to be within the target market.
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 a significant risk of consumer harm.
The regulator alleges that between 5 October 2021 and 14 June 2023, almost 20,000 of eToro’s clients lost money trading CFDs. eToro’s website states that 77 per cent of retail investor accounts lose money when trading CFDs on the platform.
"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," says ASIC deputy chair Sarah Court.
"CFD issuers must comply with the design and distribution regime and cannot simply reverse engineer their target markets to fit existing client bases.
"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."
A spokesperson for the company says eToro 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," the eToro spokesperson says.
"These proceedings relate to the time period 5 October 2021 to 29 July 2023. eToro AUS is now operating with a revised target market determination in place for CFDs.
"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."
The spokesperson says eToro prides itself on working in close collaboration with regulators to ensure consumer protection while also balancing the need for access for individual investors.
"Led by our local team in Sydney, we are committed to growing our business in Australia as well as to providing our existing Australian users with the best possible customer experience," the spokesperson says.
ASIC has previously taken administrative action to protect consumers from high-risk CFD trading, not suited to their financial circumstances. These include stop orders against Saxo Capital Markets and Mitrade Global Pty Ltd.
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