Readers of this newsletter may know that eToro was fined €1.3m by an Italian anti-trust regulator (AGCM) earlier this month.
For those unaware of this, the high level problem was that eToro advertised stock trading as ‘commission-free’ to investors in Italy, when in reality they did have to pay some costs around FX and transfers.
This happened to providers in the UK a couple of years ago, which is why a lot of them stopped doing it or put other information around the ‘commission-free’ stuff to show that there were other costs involved when buying stocks.
However, reading through the full case against eToro is interesting for several reasons.
One is that Fineco Bank actually joined the suit and provided information that was used against eToro. The spirt of friendly competition!
The main points Fineco made were essentially the same as those made by the AGCM, namely that…
- eToro wasn’t being transparent about costs
- Shares were non-transferrable
- The way they were marketed would have enabled them to cross sell “complex products”
If we start with the first point, I understand why the regulator is annoyed but I also have some sympathy for the ‘commission-free’ slogan. Most people seem to associate ‘commission’ in this context with ‘dealing fees’ or ‘execution fees’, so it doesn’t seem misleading to use the phrase in reference to those charges. Also ‘execution free’ doesn’t make for great ad copy.
But then some of eToro’s stocks weren’t commission free apparently. And regardless of what I think, it’s clear regulators don’t like this stuff – so it may be wiser for brokers to avoid doing it (or provide more info if you do).
However, the shares being non-transferrable is more of a valid point. The inability to transfer your shares out of a company is bad practice and does effectively bake in an extra cost if you ever want to do that. If you had any funds in a tax-efficient account, like an ISA, it would also mean you lose that allowance if you were forced to transfer into cash.
The broad sense you get from the regulator here is that they just don’t like it, with one of the things highlighted being that you cannot access voting rights attached to shares. One weird thing, to be fair to eToro, was that they criticised the company for not telling customers that you don’t get dividends if you bought shares after the ex-div date…which is how that works?
Anyway, the other facet they looked at here was to criticise it as an additional cost that customers had to pay. Basically if an investor wanted to transfer shares, they’d be forced to sell, incur FX and withdrawal fees in the process, then buy back, which would result in paying the spread and (potentially) dealing costs.
Aside from saying this acts as a kind of fee, the regulator also noted that the inability to transfer shares wasn’t made clear to prospective customers. Had it been, then it’s plausible they’d have decided not to invest.
This points to a couple of things. One is the operational costs associated with adding equities trading. In simple terms, this is not like CFDs, which can be manufactured relatively easily and where you don’t have to worry about things like custody, nominee accounts, exchange connections and so on.
The other is that this is just another factor that brokers will have to be cognisant of when adding equities. Regulators don’t like it in general if you don’t allow customers to transfer out. Now we know they also don’t like it if you don’t allow them to do it and market the service as being commission-free.
Now the final point about cross selling. I know many of you will be shocked – truly shocked – to learn that some providers use the ability to sell stocks as a way of circumventing marketing restrictions and cross selling other products.
The first thing is that it’s kind of hilarious Fineco complained about eToro doing this considering they were doing pretty much exactly the same thing during the pandemic. I also seem to recall similar banner ads popping up when I was in Italy towards the end of last year. The only reason I can think of that this particularly annoyed Fineco is that they do charge dealing fees, so maybe they felt eToro was stealing clients from them.
However, the ‘positive’ here is that the regulator actually didn’t look at this point. In other words, they didn’t look into the fact that eToro customers may have been able to switch too easily into leveraged products – although the caveat here is that the AGCM is not a financial regulator, so it may be something that crops up down the line.
Some other interesting info was also in the case doc. One is that eToro’s Cypriot entity was loss-making last year. The AGCM actually reduced the fine €200,000 because of this.
Following up on that, I had a look at eToro’s most recent investor presentation deck. Aside from not providing any information on revenues or profit/loss for last year, this was also interesting because it showed the company is applying for licences in Singapore, Abu Dhabi, Germany and Spain.