Yahoo Finance City watchdog to regulate 'addictive' binary trading after scammers net £60m
The Financial Conduct Authority is to police firms offering "binary options" following complaints of large losses by consumers and the prevalence of scams.
Binary options trading involves betting on what will happen to the price of a stock, commodity or other asset over a very short time period - in many cases just minutes.
Such bets are complex, high-risk, and the majority of consumers who place them lose money, according to the FCA.
Until now, those betting on binary options have had no protection from the financial regulator, as the industry was overseen by the Gambling Commission.
From January 3, 2018, firms will require FCA authorisation and complaints will be able to be referred to the Financial Ombudsman.
Deposits will also be protected by the Financial Services Compensation Scheme if a binary options company goes bust, although this will not protect consumers from losses they incur by betting on legitimate binary options. For investments, the FSCS protection limit is £50,000 per person, per firm.
Aside from most consumers losing money, the FCA's other concerns include the addictive nature of binary options betting, and inherent conflicts of interest.
"In most cases, the firm you are buying from benefits when you lose. This places the firm's interest in direct conflict with yours," it said.
There has also been significant fraud. Since 2012 there have been a reported 2,605 victims who lost a total of £59.4m on binary options scams - an average of nearly £23,000 each.
The scams involve promising high returns for bets that never occur, and using software to manipulate how asset prices and resultant payouts appear to customers. Typically, the company then refuses to return funds and breaks off contact.
These scams are often advertised on social media, and have well designed websites that "appear professional".
Binary options companies that are authorised to operate in the European Economic Area (EEA) are currently able to do business in the UK, and will continue to be able to do so.
These companies will appear on the FCA register of financial services firms, and "in most cases the firm will still be regulated by its home-state regulator".
