IG class action lawsuit in Australia: Was IG too laissez-faire with its retail clients?

IG Markets, the ASIC-authorized FX and CFD brokerage subsidiary of IG Group, has become the target of a civil class action on behalf of thousands of investors who lost an estimated $800 million trading contracts for difference (CFDs).

The figure of $800 million was put forward by the Australian Securities and Investments Commission, according to data collected by the financial watchdog.

When news first broker, law firm Piper Alderman and legal finance team Omni Bridgeway had already signed 20,000 IG investors to work on their behalf.

The class action will allege IG Markets consistently marketed CFDs to inexperienced investors and facilitated those without proper checks and balances.

A leading attorney on the case, Martin del Gallego, argues that CFDs are little more than a form of gambling and that this trading instrument has left tens of thousands of Australians out of pocket. The class action seeks to recover these losses for investors.

FXOpen executive reminds CFD brokers have duty toward retail customers

We spoke with Natalia Zakharova, Head of Sales at FXOpen, to ascertain her view about the class action lawsuit in Australia against IG. FXOpen is a highly regarded Forex and CFD brand with an ASIC-authorized entity in Australia along with other entities in the UK and Cyprus.

“The way CFD products are marketed has been a real moot point among regulators and advertising standards authorities in various parts of the world for quite some years now. In Australia, where this class action lawsuit against IG Markets is being instigated”, said Ms. Zakharova. “The sheer magnitude of the amount being requested by the series of IG Group customers who have joined this class action litigation led by two major Australian law firms demonstrates that there is weight behind it, as law firms of that stature would likely not risk their own reputation by going into a high profile case at that level if they thought it was an outlandish figure.

“Australian regulatory authorities have been looking closely at how CFDs are marketed for many years, and have in some ways led the charge of regulatory scrutiny on CFDs in general, with many publicly available sanctions having been imposed on some brokers in Australia which have aggressively marketed ‘high risk’ trading products or not engaged with their customers sufficiently to ensure suitability”, she continued. “Therefore, whilst we sympathise with any retail brokerage which is facing a potential settlement that could run up to almost $1 billion Australian Dollars, every firm has a duty to work within the remit of the regulators and the Australian authorities are particularly intent on stopping the inappropriate marketing of CFDs.

“As with the Gamestop debacle in early 2021 in which IG (among some other firms) locked customers out of their accounts when positions were open and the market was highly volatile, there is enough historic data to show that exposing retail traders to great risk and enough ammunition to ensure that regulators could demonstrate that CFD products should be carefully provided to traders who fully understand the operational functionality of the product and the underlying assets that it is based on.”

ASIC restricted CFD products to retail investors in 2021

ASIC imposed restrictions on leverage and marketing of CFD products to retail investors last year after evidence that Australians incurred in heavy losses. The regulator imposed:

  • leverage ratio limits ranging from 30:1 to 2:1
  • standardisation of margin-close out rules
  • negative balance protection
  • prohibitions on offering or giving of certain inducements

The regulator renewed the order earlier in 2022 following a successful year. For instance, ASIC observed during the order’s first six months of operation:

  • a 91% reduction in aggregate net losses by retail client accounts (from $372 million to $33 million aggregate net loss per quarter on average)
  • 51% fewer loss-making retail client accounts per quarter on average
  • an 87% decrease in margin close-outs affecting retail client accounts per quarter on average
  • an 88% reduction in negative balance occurrences for retail clients per quarter on average.