The Australian Securities and Investments Commission (ASIC) has initiated proceedings in the Federal Court against eToro Aus Capital Limited (eToro), the popular online investment platform. This legal action is driven by allegations regarding eToro’s handling of their Contract for Difference (CFD) product. This move represents ASIC’s initial legal action focusing on design and distribution responsibilities intended to safeguard consumers.
Alleged Violations of Design and Distribution Duties
ASIC accuses eToro of breaching its obligations to conduct business in an efficient, honest, and fair manner, as stipulated under eToro’s licence. These allegations chiefly concern the suitability of eToro’s intended market and the assessment criteria employed to establish whether a retail client fits within the target market for their CFD product.
The central claim by ASIC is that eToro’s target market for its CFD product was exceedingly expansive, especially considering the high-risk nature of such a volatile trading product, where the majority of clients suffer financial loss. ASIC further criticizes the assessment method, stating that it was entirely unsuitable for determining whether a retail client was likely to fit within the target market.
The watchdog has expressed its belief that eToro’s actions have most likely led to a significant number of retail clients becoming exposed to a CFD product inconsistent with their investment goals, financial position, and needs. This inconsistency has resulted in a substantial risk of consumer detriment. According to ASIC’s accusations, eToro’s approach between October 5, 2021, and June 14, 2023, resulted in almost 20,000 clients losing money while trading CFDs. This assertion is supported by a statement on eToro’s website declaring that 77% of retail investor accounts lose money when trading CFDs with their platform.
The Controversial Design and Screening Test
From October 2021, ASIC alleges that eToro’s CFD target market was excessively wide. For instance, a retail client with a medium-risk tolerance but lacking experience and understanding of CFD trading risks was still considered within the target market.
ASIC also criticizes the company’s screening test, labeling it as overly lenient and ineffective in filtering out customers for whom the CFD product would be inappropriate. It points out that clients were allowed to modify their answers without limitation and were even prompted when their responses could potentially lead to test failure.
Furthermore, ASIC claims that eToro neglected its duty to ensure the efficient, honest, and fair provision of the financial services covered by its licence, particularly when it applied its flawed screening test to decide whether to issue the CFD product to retail clients.
Court concluded, “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.”
ASIC’s Plan of Action
As a result of these allegations, ASIC is seeking declarations and monetary penalties from the court. The date for the first case management hearing has yet to be scheduled. To give some context, a Contract for Difference (CFD) is a leveraged derivative contract allowing a client to speculate on the change in the value of an underlying asset, such as foreign exchange rates, stock market indices, single equities, commodities, or crypto-assets.
ASIC has a history of administrative action aimed at protecting consumers from high-risk CFD trading that is not suited to their financial circumstances, as evidenced by stop orders against Saxo Capital Markets and Mitrade Global Pty Ltd.
The design and distribution obligations (DDO) mandate firms to design financial products that meet the needs of consumers, and to distribute those products in a targeted manner. A target market determination, a crucial requirement under DDO, is a public document that outlines the class of consumers a financial product is likely to be suitable for, and factors relevant to the product’s distribution and review.
Conclusion
eToro, a prominent online investment platform, is facing legal proceedings initiated by the Australian Securities and Investments Commission (ASIC). These allegations centre around eToro’s handling of its CFD products, particularly its target market determination and assessment methods. ASIC alleges that eToro has exposed a large number of retail clients to the high-risk CFD product, causing potential harm due to inconsistency with their investment goals, financial position, and needs.
