Such products have proved dangerously attractive to unsophisticated investors
Piper Alderman has teamed up with global legal finance firm Omni Bridgeway on the filing of a class action suit against UK-supported financial services firm IG Markets Limited in relation to contracts for difference (CFD) products.
The suit has been filed on behalf of up to 20,000 Australian investors who lost money as a result of trading such products. Proceedings kicked off in the Federal Court’s Victorian Registry after several months of in-depth investigation.
In the suit, Piper Alderman and Omni Bridgeway claimed that IG Markets did not adequately assess the objectives and financial situations of investors, and did not properly present the risks of investing in CFDs.
“The class action seeks to provide a remedy and recover these losses for retail investors who should never have been exposed to trading in such complex, high-risk products”, Piper Alderman partner Kate Sambrook said.
According to ASIC, retail investors with IG Markets have lost more than $800m overall. The Federal Court has said that CFD products are like “financial heroin hits” to unsophisticated investors.
Piper Alderman and Omni Bridgeway described CFDs as “leveraged” financial products that “enables investors to take a position on the movement of an underlying asset – such as a share, a share price index, a commodity, a currency or even a crypto currency – without owning the asset itself”.
“The investor pays only a fraction of what the underlying asset is worth and bets on whether the asset will increase or decrease in value. If an investor bets correctly, they can generate significant profits”, the organisations explained. “But if they bet incorrectly, their losses can be equally significant, and can far exceed the amount of their initial investment”.
An ASIC review revealed that 72% of retail CFD traders lost the gamble, and in March 2021, the regulator implemented stringent conditions on CFDs to shield inexperienced investors in response. CFDs have been considered similar to gambling on financial markets, and the US, along with some other countries, have banned such products.
Sambrook pointed out that highly leverage CFDs “should never have been marketed to everyday Australian investors who had little or no experience in trading such complex products”.
Piper Alderman and Omni Bridgeway reported that hundreds of impacted investors have already joined the class action. The firms call for other affected investors to register and receive more information about the suit via Omni Bridgeway’s website.
Some CFD licensees operating in Australia have been slapped with penalties exceeding $75m following proceedings brought by ASIC.