The online investment platform eToro Aus Capital Limited (eToro) has been sued by ASIC in the regulator’s first design and distribution action to protect consumers from high-risk contract for difference (CFD) products.

Allegedly, eToro breached design and distribution obligations, including not acting efficiently, honestly and fairly in line with the licence obligations.

According to ASIC, the targeted market for the CFD product was “far too broad for such a high-risk and volatile trading product where most clients lose money”. The screening test was also “wholly inadequate” to evaluate retail client’s likelihood to be within the target market or not.  

“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,” said ASIC Deputy Chair Sarah Court.

77% lost money in CFD trades

Between October 5, 2021 and June 14, 2023, almost 20,000 of eToro’s clients lost money while trading CFDs. eToro’s own website also states that 77% of retail investor accounts lose funds when trading CFDs with them. 

By “eToro’s conduct”, the commission believes that a significant number of retail clients were in risk of consumer harm when they were exposed to an CFD product that was not consistent with their investment objectives, financial situation and needs.

“CFD issuers must comply with the design and distribution regime and cannot simply reverse engineer their target markets to fit existing client bases.” 

Sarah Court, Deputy Chair, ASIC

“ASIC is concerned eToro’s screening test inappropriately exposed clients to the CFD product. Providers need to ensure clients are receiving products that are consistent with their needs and the design and distribution obligations are being met,” Court added. 

Failure to screen customers fairly

Starting from October 2021, ASIC alleges that: 

• eToro’s CFD target market was far too broad, and unexperienced clients could fall within the target market;
• its screening test was very hard to fail, and did not work properly to exclude unfit customers. Clients could even amend their answers, and were also prompted to selected answers which could result in faulty results; and
• eToro failed to take proper measures to ensure that the screening test were done efficiently, honestly and fairly in line with their financial license.

With this action, ASIC is seeking declarations and pecuniary penalties.

“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,” Court added. “CFD issuers must comply with the design and distribution regime and cannot simply reverse engineer their target markets to fit existing client bases.” 

“This is real action in an effort to protect the consumer and enforce and ensure investment products are suitable for investor types. Also interesting that 77% or retail investor accounts lose money, which supports the regulator’s caution here,” says Rob Mason, our Director of Regulatory Intelligence.

ASIC has earlier taken administrative action related to other high-risk CFD trading, which included stop orders against Saxo Capital Markets and Mitrade Global Pty Ltd.