In a significant turn of events, the Australian regulatory authority ASIC has commenced legal proceedings against the financial platform eToro. This response is prompted by concerns over the usage of a high-risk leveraged derivative contract known as a CFD.
The allegations include contravention of design and distribution obligations, along with instances of inefficiency, lack of transparency, and unfair practices.
The mechanism of CFDs allows users to partake in speculative activities tied to fluctuations in the value of underlying assets. These assets encompass stock market indices, equities, forex, and cryptocurrencies. The regulatory body notes eToro’s inadequate testing of the product before releasing it to retail investors.
In the words of the financial regulatory authority:
“eToro’s evaluative assessment proved excessively challenging to fail and held nominal efficacy in screening out customers for whom the CFD product was unsuitable.”
Impact and Oversight: Australian Regulatory Authority Observations
ASIC revealed that between October 5, 2021, and June 14, 2023, about 20,000 eToro users suffered losses due to CFD engagement. The regulatory body explains that a notable 77% of retail investors on the platform experienced losses through this financial tool.
The company further expounds:
“ASIC contends that eToro’s expansive target demographic for the CFD product exhibited a lack of precision considering its high-risk and volatile nature, leading to the majority of clients incurring losses. Moreover, the evaluation mechanism employed was grossly inadequate in assessing whether a retail client fell within the scope of the intended target audience.”
According to ASIC, a CFD allows clients to speculate on changes in underlying asset values through a leveraged derivative contract. These assets encompass foreign exchange rates, stock market indices, individual equities, commodities, and crypto-assets.
Historically, the regulatory body has implemented protective measures for consumers against high-risk financial instruments like CFDs. This is evident from past actions taken against entities such as Saxo Capital Markets and Mitrade Global Pty Ltd.
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