The Battlegrounds of Binary Options – Part 1

ESMA has pushed for binary options further reform, with many EU countries banning the instrument's activities.

In recent months, regulators in the European Union have had binary options brokerages firmly in their cross-hairs. Following on from the CySEC April circular which sent shock waves through the binary options industry, ESMA has pushed for further reform, with countries such as the Netherlands, France, Denmark, and Belgium making moves to ban advertising and other aspects of binary options related activities.

Binary options brokerages have received poor press in recent months, with the main focus being on allegations of unscrupulous and fraudulent practices, reports of high pressure sales techniques and aggressive marketing and advertising. Coupled with its rise from being the little cousin of online Forex to the mammoth Hydra-like industry we see today, it was just a matter of time before regulators shifted into action mode.

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Why have the regulators acted?

The “who we are” section on ESMA’s website sheds light on the reasons for its attempts to clamp down on the reported excesses of the binary options industry. It boldly states that it has “One mission: to enhance investor protection and promote stable and orderly financial markets”, and identifies three objectives “Investor Protection, Orderly Markets and Financial Stability.”

Functionally its role is not only to ensure that there is regulatory supervision of financial services within the EU, but also to “spot emerging trends, risks and vulnerabilities and where possible opportunities, in a timely fashion so that they can be acted upon.” It uses its “unique position to identify market developments that threaten financial stability, investor protection or the orderly functioning of financial markets.”

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In most industries a change in policy from one regional regulatory authority will cause other regions to look at the same issue and assess their position. It is not unusual for other regulatory agencies to follow suit, with political and legal realities driving this agenda. The uniformity here is of a different nature, as ESMA is designed for the purpose of creating “a single rule book for EU financial markets”, and as such exert influence on all the EU member states’ individual regulatory authorities to follow their decisions.

Following in this trend however, can have possible consequences. The regulator must walk a fine line between investor protection and ensuring that the businesses under its regulations can function. Follow the hard line and you can risk making it unprofitable to undertake business, losing potential tax and business revenue and creating frustration amongst its stakeholders. Conversely, a line that is too soft can cause other issues, a regulator with no “teeth” confers no sense of protection for the users. Subsequently, businesses under their jurisdiction will have their legitimacy thrown into question simply for having chosen an ineffective regulator.

In the next section of this three part series we take a look at the different moves made by the individual EU country regulators, shedding light on how various European countries chose to walk that fine line.

This article was written by Yael Warman, Content Manager at Leverate.

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