With a rapidly rising adviser levy, and decades of often-icy water under the bridge, financial planners and the corporate regulator don’t always see eye to eye. But ASIC’s lawsuit against retail investment platform eToro for alleged breaches of Design and Distribution Obligations will likely be cheered on by many within the profession.
ASIC on Thursday announced it had commenced proceedings in the Federal Court against eToro’s Australian arm, regarding its contracts for difference (CFD) product. The suit will allege eToro’s specified target market under DDO was “far too broad for such a high-risk and volatile trading product”.
A note in the fine print of eToro’s website disclosing that the vast majority (77 per cent) of retail investors lose money when trading CFDs did little to deter consumers from trying their hand at the complex derivatives. Almost 20,000 of eToro’s clients – many of whom are understood to be young and inexperienced investors – lost money trading CFDs since October 2021, ASIC alleges.
For the uninitiated, eToro is a global behemoth. Since opening its doors in 2007, the Israel-based platform claims to have onboarded about 20 million users around the world, giving them access to equities, derivatives and crypto assets. In Australia, it has come to prominence as an enthusiastic sponsor of sports codes, including a three-year naming rights deal with Rugby Australia and the Wallabies inked in 2021.
ASIC deserves some credit for having the chutzpah to take on a global tech unicorn. It comes as part of the regulator’s broader action on CFDs, banning the sale of binary options two years ago.
Some advisers may well choose to include CFDs – which turbocharge market gains and losses – within a well-diversified and professionally advised portfolio, especially for wholesale and sophisticated clients. But many others have warned that these products are hardly ever appropriate for regular retail investors, and certainly not in the trading volumes the regulator has been witnessing. Indeed, a Federal Court judge previously likened CFDs to a “financial heroin hit”, the implication being that while they might make you feel temporarily euphoric, they can also destroy lives.
Even more worryingly, this editor suspects many of the consumers trading CFDs may mistakenly believe they are trading equities, even where the relevant disclaimers and disclosures are present, further exemplifying why disclosure (like with long Statements of Advice) are not an effective form of consumer protection.
Warning the general public about the risks attached to popular but arguably dangerous financial products like CFDs is an example of where the profession can lean into an important social role.
But more broadly, this lawsuit is emblematic of the bigger cultural trend that has seen millions of mostly Millennial and Gen Z consumers rush to DIY trading platforms since the start of the pandemic.
Known as the “Robinhood phenomenon” after the infamous US trading app, many financial professionals, including advisers, were sceptical from the start. On social media, some warned that the rush to participate in the stimulus-fuelled and wild pandemic markets would end in tears.
ASIC’s lawsuit against eToro is possibly one of many signs they were right, along with the broader crypto market crashes that accompanied the demise of FTX at the end of last year.
But while it can be easy to say “told you so” and fall into state of schadenfreude, the profession should instead be encouraging the Robinhood generation in their newfound interest in their own finances. Its unravelling presents an ideal opportunity to advocate for the value of advice.
Lord knows the next generation of investors need it.
