FCA Introduces Permanent Ban on Binary Options to Retail Consumers

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The Financial Conduct Authority has confirmed a permanent ban on the sale of binary options (Binaries) to retail consumers. All firms acting in or from the UK are permanently prohibited from selling, marketing or distributing Binaries to retail consumers as of 2 April 2019.

New rules are included in the Policy Statement (PS19/11), which follows up on a consultation paper held in December (CP18/37) where only eight responses were received , although it seems that respondents supported the regulatory effort to reduce investor harm from Binaries.

In CP 18/37, the FCA expressed concern that:

  • Binaries are primarily used for speculative purposes;
  • Firms offering these products usually benefited from client losses;
  • Because of their inherent complexity and lack of transparency for calculating pay-outs, pose a risk of widespread mis-selling to less sophisticated clients;
  • In light of information asymmetry, is difficult for retail consumers to judge the value of their risk.

The measures to prohibit marketing, distribution, or sale of Binaries to retail clients have been in place since 2 July 2018, as a result of ESMA use of product intervention powers under article 40 of the Markets in Financial Instrument Regulation (MiFIR). The FCA rules set out in PS19/11, which were made as a result of powers exercised under article 42 of MiFIR, replicate ESMA temporary measures and go further by capturing all Binaries, including ‘securitised binary options’ (SBOs), which are currently not in scope of the ESMA ban. Queries were raised by respondents to the consultation on whether there was sufficient evidence of harm to support the ban on SBOs. The FCA did not fully address this concern (i.e. no evidence was provided), however the FCA noted that it does not believe retail consumers trade in SBOs, and that this ban guarantees this will remain the case for UK firms.

The FCA estimates this permanent ban could save retail consumers up to £17m per year, and may reduce the risk of fraud by unauthorised entities claiming to offer these products. Christopher Woolard, Executive Director of Strategy & Competition at the FCA, said: ‘Binary options are gambling products dressed up as financial instruments. By confirming our ban today we are ensuring that investors don’t lose money from an inherently flawed product.’

Firms that are currently authorised to offer Binaries to retail clients should, as soon as practicallypossible, request a Variation of Permission (VoP)to remove this investment type or apply for a requirement to limit their permissions to offer these products to professional clients only.

Retail investors should be alert for Binaries scams, and only deal with FCA authorised firms: with this ban coming in force, any firm offering Binaries services to retail consumers is likely to be a scam.

It cannot be said that the FCA’s decision is surprising as widespread feelings in the industry were that the FCA was going into the direction of a permanent ban even if ESMA had not acted. Unfortunately, there are is no data available to confirm how many retail investors have elected to become “professional” or started trading in third country jurisdictions, since the temporary ban came into effect.

The FCA has made it clear that they will continue monitoring firms’ compliance with this ban.

If you would like further information or require assistance with an application to vary your firm’s permissions, please do contact us at +44 (0)2034 573 283 or by email at info@objectivus.com.