Binary options to be regulated by FCA from January

The Financial Conduct Authority, which has taken over regulation of these products from the Gambling Commission, has numerous concerns about binary options and the potential for fraud.

Binary options are a significant source of fraud in the UK, with 2,605 victims reported since 2012, who have lost £59.4m on binary options scams.

In the year to May 2016, the City of London Police's National Fraud Intelligence Bureau reported having received 305 reports of binary options scams, or 27 per month.

Until now legitimate or illegal binary options companies both fell outside the control of financial regulators, meaning customers had little recourse to get their money back if they felt they had been scammed.

Binary options trading platforms were only regulated by the Gambling Commission if the firm has gambling equipment located in the country.

But from 3 January next year, firms offering binary options will be regulated by the FCA, meaning firms will be authorised and supervised by the regulator, that individual complaints can be referred to the Financial Ombudsman Service and that consumers will have access to the Financial Services Compensation Scheme.

FCA data has found that a majority of consumers lose money when trading binary options, with profits requiring both a sophisticated knowledge of financial markets and a way to ‘beat the odds’, "which is always difficult to do", the regulator said.

The financial regulator said it was difficult for consumers to make an informed decision: "The short duration of trades with the complex method used to price binary options, means that it is difficult for consumers to value these products accurately."

"The fact that binary options are similar to fixed odds bets, along with the short duration of contracts, means that they can be addictive and can result in consumers accumulating significant losses," the FCA added.

There are also concerns about conflicts of interest from the companies operating these games and the potential for fraud.

"In most cases, the firm you are buying options from benefits when you lose. This places the firm’s interest in direct conflict with yours, which increases the risk of poor conduct by firms offering these products," the FCA said.

Last year the UK financial regulator also clamped down on the sale by spread betting companies of contracts for difference (CFD) and binary bet products to less experienced traders.

Last December the FCA said its research had revealed binary bets are "not transparent enough for investors to adequately value them, and have product features which are more akin to gambling products than investments", while Christopher Woolard, the FCA's executive director of strategy and competition, questioned "whether binary bets meet a genuine investment need".