ASIC sues eToro for reverse engineering CFD target markets to fit existing client bases
“Our message to the industry is that CFD target markets should be narrowly defined given the significant risk that retail clients may lose all of their deposited funds. CFD issuers must comply with the design and distribution regime and cannot simply reverse engineer their target markets to fit existing client bases.”
The Australian Securities and Investments Commission has filed a civil complaint against online investment platform, eToro Aus Capital Limited (eToro), regarding its contract for difference (CFD) product.
This is ASIC’s first design and distribution action to protect consumers from high-risk CFD products since the restrictions on CFD products for retail investors came into effect in 2021.
ASIC says eToro’s target market for CFD products is far too broad
Proceedings in the Federal Court have commenced as ASIC alleges eToro breached its design and distribution obligations to act efficiently, honestly, and fairly, according to its AFS license.
The case focuses on the appropriateness of eToro’s target market, and the screening test used by eToro to assess whether a retail client fell within the target market for the CFD product.
The financial watchdog alleges eToro’s target market for the CFD product was far too broad for such a high-risk and volatile trading product where most clients lose money, and that the screening test was wholly inadequate to assess whether a retail client was likely to be within the target market.
ASIC further claims that eToro’s conduct is likely to have resulted in a significant number of retail clients being exposed to the CFD product that was unlikely to be consistent with their investment objectives, financial situation, and needs, resulting in a significant risk of consumer harm.
Between 5 October 2021 and 14 June 2023, almost 20,000 of eToro’s clients lost money trading CFDs, the regulator adds. eToro’s website states that 77% of retail investor accounts lose money when trading CFDs with eToro.
“CFD issuers cannot simply reverse engineer their target markets to fit existing client bases”
Sarah Court, Deputy Chair at ASIC, commented: “Our message to the industry is that CFD target markets should be narrowly defined given the significant risk that retail clients may lose all of their deposited funds. 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 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 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.”
According to the Australian regulator, an unexperienced retail client with a medium-risk tolerance and no understanding of the risks of trading CFDs, would still fell within eToro’s target market for CFD products, meaning that eToro’s screening test was very difficult to fail and of no real use in excluding customers for who the CFD product was not likely to be appropriate.
eToro’s platform allegedly allowed clients to amend their answers without limitation and clients were prompted if they selected answers which could result in them failing.