ASIC hits eToro with Federal Court DDO charges
Online investment platform eToro has been hit with design and distribution obligations charges launched by the Australian Securities and Investments Commission (ASIC) in the Federal Court.
ASIC has announced that it has launched the proceedings alleging breaches of the DDO obligations in respect of eToro’s contract for difference (CFD) product.
The case focuses on the appropriateness of eToro’s target market, and the screening test used by eToro to assess whether a retail client fell within the target market for the CFD product.
ASIC is alleging eToro’s target market for the CFD product was far too broad for such a high-risk and volatile trading product where most clients lose money, and that the screening test was wholly inadequate to assess whether a retail client was likely to be within the target market.
ASIC considers that eToro’s conduct is likely to have resulted in a significant number of retail clients being exposed to the CFD product that was unlikely to be consistent with their investment objectives, financial situation and needs, resulting in a significant risk of consumer harm.
ASIC alleges that between 5 October 2021 and 14 June 2023, almost 20,000 of eToro’s clients lost money trading CFDs. eToro’s website states that 77% of retail investor accounts lose money when trading CFDs with eToro.
Commenting on the move, ASIC Deputy Chair Sarah Court said, “Our message to 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.
“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.”
ASIC alleges that from October 2021:
- eToro’s CFD target market was far too broad. For example, if a retail client had a medium-risk tolerance but was not an experienced investor and had no understanding of the risks of trading CFDs, that client still fell within the target market;
- 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 further alleges eToro failed to do all things necessary to ensure that the financial services covered by its licence were provided efficiently, honestly and fairly by applying the screening test to determine whether to issue the CFD product to retail clients.
“ASIC is concerned eToro’s screening test inappropriately exposed clients to the CFD product. Providers need to ensure clients are receiving products that are consistent with their needs and the design and distribution obligations are being met,” Court said.
ASIC is seeking declarations and pecuniary penalties from the Court.
Professional advisers know that outfits like eToro are quasi gambling, and would never recommend them to clients.
But thanks to ASIC’s indiscriminate vilification and persecution of professional advisers, consumers are now much more likely to be suckered in by the direct marketing of an ever expanding array of dodgy products.
ASIC must accept a huge amount of responsibility for the consumer harm caused by dodgy direct marketed products. Launching DDO proceedings against one of them is just ASIC sweeping up a tiny bit of the mess they created.