The Australian Securities and Investments Commission (ASIC) has announced that it has filed a lawsuit in federal court against a contract for difference (CFD) product from online investment platform eToro Aus Capital Limited (eToro), marking the second time in months that eToro has drawn the ire of international regulators.。

In July 2023, eToro was fined €1.3 million by the Italian Competition Authority for misleading advertising, also at a sensitive time for eToro, which was trying to plot a 1-2 IPO after its failed eToro IPO in 2022..$200 million secondary stock sale to provide liquidity to early investors and employees。

ASIC alleges eToro violated design and distribution obligations, as well as licensing obligations to act effectively, honestly and fairly。The case focuses on the appropriateness of eToro's target market and the screening tests used by eToro to assess whether retail customers fall within the target market for CFD products.。

ASIC called its action a "first design and distribution action" to protect consumers from high-risk CFD products, strongly suggesting that regulators are indeed taking other actions.。

ASIC said the target market for eToro's CFD products is too broad for this high-risk, volatile trading product, where most customers lose money, and that screening tests are simply insufficient to assess whether retail customers are likely to be in the target market.。It believes that eToro's actions are likely to result in a large number of retail customers being exposed to CFD products that are unlikely to meet their investment objectives, financial situation and needs, thereby creating a significant risk of consumer harm.。

ASIC said that between October 5, 2021 and June 14, 2023, nearly 20,000 of eToro's customers lost money in CFD trading.。According to eToro, 77% of retail investor accounts lose money when trading CFDs using eToro。

ASIC Vice Chairman Sarah Court said: "Given the significant risk that retail customers could lose all of their deposited funds, the target market for CFDs should be narrowly defined.。CFDs must comply with the design and distribution system and cannot simply reverse-engineer the target market to fit the existing customer base。Given eToro's market penetration in Australia and globally and its brand awareness, ASIC is disappointed with the alleged misconduct in this case.。"

ASIC claims that from October 2021:

• eToro's CFDs target market is too broad。For example, if a retail client has a moderate risk tolerance, but is not an experienced investor and does not understand the risks of CFD trading, then the client is still in the target market;
• eToro's screening tests are hard to fail and have no practical role in excluding customers for whom CFD products may not be suitable。For example, customers can modify their answers without restriction, and if customers choose an answer that may cause them to fail, they will be prompted。
• ASIC further alleges that eToro used screening tests in deciding whether to issue CFD products to retail customers, thereby failing to take all necessary measures to ensure the efficient, honest and fair provision of the financial services covered by its licence.。

ASIC is concerned that eToro's screening tests improperly expose customers to CFD products, and suppliers need to ensure that customers get products that meet their needs and meet design and distribution obligations.。ASIC, for its part, is seeking a declaration and a fine from the court, which has not yet set a date for the first case management hearing.。

An eToro spokesperson said: "eToro AUS is considering the allegations made by ASIC in these lawsuits and will respond accordingly.。There will be no impact or disruption to eToro AUS's customer service and no significant impact to eToro's global operations。The lawsuit covers the period from October 5, 2021 to July 29, 2023, and eToro AUS is currently operating a revised CFD target market decision.。"

"As a company regulated by financial authorities in multiple jurisdictions around the world, eToro is committed to complying with applicable rules and regulations in all jurisdictions in which it operates.。We work closely with regulators to ensure consumer protection while also balancing the access needs of individual investors。Under the leadership of our local Sydney team, we are committed to growing our business in Australia and delivering the best possible customer experience for our existing Australian users.。"

eToro Case Background

A contract for difference (CFD) is a leveraged derivative contract that allows clients to speculate on changes in the value of an underlying asset, such as a foreign exchange rate, stock market index, single stock, commodity or crypto asset。

ASIC has previously taken administrative measures to protect consumers from high-risk CFDs trading that are unsuited to their financial situation, including a stop order against Saxo Capital Markets and Mitrade Global Pty Ltd.。

The design and distribution obligation (DDO) requires companies to design financial products that meet consumer needs and to distribute these products in a targeted manner。Target market determination is an important requirement of Design and Distribution Obligations。It is a mandatory public document that sets out the categories of consumers (target markets) for which financial products may be suitable and matters related to product distribution and review.。