Australia's financial regulator, the Australian Securities and Investments Commission (ASIC), has taken legal action against eToro over its contracts for difference (CFD) products. The lawsuit, filed on August 3, charges that eToro did not conduct adequate screening tests when offering leveraged derivatives contracts to retail investors, violating design and distribution rules.
ASIC's complaint is centered on eToro's CFD product, a leveraged derivatives contract that enables traders to speculate on the price movements of various underlying assets, including cryptocurrencies, stocks, currencies, commodities, and more. The regulator argues that the CFDs offered by eToro were highly risky and volatile, and the platform's screening tests to identify suitable clients for these products were inadequate. It stated that the screening tests were designed in a way that allowed customers to easily revise their answers without effective limitations, thus failing to weed out unsuitable clients.
EToro's cryptocurrency CFDs, which allow up to two times leverage on certain assets, were particularly scrutinized by ASIC due to the high risk and volatility associated with crypto assets. The regulator also contended that eToro's CFD target market was too broad, encompassing users who might not fully comprehend the risks associated with CFD trading.
Between October 5, 2021, and June 14, 2023, ASIC claims that nearly 20,000 of eToro's clients incurred losses while trading CFDs. The regulator expressed disappointment at eToro's alleged non-compliance and accused CFD issuers of manipulating their target market to align with their existing customer base.
An eToro spokesperson noted that the company has revised its determination of the target market for CFDs and stated that eToro AUS is currently operating in accordance with the revised determination. The spokesperson also confirmed that eToro's services remain unaffected and uninterrupted. The trading platform is evaluating ASIC's allegations and intends to respond accordingly.
In the United States, eToro halted trading in certain cryptocurrencies following the Securities and Exchange Commission (SEC) lawsuit, which categorized these assets as securities.
