ASIC Sues eToro Over High-Risk CFD Product

The Australian Securities and Investments Commission (ASIC) has commenced Federal Court proceedings against online trading platform eToro, alleging breaches of design and distribution rules. The suit focuses on eToro's contract for difference (CFD) product, a high-risk leveraged derivatives contract that allows users to speculate on various underlying assets' price movements.

On August 3, ASIC announced that it was suing eToro for offering its CFD product to a broad market of retail investors without proper screening tests to exclude unsuitable customers. The regulator contends that eToro’s CFDs, which it describes as "high-risk and volatile," were marketed to an overly extensive customer base.

ASIC alleges that the platform's screening test was "very difficult to fail," allowing clients to change their answers without limitations and prompting them if they selected answers that could lead to disqualification. As a result, a large number of retail clients might have been exposed to a CFD product that was not aligned with their investment goals, financial situations, or needs, thereby increasing the risk of consumer harm.

Furthermore, ASIC disclosed that nearly 20,000 of eToro's clients lost money trading CFDs between October 5, 2021, and June 14, 2023. eToro's website itself acknowledges that 77% of retail investor accounts lose money when trading CFDs with the platform.

"Our message to the industry is that CFD target markets should be narrowly defined given the significant risk that retail clients may lose all of their deposited funds," stated 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 alleges that eToro's CFD target market and its client screening process were insufficient, failing to properly filter out unsuitable customers. Additionally, the regulator accuses eToro of failing to ensure its financial services were provided efficiently, honestly, and fairly.

ASIC is seeking declarations and financial penalties from the Court. However, the date for the first case management hearing has yet to be scheduled.