EToro In Legal Spat With Regulator Over Trading Product: 'Most Clients Are Losing Money'

Australia's market regulator, the Securities and Investments Commission (ASIC), has initiated legal proceedings against Etoro, the online investment platform.

EToro's contract for difference (CFD) product, ASIC alleges, has breached design and distribution obligations and violated eToro’s license obligations to operate efficiently, honestly, and fairly.

The ASIC takes issue with eToro’s target market and the screening test employed by the company to determine if a retail client fits within the target market for the CFD product.

ASIC contends that the eToro CFD product was excessively 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 argued that eToro’s conduct has likely led to a significant number of retail clients being exposed to the CFD product, which was unlikely to align with their investment objectives, financial situation, and needs.

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Between Oct. 5, 2021 and Jun. 14, 2023, nearly 20,000 of eToro’s clients reportedly lost money trading CFDs.

ASIC stated that eToro’s website acknowledges that 77% of retail investor accounts lose money when trading CFDs with eToro.

Sarah Court, ASIC Deputy Chair, said, "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."

ASIC alleges that from October 2021, eToro’s CFD target market was excessively broad.

For instance, a retail client with a medium-risk tolerance but lacking experience as an investor and understanding of the risks of trading CFDs still fell within the target market.

Furthermore, eToro’s screening test was deemed very difficult to fail and ineffective in excluding customers for whom the CFD product was not likely to be appropriate.

ASIC is seeking declarations and monetary penalties from the Court.

The date for the first case management hearing is yet to be scheduled.

When contacted for a comment, an eToro spokesperson said its Australian entity is considering the allegations filed by ASIC in these proceedings and will respond accordingly and that there was 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," the spokesperson said.

“As a business which is regulated by financial authorities in multiple jurisdictions around the globe, eToro is committed to being compliant with applicable rules and regulations in all the jurisdictions in which we operate.  We pride ourselves on working in close collaboration with regulators to ensure consumer protection while also balancing the need for access for individual investors," the spokesperson added.

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