The Australian Securities and Investments Commission (ASIC) has filed a lawsuit against eToro’s Australian division.
The Australian financial watchdog has alleged that a wide range of retail clients had been given access to a volatile and high-risk product on the social trading platform.
The regulator issued a statement on Thursday stating that it was filing a lawsuit against eToro Aus Capital Limited in relation to its contract for different (CFD) products.
It said that the company’s distribution and design obligations are in breach of the law, as the target market for the CFD products was not appropriate.
Sarah Court, the Deputy Chair of the ASIC, said in a statement that they were disappointed due to eToro’s lack of compliance, considering the company’s depth of brand awareness and market penetration, not just in Australia, but in the world.
The ASIC is now going after the Australian subsidiary of eToro and seeking financial penalties, injunctions, and declarations.
A financial derivative product, CFDs are used by investors and traders for speculating on the price of foreign exchange rates, commodities, indices, stocks, and cryptocurrencies.
The traders and investors do not need to own the underlying asset when they are investing via CFDs. eToro has its headquarters in Tel Aviv, but it also has offices in the UK, US, Cyprus, and Sydney.
eToro did not respond to the allegations immediately and a spokesperson said that they would consider them before coming up with a response.
But, they clarified that the lawsuit has not had any impact for clients of the Australian subsidiary of eToro and its services have not been disrupted.
Likewise, the global business of eToro has also not suffered from any material impact due to the lawsuit.
Currently, CFD products are offered by eToro for certain cryptocurrencies with leverage of 1:2, which include Bitcoin, XRP, and Ethereum, but this offer is only available to members of its platinum loyalty program.
Apart from that, it also offers CFDs on commodities, currencies, stocks, and ETFs.
According to the allegations of the ASIC, nearly 20,000 people using the eToro social trading platform between October 5th, 2021, and June 14th, 2023 suffered from losses via CFD trading.
The regulator stated that when it came to the CFD products, eToro’s target market comprised investors who could not be considered experienced or sophisticated.
For instance, the ASIC said that it was very easy to pass the screening test put forward by eToro, even for those investors who did not have an in-depth understanding of the risks associated with CFDs.
According to the regulator, eToro’s clients were permitted to amend the answers they had entered in the screening test as many times as they wanted.
In fact, they were even prompted to consider if the answers they had selected could see them fail the screening test.
In another development, trading of four tokens was stopped on the eToro platform in the previous month, after the SEC filed lawsuits against Coinbas and Binance for offering them.