As a relatively new investment vehicle, binary options have suffered from a poor reputation in the past. Partly owing to the actions of a small minority of brokers, but also due to these options being classed as gambling in some jurisdictions.
The regulatory landscape has changed significantly since the inception of binary options, and it continues to evolve. In the UK, changes in legislation now look extremely likely, and consumers may ultimately be offered a level of protection which they have not previously enjoyed. Binary options could soon be classed alongside other financial instruments – bringing them into the financial mainstream.
Regulation of binary options brokers up until now, has fallen largely to the Cyprus Securities and Exchanges Commission (CySEC). Brokers adhering to the CySEC regulations (specifically the MiFID elements) were able to use this ‘passport’ to trade anywhere in the EU.
The CySEC regulations do have some teeth, and have certainly improved the security of traders. In terms of consumer protection for those in the UK however, regulation via the Financial Conduct Authority (FCA) would give far superior peace of mind – and it may be on the way.
The UK government had previously left control of binary options brokers in the UK to the Gambling Commission. This classification has not helped the reputation of binary options, and equally, the Gambling Commission is ill-equipped (and lack any real desire) to regulate brokers effectively.
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In the summer of 2015, the UK government embarked on a consultation exercise to judge whether regulation of binary options would be better handled via the FCA. Relevant stakeholders, and the wider public, were asked their views on where regulation should sit.
The consultation process ended in July, and we understand that the findings will be published in early 2016. The commonly held view is that the government would like to align itself with the rest of the EU, in classifying binary options as financial instruments, and not as bets.
The importance of regulatory responsibility moving from the gambling Commission to the FCA cannot be overestimated. Key requirements of FCA regulation are likely to include;
• Suitability checks (or ‘wealth’ checks) to ensure products are not mis-sold
• Segregated funds between broker accounts and trader funds
• Dispute resolution processes
Many responsible brokers will already adhere to many of the requirements that FCA regulation brings, or will be able to implement them. So the real value in these changes will be in finally ensuring high standards of any broker operating in the UK.
Enhanced customer protection, coupled with a greater respect for binary options, could see a huge increase in their use. 2016 could be a watershed year for binary options in the UK – for all the right reasons.