ASIC found eToro’s target market to be too broad, and its screening test ineffective for excluding unsuitable consumers from CFDs.
The Australian Securities and Investments Commission (ASIC) has filed a lawsuit against the crypto trading platform eToro for offering high-risk leverage derivative products that enable users to speculate on cryptocurrencies.
In an official statement issued on Thursday, August 3, ASIC accused eToro Aus Capital Ltd. of violating the contract for difference (CFD) product distribution and design obligations. The CFDs offered by eToro, a crypto trading platform, are leveraged derivative contracts.
CFDs allow purchasers to speculate on the price movements of various assets, including foreign exchange rates, stock market indices, individual equities, commodities, and cryptocurrencies.
ASIC stated that the crypto trading platform offered leveraged derivative contracts to retail investors without conducting sufficient screening tests. ASIC determined that eToro’s CFDs were “high risk and volatile.” In addition, the regulator stated that the platform’s existing screening test did not exclude unsuitable consumers from its trading product. Additionally, ASIC said:
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 Seeks Sanctions Against eToro
The regulator has also alleged that the target market for eToro’s products was “far too broad” and that some users did not understand the risks associated with CFD trading. “ASIC alleges that between 5 October 2021 and 14 June 2023, almost 20,000 of eToro’s clients lost money trading CFDs,” the statement continued.
Sarah Court, Deputy Chair of the ASIC, was disappointed by eToro’s alleged lack of compliance. She emphasized that the target markets for CFDs must be specific and well-defined, as retail clients face significant risks of losing their entire investment.
CFD issuers must adhere to the design and distribution rules and cannot modify their target markets to accommodate existing customers. The extensive market presence and global brand recognition of eToro made ASIC’s concerns more significant.
