The Australian Securities and Investments Commission (ASIC) has recently filed a lawsuit against the online trading platform eToro, accusing it of violating financial regulations related to cryptocurrency derivative products. This alleged violation has reportedly led to two-thirds of Contract For Difference (CFD) traders losing their funds. The ASIC Deputy Chair, Sarah Court, expressed disappointment over eToro’s alleged lack of compliance in this case, considering its market penetration and brand awareness both in Australia and globally.
eToro’s Alleged Contravention of Design and Distribution Obligations
According to ASIC’s concise statement, eToro is accused of contravening the design and distribution obligations under the Corporations Act 2001 from October 2021 to July 2023. ASIC argues that eToro defined its CFD target market too broadly, including retail clients with medium-risk tolerance but no experience or understanding of the risks involved in trading CFDs. Court emphasized that CFD issuers must comply with the design and distribution obligations, and not simply tailor their target markets to fit their existing client bases.
In response to the allegations, an eToro spokesperson has stated that they are considering ASIC’s claims and will respond accordingly. The spokesperson also reassured clients that there is no impact or disruption of service and no material impact on eToro’s global business. Additionally, eToro claims to be operating with a revised target market determination for CFDs in Australia. They affirm their commitment to adhering to applicable rules and regulations and stress their collaboration with regulators to ensure consumer protection while providing access for individual investors.
The crux of the lawsuit revolves around eToro’s alleged inadequate target market determinations. ASIC argues that eToro’s screening tests for retail investors were overly lenient, making it difficult for clients to fail and failing to accurately exclude customers for whom the CFD product was not appropriate. This allowed unsuitable investors to trade CFDs and exposed them to significant losses. ASIC asserts that CFDs are not suitable for most retail investors due to their complexity and leverage involved.
ASIC’s Previous Actions and the Scope of eToro’s CFD Trading
ASIC has previously taken administrative action against other companies involved in high-risk CFD trading, demonstrating their commitment to consumer protection. During the period in question, eToro had nearly 30,000 retail clients trading CFDs. Of these clients, around 19,601 suffered realized losses totaling over AUD 26 million. Shockingly, over 9,800 eToro CFD clients admitted to having no financial knowledge, while over 11,000 had no previous experience trading with leverage. This highlights the potential harm caused by eToro’s alleged contravention of its obligations as a financial services licensee and the inadequate screening tests applied.
Regulatory Consequences and Consumer Guidance
ASIC is seeking penalties, compliance orders, and costs from eToro in relation to the alleged breaches. The case is expected to be heard in the Federal Court of Australia. In the meantime, ASIC’s Moneysmart platform provides trusted tips, tools, and guidance to help consumers make informed financial decisions. It offers information about the risks and complexities of CFD trading, serving as a resource for individuals seeking assistance in navigating the financial landscape.
The ASIC’s lawsuit against eToro highlights the regulator’s commitment to enforcing financial regulations and protecting consumers in the digital asset sector. It underscores the potential risks associated with trading CFDs and the need for companies to accurately define their target markets and conduct appropriate screening tests. As the case unfolds, the outcome will have significant implications for eToro and the broader cryptocurrency trading platform industry.
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