ASIC Takes eToro to Court Over CFD Investor Identification

The Australian Securities and Investments Commission (ASIC) has taken legal action against eToro’s Australian branch. The case concerns the alleged contract violations for differences (CFDs) offerings. ASIC claims that eToro Aus Capital Limited neglected its design and distribution obligations (DDO) and failed to operate in a manner that is efficient, honest, and fair.

First Legal Action Against a CFD Broker by ASIC

In October 2021, ASIC implemented the DDO rules, demanding strict compliance from finance companies. Saxo Capital Markets and Mitrade faced temporary stop orders from ASIC but managed to rectify their breaches, leading to order revocation. This lawsuit marks ASIC’s inaugural legal action against a CFD broker for DDO rule violation.

eToro’s Screening Test Deemed Inadequate

The case against eToro centers on the suitability of their target market assessment and retail client screening for CFD products. ASIC asserts that eToro’s target market was overly broad, and the screening test must be revised. The regulator highlighted that eToro’s screening test was too easy to pass, rendering it ineffective at eliminating unsuitable customers.

High Risk and Volatility of CFDs

CFDs are risky trading products allowing traders to speculate on prices of various assets, including forex, indices, and shares. ASIC noted that nearly 20,000 eToro clients lost money trading CFDs between October 5, 2021, and June 14, 2023. Despite the unsuitable products, the regulator suggests that eToro might have exposed many retail clients to the risks of CFDs.

Sarah Court, Deputy Chair of ASIC, emphasized that “CFD target markets should be narrowly defined due to the high risk of retail clients losing all deposited funds. CFD issuers must comply with the design and distribution regime and cannot modify their target markets to fit their current client bases.

The court expressed disappointment with eToro’s alleged non-compliance, given its market reach and brand recognition locally and globally.

ASIC aims to get declarations and monetary penalties against the Israel-based broker through this lawsuit.

In response, an eToro spokesperson stated: “eToro AUS is examining the allegations lodged by ASIC in these proceedings and will respond appropriately. There is no disruption to eToro AUS clients’ service or significant impact on eToro’s worldwide business. These proceedings are relevant to the period from October 5, 2021 to July 29, 2023. eToro AUS currently operates with a revised target market determination for CFDs.”