The Australian Securities and Investments Commission (ASIC) has initiated legal action against the financial platform eToro, alleging the improper use of a high-risk leveraged derivative contract known as a Contract for Difference (CFD).
According to ASIC, the regulator claims that eToro breached its design and distribution obligations and failed to act efficiently, honestly, and fairly in offering the CFD product to retail investors. CFDs allow users to speculate on changes in the value of underlying assets, including stock market indices, stocks, forex, and cryptocurrencies.
The regulator’s investigation revealed that eToro did not adequately test the product before making it available to retail investors. ASIC criticized eToro’s screening test, stating that it was too lenient and failed to exclude customers for whom the CFD product was not suitable. Between October 5, 2021, and June 14, 2023, ASIC reported that nearly 20,000 eToro users suffered financial losses due to the use of CFDs. The financial regulator further explained that 77% of retail investors using the financial tool incurred losses.
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ASIC expressed concern over eToro’s broad target market for the CFD product, considering its high-risk and volatile nature, where most clients tend to lose money. The regulator asserted that eToro’s screening test was inadequate in assessing whether a retail client was likely to be within the appropriate target market for such a product. A CFD is a leveraged derivative contract that enables clients to speculate on the value fluctuations of various underlying assets, including foreign exchange rates, stock market indices, individual equities, commodities, and crypto assets.
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This is not the first instance where ASIC has taken action against high-risk financial products like CFDs. In the past, the regulator has acted to safeguard consumers by pursuing legal action against Saxo Capital Markets and Mitrade Global Pty Ltd. The legal proceedings against eToro highlight ASIC’s commitment to protecting investors and ensuring financial institutions comply with their regulatory obligations. The outcome of this case will likely have implications for the use and distribution of CFDs in Australia, emphasizing the importance of responsible and transparent financial practices in the industry.