The Australian Securities and Investments Commission said on Thursday it had filed the suit in Federal Court over eToro's contracts-for-difference.
The leveraged derivates contracts allow clients to speculate on the change of underlying assets, such as foreign exchange rates, stock market indices, individual shares, commodities or cryptocurrencies.
ASIC said that between October 5, 2021 and June 14, 2023, almost 20,000 of eToro's clients lost money trading CFDs.
Under the Corporations Act 2001, financial products must be marketed to a "target market". ASIC alleges eToro's target market for its CFDs was far too broad and used a screening test that was very difficult to fail.
For example, clients could amend their answers without limitation and were prompted if they selected answers that could result in them failing, the watchdog said.
"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," ASIC deputy chair Sarah Court said.
The regulator is seeking fines and declarations from the Federal Court.
A company spokesperson said eToro Australia was now operating with a revised target market determination for its CFDs and would consider the allegations and respond accordingly.
"As a business which is regulated by financial authorities in multiple jurisdictions around the globe, eToro is committed to being compliant with applicable rules and regulations in all the jurisdictions in which we operate," the spokesperson said.
"We pride ourselves on working in close collaboration with regulators to ensure consumer protection while also balancing the need for access for individual investors."
Headquartered in Tel Aviv, eToro has offices in Sydney as well as Cyprus, the United Kingdom and the US.
The platform sponsors Rugby Australia and has used actor Alec Baldwin as a paid spokesman.
ASIC in recent months also took administrative actions against Saxo Capital Markets and Mitrade over their CFD products.
10°C