‘Financial heroin hits’ – selling of ‘CFDs’ sees 20,000 Australian investors bring class action against IG Markets Limited

This month a class action was filed on behalf of 20,000 Australian investors who allege that broker IG Markets Limited sold high-risk derivatives in the form of ‘contracts for difference’ (‘CFDs’) to inexperienced investors, resulting in losses up to $800 million.

CFDs have been subject to increasing regulatory scrutiny, as previously reported in our focus papers: ‘ASIC update: proposal to extend CFD product intervention order following improvements in retail trading outcomes’ and ‘ASIC product intervention orders: ban on binary options for retail clients and restrictions on retail trading of CFDs’.

CFDs enable an investor to speculate on the change in the value of an underlying asset such as a share, commodity, currency or crypto currency without having to purchase the asset itself. While the investor is only required to pay a fraction of the price of the value of the underlying asset, the investor is exposed to the total movement in the price of the asset. The Federal Court of Australia has likened CFDs to ‘financial heroin hits’ as this form of investing can result in significantly magnifying both profits and losses.1

The class action alleges that IG Markets failed to adequately assess the objectives and financial situations of the investors and had marketed the trading of highly complex derivatives to inexperienced investors. It is further claimed that IG Markets had inadequately disclosed the risks associated with CFD trading until the Australian Securities and Investments Commission imposed strict conditions on dealings with CFDs in March 2021.

The class action was filed in the Federal Court of Australia and is being funded by litigation funder Omni Bridgeway. Addisons’ Corporate team will keep you posted on developments.

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1 Australian Securities and Investments Commission v AGM Markets Pty Ltd (In Liq) (No 4) (2020) 148 ACSR 511

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