The Australian Securities and Investments Commission (ASIC) has sued the Aussie entity of the multi-asset broker, eToro for lapses in its contracts for differences (CFDs) offerings. Announced today (Thursday), ASIC alleged that eToro Aus Capital Limited breached design and distribution obligations (DDO) as well as license obligation “to act efficiently, honestly, and fairly.”

ASIC Sues eToro

ASIC introduced the DDO rules in October 2021 and has been very strict towards compliance with these obligations by financial services companies. Earlier, the Aussie regulator issued interim stop orders against Saxo Capital Markets and Mitrade, but both these companies took steps to rectify the breaches, subsequently, the orders were revoked.

The lawsuit against eToro is ASIC’s first such legal action against a CFDs broker for the breach of DDO rules.

The action against eToro focuses on the appropriateness of the broker’s target market assessment and screening test of retail clients for the CFDs products. According to ASIC, the broker’s target market for CFDs products was too broad, and the screening test was “wholly inadequate.”

The regulator pointed out that it was very difficult to fail eToro’s screening test, which was of “no real use” in excluding customers for whom CFDs were not the appropriate instrument.

CFDs Are “High-Risk and Volatile Trading Product(s)”

CFDs are high-risk derivative trading products that allow traders to speculate on the prices of forex, indices, shares, and other asset classes. ASIC pointed out that almost 20,000 of eToro’s clients lost money trading CFDs between 5 October 2021 and 14 June 2023. According to the regulator, eToro’s conduct might have exposed a “significant number of retail clients” to CFDs who were unsuitable to be exposed to such risky products.

“Our message to the industry is that CFD target markets should be narrowly defined given the significant risk that retail clients may lose all of their deposited funds. CFD issuers must comply with the design and distribution regime and cannot simply reverse engineer their target markets to fit existing client bases,” said ASIC’s Deputy Chair, Sarah Court.

"ASIC is disappointed by the alleged lack of compliance in this case, given eToro’s market penetration and the depth of its brand awareness, both in Australia and globally."

With the lawsuit, ASIC seeks declarations and pecuniary penalties against the Israel-headquartered broker.

In a statement shared with Finance Magnates, a spokesperson at eToro stated: “eToro AUS is considering the allegations filed by ASIC in these proceedings and will respond accordingly. There is no impact or disruption of service for clients of eToro AUS and no material impact on eToro’s global business.”

“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.”