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eToro sued for marketing high-risk CFDs to unsophisticated investors
Online investment platform eToro inappropriately exposed unsophisticated clients to speculative contracts for difference (CFDs), a “high-risk and volatile” product that most retail investors lose money on, Australia’s financial markets regulator has alleged in its first design and distribution obligations (DDO) lawsuit over CFDs.
In an action commenced August 2 in the Federal Court in New South Wales, the Australian Securities and Investment Commission claims the target market determination (TMD) eToro used to identify appropriate investors for the risky CFD product was “far too broad” and that its screening test was “wholly inadequate”.
ASIC has been ramping up its DDO enforcement in recent months, warning financial product issuers in May to “lift their game” after finding “across the board” deficiencies in marketing materials. It has previously issued stop orders against Saxo Capital Markets and Mitrade Global to protect consumers from high-risk CFD trading; this is the first court action.
The lawsuit alleges eToro’s overbroad TMDs meant retail clients fell within the target market for CFDs if they had a medium risk tolerance, even if they were not experienced investors and had no understanding of the risks involved in trading CFDs.
“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,” ASIC deputy chair Sarah Court (pictured) said in a statement.
As a result of eToro’s conduct, ASIC alleges, a significant number of its retail clients have likely been exposed to risky products that were inconsistent with their investment objectives and financial situations, with a “significant risk of consumer harm”.
The DDOs require firms to design financial products to meet consumers’ needs and distribute them in a targeted manner, using a TMD to set out the class of consumers for which the product is likely appropriate.
ASIC argues that CFDs – leveraged derivative contracts that allow investors to speculate in changes in the value of an underlying asset, such as foreign-exchange rates, stock market indices or commodities – are far too risky to be marketed broadly to retail investors. It noted that between October 2021 and June 2023, almost 20,000 of eToro’s clients lost money trading CFDs; it also pointed to eToro’s website stating that 77 per cent of retail accounts lost money trading its CFDs.
“ASIC is concerned eToro’s screening test inappropriately exposed clients to the CFD product,” Court said. “Providers need to ensure clients are receiving products that are consistent with their needs and the design and distribution obligations are being met.”
The regulator further alleges eToro’s screening test was “of no real use in excluding customers for whom the CFD product was not likely to be appropriate” and that the company “failed to do all things necessary to ensure that the financial services covered by its license were provided efficiently, honestly and fairly” by sufficiently screening clients.
“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,” ASIC deputy chair Sarah Court said in a statement. “CFD issuers must comply with the design and distribution regime and cannot simply reverse-engineer their target markets to fit existing client bases.”
ASIC is seeking declaratory relief and pecuniary penalties.
An eToro spokesperson told The Inside Investor the company is considering its response to the allegations, with no impact or disruption of service for Australian clients and no material impact on its global business. The proceedings cover a period from October 5, 2021, through July 29, 2023, and eToro is now using a revised TMD for its CFD products.
“As a business which is regulated by financial authorities in multiple jurisdictions around the globe, eToro is committed to being compliant with applicable rules and regulations in all the jurisdictions in which we operate,” the statement said. “We pride ourselves on working in close collaboration with regulators to ensure consumer protection while also balancing the need for access for individual investors.”
