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Australian watchdog charges after eToro over high-risk CFDs offering

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Australia’s financial services watchdog has sued online trading platform eToro for offering its volatile and highly-leveraged derivatives products to unsuited retail investors.

The Australian Securities and Investment Commission (ASIC) alleges that eToro Aus Capital Limited, the local entity of the Israeli social trading firm, breached the design and distribution obligations of its license.

ASIC believes the company targeted investors ill-suited for contract for difference (CFD) products. Additionally, the screening test used to determine which clients were suitable for CFDs was too broad and inadequate.

“ASIC considers that eToro’s conduct is likely to have resulted in a significant number of retail clients being exposed to the CFD product that was unlikely to be consistent with their investment objectives, financial situation, and needs, resulting in a significant risk of consumer harm,” the watchdog said.

A CFD is a leveraged derivative contract with which an investor speculates on the future change in the value of an underlying asset, including equities, indices, foreign exchange rates, and digital assets.

CFDs are considered risky for retail investors as wrong bets can trigger massive losses due to their leveraged nature. Some jurisdictions like the United States and Hong Kong have strict limitations on CFDs for retail traders, while others like Brazil and Belgium have banned them altogether.

Australia has been tough on trading firms that target retail traders with CFDs. In 2020, the Federal Court hit three trading firms with a $49 million fine for selling CFDs to retail investors, describing them as “financial heroin hits.”

In its legal action, ASIC says that between October 2021 and June 2023, almost 20,000 eToro clients lost money trading CFDs. Additionally, over three-quarters of the firm’s clients lose money trading CFDs.

ASIC Deputy Chair Sarah Court warned trading firms against ingenuity with their CFD targeting tactics. They must narrowly define their target markets “given the significant risk that retail clients may lose all of their deposited funds.”

“ASIC is concerned eToro’s screening test inappropriately exposed clients to the CFD product. Providers need to ensure clients are receiving products that are consistent with their needs and the design and distribution obligations are being met,” she added.

The watchdog is seeking monetary penalties from the court.

eToro had an impressive year in 2022, raking in $631 million. Digital assets only comprised 6% of the Israeli firm’s earnings, with commodities accounting for half the income.

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