Australia’s financial regulator has taken legal action against eToro concerning its contract for difference (CFD) product, asserting that the trading platform failed to implement adequate screening tests while offering leveraged derivative contracts to retail investors.
The Australian Securities and Investments Commission (ASIC) revealed on Aug. 3 that it had initiated Federal Court proceedings against eToro’s CFD product, alleging that it targeted a market that was too broad and violated design and distribution rules.
CFDs are leveraged derivative contracts that allow buyers to speculate on the price movements of various underlying assets, including foreign exchange rates, stock market indices, single equities, commodities, and cryptocurrencies, all of which are offered by eToro.
ASIC is suing eToro for allegedly breaching design and distribution obligations and their licence obligations to act efficiently, honestly and fairly #CFD
— ASIC Media (@asicmedia) August 2, 2023
ASIC claimed that the CFDs offered by eToro were excessively “high-risk and volatile” and that the platform’s screening test for the target market did not effectively exclude unsuitable customers from trading the product.
The test was deemed to be easily passed and ineffective in filtering out individuals for whom the CFD product was not suitable. For instance, clients could freely modify their answers, and the platform even prompted them if their selections could lead to failure.
eToro’s crypto CFDs allowed for up to two times leverage on certain assets, with others covering stocks, currencies, commodities, and precious metals.
ASIC’s filing notice emphasised that the risks associated with CFD products were amplified when the underlying assets also possessed their own hazards, particularly in the case of “extremely high-risk volatile products such as crypto-assets.”
ASIC alleged that eToro’s CFD target market was too wide-ranging, encompassing users with little understanding of CFD trading risks.
According to ASIC, between October 5, 2021, and June 14, 2023, nearly 20,000 of eToro’s clients incurred losses while trading CFDs.
An eToro spokesperson informed Cointelegraph that the company had revised its CFDs target market determination. The revisions were made for the time period between October 5, 2021, and July 29, 2023, and the spokesperson clarified that eToro’s services remained unaffected and operational.
eToro is now reviewing ASIC’s allegations and intends to respond accordingly.
ASIC deputy chair Sarah Court expressed disappointment in eToro’s alleged lack of compliance, stating that CFD issuers cannot simply manipulate their target markets to fit existing client bases.
In a related development, eToro suspended trading in four cryptocurrencies in the United States after these tokens were labelled as securities in lawsuits brought by the Securities and Exchange Commission.
