ASIC has commenced its first civil penalty action for contravention of the Design and Distribution Obligations (DDO) regime against online CFD trader eToro.
It is a significant upping of the ante for ASIC's enforcement of the DDO regime. Since its implementation there have been a significant number of product interventions in the form of Interim Stop Order which prevent the product being offered for a specified period on the basis of ASIC's concerns regarding compliance with the DDO regime.
The DDO regime has been one of the most significant reforms of recent years for financial services with implications across the full gamut of product types and FS industry sectors.
And ASIC has not been shy to use what is, on its face a protective regime, as an enforcement tool by intervening in the market.
Now ASIC has upped the ante with its first civil penalty action. ASIC alleges eToro breached DDO requirements and its obligation as an Australian financial services licence holder to act 'efficiently, honestly and fairly'. The case focuses on eToro's self-defined target market, and the screening test it uses to assess whether a retail client falls within that target market. Specifically, ASIC alleges eToro's target market for the CFD was too broad, and the screening test wholly inadequate to determine whether a retail client fell within the target market. ASIC's position is the test was ineffective, and it has warned industry participants against reverse engineering the target market determination to suit their existing client base – a warning against using screening tests which are, in effect, a 'choose your own retail client adventure' to fitting within the target market.
ASIC enforcement has been relentless in pursuing what it sees as wrongdoers and risky products in the OTC derivatives markets. A programme of aggressive enforcement saw a significant number of online trading platforms forced out of the market or into administration. The message from ASIC Deputy Chair Sarah Court in the media release of this action is pretty clear:
'Our message to industry is that CFD target markets should be narrowly defined given the significant risk that retail clients may lose all of their deposited funds. CFD issuers must comply with the design and distribution regime and cannot simply reverse engineer their target markets to fit existing client bases. ASIC is disappointed by the alleged lack of compliance in this case, given eToro's market penetration and the depth of its brand awareness, both in Australia and globally.'
For the lawyers, it will be interesting to see how ASIC pleads this first case and the nature of particulars, along with how eToro responds.
For the normal people out there in industry, it is a further indication of ASIC's commitment to using DDO to drive industry behaviour, and now its ability/willingness to use it as a regulatory sword rather than shield with civil penalty action. And it's a further confirmation that consumer harm has become a key driver of its enforcement response and that online derivatives remain under close scrutiny.
More detail can be found in Lucy Dean's AFR article below, which notes the previous Stop Orders against Saxo Capital Markets and Mitrade, and in ASIC's press release.
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