FCA Takes Charge of Binary Options, Warns Against Crypto CFDs

The UK FCA has issued a communique highlighting that it is taking over the regulation of binary options starting from 2018. The companies that are operating in the industry will no longer be required to be licensed by the UK’s gambling commission.

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Binary Options Toxicity

According to the FCA, there are major concerns associated with binary options trading. The regulator highlights that not only do the majority of consumers lose money while trading the product, but that binary options also cause clients to become addicted.

Elaborating on the potential for fraud and the conflicts of interest between clients and their brokers, the FCA highlights that since 2012, binary options fraud has caused 2,605 victims to be scammed out of £59.4 million. That's an average of over £22,000 per person.

Up until now the UK’s Gambling Commission was regulating binary options only for companies that have some equipment in the UK.

Starting from the 3rd of January 2018, companies that want to offer binary options in the UK will need to be regulated by the FCA. Clients will be able to complain to the Financial Ombudsman Service and will have access to the Financial Services Compensation Scheme (FSCS).

Firms that are regulated in other EEA countries will need to be restored with the FCA before being able to legally provide their product in the country.

Crypto CFDs Classified as “Extremely High Risk”

Due to the high fluctuations in the prices of cryptocurrencies, the FCA frowns upon offering high leverage on the product. The move spells changes to the conduct of retail brokers that offer crypto trading. The watchdog alerts retail investors that the product is “extremely high risk” due to the potential risk of gaps in the market.

Bitcoin tanked almost 30 percent in a matter of hours as recently as last week, and the FCA highlighted that this had shades of the SNB crisis that caused negative balances.

The regulator states that leverage on these products may end up causing the customer to lose more than his/her balance. The sources of price data are also being put into question, as the FCA states that there is a greater risk of getting inaccurate pricing for cryptocurrencies.

Commenting on the warning, Jake Green, a regulation partner at law firm Ashurst, said: "Many market participants will be comforted by the fact that the FCA has expressly stated it regulated crypto CFDs (there was some doubt). However, they are on notice that the FCA will regulate such offerings in micro detail, and brokers have been warned that the FCA will not look too kindly on providers that do not offer appropriate levels of client disclosure and protections – particularly with a MiFID II 'product governance' hat on."

Too Little Too Late on Binary?

The sheer number of complaints against companies involved with binary options is enormous. Since the losses that are highlighted by the FCA total £22,000 per person on average, the action taken by the FCA comes a bit too late.

Fraudsters that have been actively involved in the industry have been spotted displaying misleading affiliate advertising campaigns in the UK press for some time. Only after a Finance Magnates report on the matter did some newspapers start vetting some of the content they receive.