eToro faces accusations from Australian regulatory body ASIC for loose screening leading to majority of clients incurring losses on CFD products

The Australian Securities and Investments Commission (ASIC) has filed a lawsuit against the online investment platform eToro Aus Capital Limited (eToro) for allegedly breaching its design and distribution obligations as well as its efficient, honest, and fair licensing obligations with regard to its contract for difference (CFD) products.

CFD Client Screening Criteria Too Lenient

The Australian Securities and Investments Commission (ASIC) is known for its strict financial regulations recognized internationally. In February this year, Binance came under investigation by ASIC in Australia, as it was found that its wholesale clients did not meet the relevant criteria limits. Subsequently, Binance voluntarily withdrew its license in April.

This time, eToro is being scrutinized for its Contract for Difference (CFD) products, which are leveraged derivative product contracts that allow clients to speculate on the price movements of underlying assets, including foreign exchange rates, stock market indices, individual stocks, commodities, or cryptocurrencies, using leverage to enhance capital efficiency.

ASIC believes that eToro's CFDs are high-risk and volatile products, and that its assessment of clients is too lenient, resulting in the majority of clients being in a loss-making position. ASIC stated that between October 5, 2021, and June 14, 2023, nearly 20,000 of eToro's clients incurred losses in CFD trading. Data from eToro's website also shows that 77% of retail investor accounts incurred losses when trading CFDs on eToro.

ASIC asserts that eToro's client screening tests are too lenient, leading to a large number of retail clients being exposed to CFD products that are unlikely to align with their investment goals, financial situation, and needs, posing significant risks of harm to consumers.

ASIC Deputy Chair Sarah Court stated:

The message we want to convey to the industry is that, given the significant risks to retail clients of losing all their invested funds, the definition of the target market for CFDs should be very narrow.

The documents from ASIC also mention that eToro's screening tests are difficult to fail. For example, clients can freely modify their answers without restrictions to pass the test and meet the required conditions.

eToro is a fintech startup from Israel that offers social trading services and a variety of convenient trading products, attracting young investors globally to use its platform. According to its website, the platform offers over 3,000 assets and has a user base of 30 million. In February this year, eToro also obtained the New York BitLicense and money transfer license.