The Australian Securities and Investments Commission (ASIC) has taken legal action against online trading platform eToro for allegedly breaching financial regulations related to cryptocurrency derivative products. ASIC claims that eToro violated the design and distribution obligations under the Corporations Act 2001 between October 2021 and July 2023.
Concerns Over Consumer Protection
ASIC Deputy Chair Sarah Court expressed disappointment with eToro’s alleged lack of compliance, especially considering the platform’s market penetration and brand awareness in Australia and globally. Court stressed the importance of narrowly defining target markets for Contract For Difference (CFD) products to minimize the risk of retail clients losing their funds. According to ASIC, eToro’s definition of its CFD target market was too broad, allowing clients with limited investing experience and risk tolerance to fall within the target market.
CFDs and their Risks
A CFD is a type of derivative that allows buyers and sellers to speculate on the price difference of an underlying asset. Buyers make a profit if the price increases, while sellers make a profit if it decreases. ASIC argues that CFDs are complex financial products with significant leverage and are generally unsuitable for most retail investors.
eToro’s Response
An eToro spokesperson stated that the company is reviewing the allegations and will respond accordingly. They emphasized that there is no impact or disruption of service for eToro clients and no material impact on the company’s global business. The spokesperson confirmed that eToro is now operating with a revised target market determination for CFDs.
Commitment to Regulation and Consumer Protection
eToro reaffirmed its commitment to adhering to the applicable rules and regulations in all jurisdictions where it operates. The company emphasized its collaboration with regulators to ensure consumer protection while providing access for individual investors. eToro expressed its desire to continue operating in Australia and provide the best possible customer experience.
Inadequate Target Market Determinations and Screening Tests
ASIC alleges that eToro’s target market determinations were inadequate in defining suitable retail clients for trading CFDs. The regulator also claims that eToro’s screening tests for retail investors were difficult to fail and did not effectively exclude customers for whom CFDs were not appropriate. This allowed unsuitable investors to trade CFDs and exposed them to significant losses.
ASIC has previously taken action to protect consumers from high-risk CFD trading. They have issued stop orders against other trading platforms, such as Saxo Capital Markets and Mitrade Global Pty Ltd. These actions aim to safeguard consumers whose financial circumstances make them unsuited for high-risk trading.
Penalties and Compliance Orders
ASIC is seeking penalties, compliance orders, and costs from eToro, alleging that the platform did not act efficiently, honestly, and fairly as a financial services licensee. The regulator claims that eToro failed to make a genuine attempt at an appropriate target market determination and applied inadequate screening tests, resulting in harm to consumers. The lawsuit will be heard in the Federal Court of Australia.
For consumers seeking guidance on financial decision-making, ASIC’s Moneysmart provides tips, tools, and guidance to support Australians with everyday money decisions. The platform offers information about the risks and complexities of CFD trading and aims to empower consumers to make informed choices.
ASIC’s lawsuit against eToro is part of a broader trend of regulatory scrutiny on cryptocurrency trading platforms. Regulators worldwide are increasingly focused on ensuring investor safeguards in the digital asset sector. The concerns over consumer protection highlight the need for effective regulations and compliance in the rapidly evolving cryptocurrency market.
As the case unfolds, it will shed light on the extent to which trading platforms are following financial regulations and protecting retail investors. The outcome of this lawsuit will likely have implications for eToro’s operations in Australia and may influence regulatory approaches to cryptocurrency trading platforms in other jurisdictions.