eToro’s Australian Entity Faces Regulatory Lawsuit Over CFDs

The Securities and Investments Commission (ASIC) of Australia is now pursuing legal action against eToro Aus Capital Limited, the social investment platform’s Australian affiliate. The regulator claims that eToro violated its “design and distribution obligations and licence obligations to act efficiently, honestly, and fairly.”

The contract for difference (CFD) product offered by eToro, a leveraged derivative contract that enables customers to speculatively trade on the value of underlying assets including cryptocurrencies, is the subject of ASIC’s accusations. Recently, Australia increased its control over cryptocurrency companies, with ASIC pursuing legal action against a number of participants in the market, including Binance Australia, whose offices were searched.

Broad Target Market and Losses for Clients

ASIC is worried that eToro’s CFD product target market was too broad and included customers with different degrees of risk tolerance and experience. Nearly 20,000 of eToro’s clients reportedly lost money while trading CFDs between October 2021 and June 2023 as a result of the screening exam for prospective consumers supposedly being particularly tough to pass.

The regulator used an example of how eToro’s target market encompassed even retail consumers with a medium risk tolerance and little knowledge of CFD dangers. Clients may freely change their responses, allowing them to pass the screening exam even when they selected options that should have resulted in failure.

Company’s Response and Impact on Business

In response to the accusations, eToro AUS said that it is taking the ASIC’s charges into consideration and would respond properly. The company informed its customers that neither eToro AUS customers nor the international business will have any effect or service inconvenience. The business disclosed that it is now conducting business using a modified target market determination for its CFDs.

ASIC has not yet set a date for the court hearings, but as part of its legal action against eToro Aus Capital Limited, it is requesting monetary penalties. The result of the action will be eagerly monitored by the cryptocurrency sector and regulatory bodies as it may serve as a precedent for other social investing platforms and fintech businesses operating in Australia.