In recent events, eToro, the widely known online trading platform, is under the legal microscope of Australia’s chief financial regulator. The Australian Securities and Investments Commission (ASIC) has initiated a lawsuit against eToro, raising concerns about how the platform offers its Contract for Difference (CFD) product to retail investors.
The eToro and ASIC Clash
On August 3, ASIC officially launched its Federal Court case against eToro’s approach to its CFD product. The grounds? The financial authority argues that the platform has cast its net too wide, targeting an overly extensive market and violating established design and distribution protocols.
For the uninitiated, CFDs belong to the category of leveraged derivative contracts. In essence, they allow purchasers to wager on the fluctuation in the price of various underlying assets. This array of assets can be as diverse as foreign exchange rates, stock market indices, individual equities, cryptocurrencies, or commodities – all options that eToro makes available to its users.
ASIC’s Critique of eToro CFD Practices
According to ASIC, eToro’s approach to CFDs is a matter of contention. The regulator brands the CFDs offered by eToro as being “high-risk and unstable.” ASIC further alleges that eToro’s target market screening for these products fails to weed out unsuitable clientele adequately.
The core of ASIC’s argument is that eToro’s screening process is fundamentally flawed. It alleges the test to be remarkably easy to pass, rendering it ineffective in excluding customers unlikely to find the CFD product suitable.
To illustrate, the regulator highlights how clients can change their answers without restriction.
eToro’s CFDs: A Vast Array of Investment Opportunities
eToro’s collection of crypto CFDs allows for a leverage of up to two times on particular assets. The platform also features an assortment of CFDs covering stocks, currencies, commodities, and precious metals. However, ASIC has expressed concerns about the associated risks of these CFD products, especially when the underlying assets have inherent risk, including the volatility of crypto-assets.
ASIC’s lawsuit also criticizes eToro’s broad CFD target market. The regulator suggests that it encompasses users who lack a basic understanding of the potential risks involved in CFD trading.
The regulator has made a startling revelation: between October 5, 2021, and June 14, 2023, almost 20,000 of eToro’s clients experienced financial losses due to CFD trading.
eToro’s Reaction and Future Implications
In response to ASIC’s allegations, eToro has modified its target market determination for CFDs. The platform asserts that these changes apply between October 5, 2021, and July 29, 2023.
eToro assures that this issue will not affect or interrupt its services and is considering ASIC’s allegations seriously, with a follow-up response.
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