In an announcement on its website, published on 14 November 2017 (that can be downloaded below), the Financial Conduct Authority (FCA) has stated that the regulation of binary options is changing from 3 January 2018. From that date, binary options will be regulated by the FCA in the same way as investment products. This means that:
- firms will be authorised and supervised by the Financial Conduct Authority
- any individual complaints will be resolved by the Financial Ombudsman Service
- consumers will have access to the Financial Services Compensation Scheme
This announcement has been long expected, following a March 2015 HM Treasury consultation that set out the Government’s proposed amendments to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, the effect of which was intended to transfer the regulation and supervision of binary options to the FCA.
Currently, the Gambling Commission regulates businesses offering binary options, but only if they have remote gambling equipment located in Great Britain.
The use of the word ‘binary’ refers to the fact that there can only be two outcomes to the bet. If your prediction is right you win the bet; if your prediction is wrong you lose. Binary options have been described by the Commission (on a webpage, a copy of which can be downloaded below) as “a form of bet where you try to predict the outcome of events in financial markets. For example, whether a company’s stock price, or a foreign exchange rate, will rise or fall over a defined period (sometimes as short as 60 seconds)”.
In the FCA’s above-mentioned announcement, it states that: “Binary options are also regulated as investment products in many other European Union (EU) countries. Therefore under EU financial services law, firms which are legally established and authorised in one European Economic Area (EEA) country are entitled to do business in any other EEA country once certain procedural safeguards are met. This means that although the FCA does not currently regulate binary options, firms offering binary options trading and operating as financial services firms in other EEA countries, are able to do business in the UK”.
- On 15 December 2017, the European Securities and Markets Authority (“ESMA”) issued a statement (that can be downloaded below) providing an update on its work in relation to the provision of contracts for differences (“CFDs”), including rolling spot forex, and binary options to retail clients, in which it stated that it “has been concerned about the provision of speculative products such as CFDs, including rolling spot forex, and binary options to retail clients for a considerable period of time and has conducted ongoing monitoring and supervisory convergence work in this area” and “remains concerned that the risks to investor protection are not sufficiently controlled or reduced”, as a result of which it is considering the possible use of its product intervention powers to (a) prohibit the marketing, distribution or sale to retail clients of binary options and (b) restrict the marketing, distribution or sale to retail clients of CFDs, including rolling spot forex. It intends to conduct a brief public consultation in January 2018 on this matter.
- On 12 January 2018, FCA published a list of 94 firms (accessible here) that it understands to be offering binary options trading to UK consumers without its authorisation. The list is based upon information that it has received from consumers, partner agencies and from monitoring the binary options market. The FCA states: “Many of these firms claim to be based in the UK but we believe that most of the addresses they provide are false and that the firms are actually based overseas. We are examining each of these firms to determine whether any are genuinely operating from within the UK”. It adds that it is examining each of those firms to determine whether any are genuinely operating from within the UK and, if they are, it will “consider taking enforcement action through the courts to stop their illegal activity”.