Financial news

Another powerhouse in the crypto sphere has clashed with regulators as eToro, the social investment platform, has allegedly failed to act efficiently, honestly and fairly, according to the Australian Securities and Investments Commission (ASIC).  

The ASIC has sued eToro over its contract for difference (CFD) product. This type of contract is an agreement between a trader and their broker, in which the two parties agree that one will pay the other depending on which direction the asset’s prices goes.

According to eToro, CFD trading “is a method of trading the value of an underlying asset, rather than the asset itself. The ‘derivative’ nature of CFDs makes them highly versatile and has resulted in the market, first developed in the 1990s, growing to be worth billions of dollars.”

ASIC vs eToro

The case focuses on the appropriateness of eToro’s target market. In addition, it looks at the screening test used by eToro to assess whether a retail client fell within the target market for the CFD product.

ASIC 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. Furthermore, it suggest that the screening test was wholly inadequate to assess whether a retail client was likely to be within the target market.

The Australian regulator considers that eToro’s conduct is likely to have resulted in a significant number of retail clients being exposed to the CFD product. It suggests that this exposure was unlikely to be consistent with their investment objectives, financial situation and needs, resulting in a significant risk of consumer harm.

ASIC alleges that between 5 October 2021 and 14 June 2023, almost 20,000 of eToro’s clients lost money trading CFDs.

Sarah Court, deputy chair, ASIC said: “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. Furthermore, 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.”

eToro alleged failures

ASIC alleges that from October 2021:

• eToro’s CFD target market was far too broad. For example, if a retail client had a medium-risk tolerance but was not an experienced investor and had no understanding of the risks of trading CFDs, that client still fell within the target market;
• 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. For example, clients could amend their answers without limitation and clients were prompted if they selected answers which could result in them failing.
• ASIC further alleges eToro failed to do all things necessary 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 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,” concluded Ms Court.

ASIC is seeking declarations and pecuniary penalties from the Court. The date for the first case management hearing is yet to be scheduled by the Court.