There have been a set of worrying developments over the past couple of years concerning binary options. What started as a controversy in the US in 2013 with the action of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to limit the offering of the product across the Atlantic, has been spreading to other regions of the world.
While the dispute of whether binary options should be treated as a financial instrument or gambling continues, a number of regulators have joined the US in proclaiming binary options as dangerous or illegal.
At the beginning of the past week the Israeli Financial Services Authority gave a 30 day notice to brokers providing the contracts in Israel, before a ban on binary options is activated. Canadian authorities have also joined the fray with an announcement that Canadians should be wary of binary options brokerages which are likely to abuse their personal data and credit card information, among other financial fraud.
The Canadian regulators have compared binary options to gambling and elaborated that the brokerages are frequently mistreating their clients. The news comes after a year of complaints and bad press regarding binary options across Europe, particularly from France and the local authority Authorite des Marches Financiers (AMF).
The French regulator has been actively studying the binary options market and published last year a “mystery shopper” survey which revealed striking irregularities in the practices of binary options brokers across Europe.
CySEC Under Fire by European Securities Markets Authority
The Cypriot regulator has been at the center of the AMF study, with the mystery shoppers managing to open accounts at 8 brokerages regulated by CySEC. After some time the clients of the regulated brokerages attempted to withdraw their funds, and succeeded in doing so on only two occasions.
After literally thousands of complaints from clients across the European Union contacting their local regulators regarding the malpractices by companies engaging in the provision of binary options services to their clients, the European Securities Markets Authority has applied pressure on the CySEC to start treating the complaints of clients adequately.
Serving as proof about the situation in which the Cypriot regulator has found itself is the fact that after years of silence, the watchdog has finally started cracking down on dubious practices across the industry and started issuing more material fines. On top of it, CySEC hired a PR agency to facilitate communications with the media.
Feasibility of Regulated Binary Options in the European Union
Looking at the prospects for the industry and CySEC, the possibilities for the continuation of the operation of regulated binary options brokers across the European Union is largely dependent on the watchdogs and the brokers themselves.
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While CySEC has certainly tightened its stance regarding the firms offering binary options contracts across the European Union, it would take action on the part of the brokers to adhere to fair market practices in order for the industry to continue operating legally across the continent.
The ESMA may be pushing for CySEC to suspend regulating binary options companies, however a legal precedent in the Netherlands, which Finance Magnates reported on last year, could provide a necessary lifeline for binary options to continue to be regulated as a financial product.
Dutch company Optieclub has been vigorously battling in court to obtain the right to get regulated as a financial product by the local regulator for a couple of years now. After a court ruling awarded the company with the right to get regulated as a financial intermediary, other regulators across the European Union in theory should be mandated to do the same.
The Case for CySEC to Continue Regulating Binary Options
With CySEC facing criticism from the ESMA regarding the conduct of regulated binary options brokers, there is no choice for the regulator but to approach the matter seriously and make regulated firms adhere to the standards determined by the law.
While a number of companies related to the binary options industry continue to be based in Cyprus, the political case for ceasing regulation and kicking them out of the country is not compelling, especially considering the precarious times for the Cypriot economy and the need for jobs in the country.
Several big brokerages are operating from the island and the industry is providing thousands of jobs, which are hard to be replaced by existing industries on the island. It is in the interest of CySEC to continue to regulate binary options companies especially considering that no other regulators across the EU are particularly enthusiastic about taking on the product. While the FCA was rumored to begin regulating the product in the past, a lot of quarters have passed since then that are making the transition unlikely at present.
Brokers Should Forget About Malpractice for the Sake of Business
Binary options brokerages which are not adhering to honest conduct clearly have no place in the industry and clearly will lose out in the long run. With a number of companies already actively engaging in proper conduct, the word about fraudulent practice gets out quickly amongst the trading community and regulators.
The European Union is a huge market for the product and not many brokers will be able to afford to continue operating should binary options be banned across the European Union. That said, this is contingent on the brokerages and technology providers adhering to honest conduct and avoiding the use of tools that are actively preventing their clients from making winning trades.
Unlike foreign exchange and CFDs trading, where clients have the option to choose whether to trade with a market maker or an STP broker, in the over-the-counter (OTC) binary options market, the broker is always on the other side of the trade.
With no visible elimination of the conflict of interest in sight, binary options brokers might as well consider repaying their clients their winnings on time and adhere to the market price when selling their contracts. This way is the only way forward for the industry considering the rising tide against the product around the globe.