Piper Alderman, Omni Bridgeway prepare class action against IG Markets over CFDs

Piper Alderman and Omni Bridgeway are preparing a $800m class action against IG Markets over its marketing of complex financial products to retail investors.

Piper Alderman is preparing an $800m class action against IG Markets over its marketing of contracts for difference, alleging the platform engaged in unconscionable conduct by pushing the complex financial products on inexperienced investors.

According to the law firm and its funder, Omni Bridgeway, some 20,000 investors have lost hundreds of millions of dollars trading contracts for difference through the company.

CFDs are leveraged financial products that allow investors to take positions on the movement of underlying assets, without owning any interest in those assets. The products have been banned in some countries, including the US, and have in the past caught the attention of the financial regulator.

Following a 2017 review, the Australian Securities and Investments Commission in 2021 imposed strict conditions on CFDs to protect inexperienced investors after it found that 72 per cent of retail clients lost money.

IG Markets is not the only platform facing heat on the risky financial products. The company’s main rival, CMC Markets, was in May hit with a separate class action over its marketing of CFDs and binary options to retail investors. The proposed class action against IG Markets will allege the platform consistently marketed CFDs to inexperienced investors and facilitated those investors to trade in the financial products without applying adequate checks and balances, according to Piper Alderman.

A statement from Omni Bridgeway, which is funding the litigation, said the action would allege that IG engaged in a ‘system of conduct’ or ‘pattern of behaviour’ in relation to the provision of CFDs to retail clients that was unconscionable, in contravention of the Corporations Act and the ASIC Act.

It will also accuse IG of misleading and deceptive conduct, again in breach of the Corporations Act and the ASIC Act.

Piper Alderman partner Martin del Gallego said highly leveraged CFDs should never have been marketed to everyday Australian investors.

“CFDs are little more than a form of gambling which has left tens of thousands of Australians out of pocket,” he said. “Our proposed class action will seek to recover these losses for investors who should never have been exposed to trading in such complex, high-risk products.”

Separately, CMC is accused of selling highly leveraged CFDs to retail investors, which were complex, highly risky and unsuitable for this segment of the market.

“In particular, the combination of the very high leverage provided by CMC, the margin call and automatic close out mechanisms and the price volatility of the reference assets meant there was an inherent risk of significant and rapid loss,” documents filed with the court read.

“Retail investors had limited ability to adequately understand and mitigate the risks of the products so as to generate a reasonable investment return.”

Further, CMC’s system “was likely to cause and did cause retail investors to trade in highly leveraged CFDs and binaries when it was not in their best interests, was likely to cause them significant losses and where they were not fully informed of the risks of those trading activities”, it is alleged.

CMC is alleged to have contravened sections of both the Corporations Act and the ASIC Act.

The two applicants representing the class action against CMC, brought through law firm Johnson, Winter & Slattery, both lost hundreds of thousands of dollars of a period of years through CFD trading on the platform.

One of the applicants, who lost $270,000, funded all of his trading on his credit card, resulting in “significant credit card and loan debts, charges and fees”. The other lost $226,000 over a period of four years from May 2017.

A regulatory crackdown in 2021 saw ASIC slash the CFD leverage available to retail clients and target product features and sales practices it said amplified trading losses. Within six months of the restrictions coming into effect the watchdog said it saw a 91 per cent decline in net losses in retail trading accounts, from an average aggregate net loss per quarter of $372m to $33m. It also saw a 51 per cent drop in loss-making accounts per quarter.