The allegations pertain to eToro's contract for difference (CFD) product and involve breaches of design and distribution obligations, as well as eToro's licence obligations to act efficiently, honestly, and fairly.
The focus of the case is on the appropriateness of eToro's target market for the CFD product and the screening test used to assess whether a retail client belongs to that target market. ASIC contends that eToro's target market was too broad for a high-risk and volatile trading product, where most clients end up losing money. Furthermore, ASIC claims that the screening test was inadequate in determining whether a retail client was suitable for the CFD product.
According to ASIC, this alleged conduct by eToro may have exposed a significant number of retail clients to the CFD product, which was not consistent with their investment objectives, financial situation, and needs, resulting in a substantial risk of consumer harm.
Between 5 October 2021, and 14 June 2023, nearly 20,000 of eToro's clients reportedly lost money trading CFDs. eToro's website itself states that 77% of retail investor accounts lose money when trading CFDs with them.
ASIC emphasizes that CFD target markets should be narrowly defined due to the significant risk of retail clients losing all of their deposited funds. Providers must comply with the design and distribution regime and cannot manipulate their target markets to fit existing client bases.It specifically alleges that eToro's CFD target market was overly broad, and their screening test lacked efficacy in excluding customers for whom the CFD product was unsuitable. For instance, clients could modify their answers without limitation, and the test prompts were designed in a way that clients could pass them easily.
The company further accuses eToro of failing to ensure that the financial services covered by its licence were provided efficiently, honestly, and fairly by applying the screening test to determine whether to issue the CFD product to retail clients.
ASIC seeks declarations and pecuniary penalties from the Court in this matter, and the date for the first case management hearing is yet to be scheduled.
The CFD is a leveraged derivative contract that allows clients to speculate on changes in the value of underlying assets, such as foreign exchange rates, stock market indices, equities, commodities, or crypto-assets.
It's important to note that ASIC has previously taken administrative action against other firms involved in high-risk CFD trading not suited to consumers' financial circumstances.
The design and distribution obligations (DDO) require firms to design financial products that meet consumers' needs and distribute them in a targeted manner. A target market determination is a critical requirement under DDO and provides essential information about the financial product's target market and distribution and review-related matters.
ASIC's Moneysmart offers tips, tools, and guidance to support Australians in making everyday money decisions, including information about the risks and complexities of CFD trading.
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