The Australian Securities and Investments Commission (ASIC) has initiated legal action against online investment platform eToro, accusing it of failing to market its contract for differences (CFD) product in an honest and fair manner, which has left 77% of retail clients at a loss.
ASIC claims that eToro’s target market for this leveraged trading product was excessively broad for such a high-risk and volatile offering, where the majority of clients incur losses. The regulator argues that the screening test employed by eToro to determine client suitability was insufficient and ineffective in identifying retail clients who belonged in the target market.
According to ASIC, eToro’s practices exposed numerous retail clients to the CFD product, which was unlikely to align with their investment goals, financial situation, and needs, consequently posing a substantial risk of consumer harm. The screening tool was reportedly easy to pass, allowing clients to modify their responses without limit and providing prompts to assist clients in answering in a way that wouldn’t result in disqualification.
Between October 5, 2021, and June 14, 2023, nearly 20,000 of eToro’s clients reportedly lost money trading CFDs. ASIC Deputy Chair Sarah Court emphasized the necessity for narrowly defined target markets due to the significant risk of complete loss of funds by retail clients when trading CFDs. She noted that CFD issuers must adhere to the design and distribution obligations and cannot simply alter their target markets to accommodate their existing client base.
ASIC expressed disappointment regarding the alleged non-compliance, especially given eToro’s substantial presence and brand recognition in both Australia and globally.
In response, eToro stated it has implemented a revised target market determination for CFDs and is thoughtfully considering the allegations brought forth by ASIC, indicating that there would be no disruption to services for eToro AUS clients and no significant effect on its global operations.