eToro’s contract for difference product (CFD) has resulted in Australia’s financial regulator suing the firm. It is suspected this trading platform utilized inadequate screening tests when providing leveraged derivative contracts to retail investors.
In August, the Australian Securities and Investments Commission (ASIC) revealed it had started Federal Court proceedings related to the company’s CFD product. It focused on a vast market and breached distribution and design regulations.
Reviewing Contract for Difference Relative to Other EToro Products
Contracts for different products are a form of leveraged derivative contracts that permit purchasers to postulate an underlying asset’s price shifts. Examples include stock market indices, foreign exchange rates, cryptocurrencies, commodities, or single equities. eToro provides all these assets.
The financial regulator claimed eToro-provided CFDs were volatile and high-risk. In addition, the screening test that assesses target markets failed to accurately leave out unsuited clients. It stated that this screening test was quite hard to fail and failed to exclude clients for whom this CFD product was less likely to be suitable.
Further, it provided an example of a situation where clients would adjust answers without restriction and were also prompted in case they picked answers that could lead to them failing. Up to two times leverage on specific assets is allowed by eToro’s crypto CFDs. Other CFDs cover Commodities, precious metals, stocks, and currencies.
CFD Product Risks Amplified When Underlying Assets Are Vulnerable
The Australian Securities and Investment Commission filing claimed CFD product risks were increased when the underlying assets also possessed their risks. This included volatile and high-risk products, for instance, crypto assets.
Further, the regulator highlighted the vastness of eToro’s CFD target market in which users did not understand the risks involved in CFD training. ASIC added that between October 5, 2021, and June 14, 2023, nearly 20,000 eToro’s customers lost money trading CFDs.
eToro Assures of Resolving Issues Highlighted by ASIC
A spokesperson at the firm disclosed that it has changed the target market of CFDs. The proceedings are associated with the time frame between October 5, 2021, and July 29, 2023. Currently, eToro AUS is using a reviewed target market determination for contracts for different products.
eToro revealed there was no effect or service disruption. It was also considering allegations by ASIC and would respond appropriately. Sarah Court, ASIC’s deputy chair, revealed that issuers of CFD cannot seek to fit current client bases by reverse engineering their target markets. She also expressed displeasure with the supposed lack of compliance by eToro.
In the U.S., eToro paused trading in four cryptocurrencies after the Securities and Exchange Commission’s lawsuits labeled the tokens as securities.
Editorial credit: David Esser / Shutterstock.com
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