Australian financial regulator sues eToro over ‘volatile’ trading products

The Australian Securities and Investments Commission alleged eToro users with no understanding of CFD product risks could still buy them on the platform.

Australia’s financial regulator has sued eToro over its contract for difference (CFD) product, alleging the trading platform used insufficient screening tests when offering the leveraged derivative contracts to retail investors.

The Australian Securities and Investments Commission (ASIC) said on Aug. 3 that it hadcommenced Federal Court proceedings over eToro’s CFD product for targeting too wide a market and breaching design and distribution rules.

CFDs are a type of leveraged derivatives contract that allows buyers to speculate on price movements of an underlying asset such as foreign exchange rates, stock market indices, single equities, commodities, or cryptocurrencies — all of which eToro offers.

ASIC alleged the CFDs offered by eToro were “high-risk and volatile” and the platform’s target market screening test didn’t properly exclude unsuitable customers from trading the product, stating:

“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,” it said.

ASIC is suing eToro for allegedly breaching design and distribution obligations and their licence obligations to act efficiently, honestly and fairly #CFD

— ASIC Media (@asicmedia) August 2, 2023

EToro’s crypto CFDs allow for up to two times leverage on certain assets. Others cover stocks, currencies, commodities and precious metals.

ASIC’s filing notice said CFD product risks were heightened where the underlying assets also had their own risks, which included “extremely high-risk and volatile products such as crypto-assets.”

The regulator also alleged that eToro’s CFD target market was too broad, where users that had no understanding of CFD trading risks could still fall within its target.

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

An eToro spokesperson told Cointelegraph it has since revised its CFDs target market determination.

“These proceedings relate to the time period 5 October 2021 to 29 July 2023. eToro AUS is now operating with a revised target market determination in place for CFDs,” the spokesperson said.

EToro added there’s no impact or disruption of its service. It’s considering ASIC’s allegations and will respond accordingly.

ASIC deputy chair Sarah Court said CFD issuers “cannot simply reverse engineer their target markets to fit existing client bases” and expressed disappointment in eToro’s alleged lack of compliance.

In the United States, eToro halted trading in four cryptocurrencies following the tokens being labeled as securities in lawsuits by the Securities and Exchange Commission.

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Update (Aug. 3, 1:00 am UTC): This article has been updated to include eToro’s response.