What is the impact of the FCA’s ban on binary options?

Apr 5th '19

On 29 March, the Financial Conduct Authority (FCA) confirmed that it was permanently banning the sale of binary options to retail customers.


In an announcement on its website, the regulator stated that following consultation feedback, it had decided that ‘all firms acting in or from the UK are prohibited from selling, marketing or distributing binary options to retail consumers’.


The ban came into force on 2 April 2019.


Here we look at the implications of this ban from a compliance point of view.


What are binary options?

In the words of Christopher Woolard of the FCA, binary options are ‘gambling products dressed up as financial instruments’ and ‘an inherently flawed product’.


Investopedia says that: A binary option is a financial product where the buyer receives a payout or loses their investment, based on if the option expires in the money’ (i.e. increases in value).


They first fell under the regulatory spotlight in March 2018, when a ban was proposed by pan-European regulator ESMA. The FCA then consulted on whether it should take the same approach.


The FCA’s new rules are the result of that consultation. They go further than ESMA’s current EU-wide temporary restrictions on binary options, also being applicable to so-called ‘securitised binary options’, which are excluded from ESMA’s prohibition.


Securitised binary options are not currently sold in or from the UK, but the UK regulator believes that they pose the same risks for investors, and is including them in its rules ‘to prevent a market developing for these products’.


Why have they been banned?

Announcing the ban, the regulator cited ‘the inherent risks of these products, and the poor conduct of the firms selling them’.


Their availability in the retail market – where they can potentially be bought by inexperienced investors – has led to ‘consumer harm in the UK and internationally through large and unexpected trading losses’.


The FCA is estimating that its permanent ban on binary options could save retail consumers up to £17m per year, as well as reducing the risk of fraud by unauthorised entities claiming to offer these products.


What advice does the FCA have for consumers?

The regulator says that ‘UK consumers should continue to be alert for binary options investment scams and should only deal with financial services firms that are authorised by the FCA’.


It also makes the point that, with the sale of binary options to retail consumers now banned, any firm that is still offering binary options services to retail consumers ‘is likely to be a scam’.


What does this mean for firms?

All firms offering binary options services in the UK should now have ceased doing so. If this is something you used to sell, you need to have stopped.


Whether or not you offer investment products, there are some useful reminders in the binary options announcement for all FCA-regulated firms.


  • Make sure you are not causing potential harm

One of the main issues cited by the FCA on binary options is the potential ‘harm’ they cause to investors.


Harm was a big theme of the FCA’s new approach to supervision, announced in March last year. Firms should examine their own products and communications to ensure that they do not potentially cause harm to customers.


  • Bear suitability in mind

A related issue is that of suitability. Your products – and the financial promotions that communicate them to potential customers – need to be suitable for your market and audience.


This is particularly true when dealing with vulnerable customers.


  • Treat customers fairly

Treating customers fairly is a key theme for the FCA and central to its desired consumer outcomes.


Your products and financial promotions need to meet the FCA’s standards in terms of content (and of course, also in terms of the Compliance review and sign off process)


You can read the detail of the FCA’s ban on binary options  here.


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