Key Takeaways
- ASIC stated that eToro’s target market screening test was overly lenient and of little use in excluding customers for whom CFDs were not appropriate.
- ASIC claims that between October 2021 and June 2023, nearly 20,000 of eToro’s clients suffered losses from trading CFDs
The Australian Securities and Investment Commission (ASIC) has taken legal action against the social investing platform eToro, specifically targeting its crypto trading wing for alleged dishonest, inefficient, and unfair execution of its contract for difference (CFD) product. CFDs are popular financial derivative products used in trading, allowing investors to speculate on the price movements of various underlying assets without owning them.
ASIC’s charges stem from concerns about eToro’s CFD offerings being categorized as “high-risk and volatile.” The regulatory body accused the platform of failing to properly screen and exclude unsuitable customers from trading these products, stating that eToro’s target market screening test was overly lenient and of little use in excluding customers for whom CFDs were not appropriate.
The Australian regulator argued that eToro’s CFD target market was too broad, and the screening test lacked effectiveness in identifying clients who might not be suited for such high-risk trading. The test allowed clients to modify their answers without limitations, and the prompts were designed to be easily passed, further raising concerns about the suitability of the CFD product for certain clients.
According to ASIC, between October 2021 and June 2023, nearly 20,000 of eToro’s clients suffered losses from trading CFDs. eToro’s website itself acknowledges the risks involved, stating that 77% of retail investor accounts lose money when trading CFDs with the platform. The alleged lack of compliance by eToro in safeguarding its clients has drawn scrutiny from the regulatory authority.
ASIC deputy chair Sarah Court expressed disappointment in eToro’s alleged misconduct, emphasizing that CFD issuers must define their target markets narrowly to protect retail clients from significant risks that could lead to the loss of all their deposited funds.
Responding to the charges, eToro confirmed that there had been no disruptions or impacts on its services and stated that it is carefully considering ASIC’s allegations. The platform plans to respond to the regulatory body’s claims in due course.
This recent legal action by ASIC follows eToro’s decision in June to suspend purchases of certain cryptocurrencies for its U.S. customers. The platform halted trading in Algorand, Decentraland, Polygon, and Dash in response to these tokens being classified as securities in recent lawsuits by the U.S. Securities and Exchange Commission (SEC).
