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  • The Market Herald contacted IC Markets twice over the last 24 hours but received no response before deadline. We note there is no evidence of criminality by any party

Australian Contract-for-Difference (CFD) providers will be closely watching commercial law firm Piper Alderman when it files a class action lawsuit against IC Markets in an Australian court. 

IC Markets is an Australian CFD provider which has been on the scene since 2007.

But now the company is facing claims of alleged misconduct related to risk disclosures.

Speaking to The Market Herald, Piper Alderman Partner and class action manager, Kate Sambrook, expressed her view that the “golden age” for CFD trading in Australia was over.

“We’re saying IC Markets didn’t adequately disclose the risks [inherent in CFD trading,]” she said.

“I think the industry’s been woken up to this. You’ve got ASIC coming down on it … I think the golden age is over.”

Wait – what’s a CFD?

In simple language, CFDs are products that enable someone to place money on a prediction that the price of a share will go up or down. 

You can think of them as kind of like futures for share prices. 

Traders stand to gain money off “leverage” which means basically, the difference between a bet and the price movements of a selected asset.

Leverage allows for providers to advertise the potential for huge gains. 

In the past, these could be as high as 500:1, meaning that a $1 investment could net $500. IC Markets advertised such leverage before the Australian regulator wagged its finger at the sector some years ago.

And as for that 500:1 gain, in reality, it rarely happens.

The European Securities Markets Authority (ESMA) restricted the advertising of CFDs to retail investors in 2018, based on its research which found up to 90 per cent of CFD traders lost money.

The same potential for gains that make CFDs attractive is the reason why they’re so risky. 

One can lose more money than they invest – something which can’t happen with trading ordinary shares. 

But why the class action?

Piper Alderman will argue that CFDs are generally highly complicated products not fit for retail traders. 

The firm is representing a large pool of Australian traders. Their collective allegation is that IC Markets failed to advertise risks appropriately, meaning they, and other Australian consumers, unfairly lost money.

That view is far from controversial as far as the regulatory landscape goes. The products are banned outright in the USA

The American Government doesn’t like the fact CFDs are over-the-counter (OTC) products, and not on a regulated exchange.

The world’s largest economy isn’t alone. Hong Kong and Belgium have also banned the products. And the EU has banned CFD providers from advertising to anyone beyond institutional investors. 

Australia, however, for now, still allows CFDs.

Leaning into ASIC’s stance

Australia’s market regulator could be a sympathetic camp to Alderman’s position.

ASIC is already overseeing a lawsuit against another CFD provider, eToro. 

Ms Sambrook will be grilling IC Markets on its target market statement. Like eToro, she maintains IC Markets advertises its wish to attract clients with disposable incomes and risk-on appetite, despite research suggesting disposable income doesn’t particularly define those traders who pursue CFDs.

The Australian Securities and Investment Commission (ASIC) introduced a Product Intervention Order (PIO) for CFDs in August 2019. That PIO ordered CFD providers to water down the advertised gains they claimed users could achieve, with a view to protecting retail clients.

The report attached to the PIO was revealing. It found that 37 per cent of CFD traders earned less than $40,000 a year; 72 per cent were making under $80,000; and, the vast majority were aged between 25 and 50. 

A question of appropriateness 

“Part of the answer to this question [of adequate risk disclosure] relates to how risky these products are and who’s really using them,” Ms Sambrook said. 

“The products are difficult to understand, and the fee and cost structures aren’t particularly transparent … so people are starting from a position where they may not understand these products, while IC Markets understands.”

ASIC has itself taken issue with the general lack of research CFD traders were doing, often lured in by advertisements on the internet. Ms Sambrook said prior to the PIO, many CFD providers were offering perks – including iPad giveaways – to users. 

“CFDs are advertised at sporting events and in newspapers and things like that,” she said.

“I don’t recall seeing a lot of advertising for share trading. I don’t recall seeing ASX ‘come and trade with us’ advertisements.

“CFDs are on sporting teams and publications like the AFR, and so I think that might help [CFDs seem more credible.]”

IC Markets did not respond to multiple requests for comment before deadline. 

Do you know more about this story, or have a rebuttal to make? E-mail Jonathon Davidson at: [email protected]

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