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Ex-securities regulator now works for fintech firm that pushed him to weaken law

9 14 0
01.07.2021

Shmuel Hauser, Israel’s former top securities regulator, has taken a job as an advisory board member at one of Israel’s fastest-growing online trading companies, The Times of Israel has learned.

The company, eToro, falls into the category of online trading firms that were under Hauser’s purview when he was chairman of the Israel Securities Authority (ISA) from 2011 to 2017. In 2017, eToro lobbied for, and Hauser agreed to, the watering down of a Knesset bill banning the fraudulent binary options industry. EToro did not sell binary options. Nevertheless, the original draft of the bill, if left intact, would have restricted eToro’s overseas activities by banning it from operating in countries where it does not have a license.

EToro is an online brokerage that allows mom-and-pop traders, also known as retail traders, to buy and sell stocks, commodities, cryptoassets, currencies, indices and ETFs (exchange-traded funds) as well as derivatives of some of these assets. Riding the wave of Millennial and Generation Z interest in online trading, eToro reported more than 275 percent growth in funded accounts in 2020, and is set to go public in the United States at a whopping $10.4 billion valuation in the coming months. The company reported $605 million in gross revenue last year.

Hauser has been advising eToro for a year, The Times of Israel has learned, focusing on regulation matters around the world, and serving on the company’s senior advisory board ahead of the SPAC deal that is due to take eToro public in the US. The Times of Israel asked him whether and how much eToro pays him. He declined to comment for this article.

Critics of the company claim that a significant share of eToro’s revenue comes from leveraged CFDs, a complex financial product ill-suited for unsophisticated investors.

It is illegal to offer CFDs to retail traders in some countries, including the United States, and other countries are considering bans or restrictions. EToro does not offer CFDs in the US.

Most mom-and-pop traders lose money on CFDs. At eToro, “67% of retail investor accounts lose money when trading CFDs with this provider,” according to the company’s homepage.

Critics have also slammed eToro’s business model, whereby eToro reserves the right to make money from its customers’ losses, and does not always hedge its positions on CFDs. They further claim that eToro advertises aggressively, touting its website as a safe and easy way to trade on financial markets, when in fact many of its customers lose their money.

In at least two cases, eToro has also accepted customers in countries where it lacks a license, even when the country’s laws explicitly prohibit this.

Finally, critics have pointed to staffing connections between eToro and Israel’s outlawed, largely fraudulent binary options industry: More than two dozen past and present employees of eToro have also worked for a binary options company, according to their LinkedIn profiles.

EToro told The Times of Israel that the vast majority of its users do not trade CFDs. It said that “since our users do not trade CFDs exclusively, the performance of the majority of eToro users is significantly better than the performance cited in the CFD disclaimer.” (EToro’s response to all of ToI’s questions appears at the bottom of this article in full.)

EToro refused to specify what percentage of its overall revenue comes from the trading of leveraged CFDs, saying in a phone interview that this was “material nonpublic information.”

Hauser is not the only former Israeli regulator to have gone to work for eToro. On April 7, eToro announced that it had appointed Hedva Ber, former supervisor of banks at the Bank of Israel, as its deputy CEO and global COO.

Nir Barkat, a senior Likud Knesset member and former mayor of Jerusalem, is a shareholder in a venture capital fund that invested in eToro, his spokesman confirmed to The Times of Israel. According to Israel’s Channel 12 News, the imminent deal to take eToro public in the US will turn Barkat into “the Knesset’s first billionaire.” Barkat’s spokesperson did not answer the question of whether Barkat would make money from eToro’s IPO.

Hauser was the chairman of the Israel Securities Authority until December 2017, when he stepped down more than a year before the end of his term, at the height of several high-profile anti-corruption battles. His spokeswoman said at the time that Hauser had no immediate plans, other than “to rest.”

While by no means illegal, Hauser’s transition from heading the ISA to working for a company that had been under his purview raises concerns about a “revolving door,” whereby former regulators obtain lucrative jobs with companies they were previously tasked with scrutinizing for wrongdoing.

EToro was founded in 2007 by Israeli brothers Yonatan and Ronen Assia as well as David Ring.

In the beginning, it billed itself as a forex trading platform that would “democratize” financial trading by making it more “game-like.”

“Currencies run marathons, pull ropes or relate to each other connecting strings between their countries on a world map. Users trade with a cowboy or a sumo wrestler, they participate in prize-winning championships, chat, and trade for practice as well as for real money,” read a 2007 eToro press release.

Over time, eToro began to emphasize CFDs over forex trading and began marketing a “copy trading” feature whereby users can share investment ideas and copy the trades and portfolios of successful traders on the site. EToro currently describes its mission as “to build the world’s largest social trading network.”

The firm is licensed in the UK, Cyprus (which covers the rest of the European Union), and Australia. In 2020, eToro got a broker-dealer license from the Financial Industry Regulatory Authority (FINRA) in the US and will launch stocks and copy-trading in the US later this year, the company said in a recent investor presentation.

In the mid-2000s, a new industry appeared in Israel and Cyprus simultaneously. It was known as “retail forex” and consisted of websites that purportedly allowed ordinary people to trade on foreign exchange markets, a type of trading that had previously been restricted to big banks, hedge funds and other sophisticated investors. Many of these forex trading websites used the Metatrader software platform developed in Russia. They proliferated very rapidly in both Israel and Cyprus.

But most had a business model that rested on a conflict of interest with their customers, meaning that the company sometimes or always made money as a direct result of customer losses. One of the more reputable forex companies operating from Israel, FXCM, proclaimed that it did not make money from customers’ losses, but in 2017 several of its entities were fined $7 million by the United States Commodity Futures Trading Commission for failing to disclose that it did in fact have a conflict of interest.

EToro has in the past insisted that it was different from other forex companies, that it did not take the other side of forex trades, and that it did not have a conflict of interest with traders.

But when it comes to CFD trading, which the company appears to have introduced about a decade ago, a representative of eToro acknowledged to The Times of Israel that eToro does have a conflict of interest with its customers.

“There is a conflict of interest,” Elad Lavi, eToro’s VP of corporate development, said of CFD trading on eToro’s website. “But it’s managed. We’re regulated by the FCA and in Europe. We’re audited. We add risk disclaimers wherever needed, saying that eToro is acting in a conflict of interest. Everything is transparent for clients.”

Lavi refused to disclose what percentage of its revenue eToro derives from CFDs.

Why is this important? Jacob Ma-Weaver, an investment adviser in the United States who has closely followed the battle against online investment fraud in Israel, told The Times of Israel that the question of whether or not an online trading website has a conflict of interest with its investors is one of the most important things a potential investor needs to know.

When trading stocks, investors generally own the shares outright, and brokerages make their money from commissions on the transaction. But with many online trading platforms, investors are actually buying a complex derivative........

© The Times of Israel


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