Binary options

Find out how binary options work, what our concerns are and what will change when we begin to regulate them from 3 January 2018.

What are binary options?

Binary options allow a consumer to make a bet on the expected value or price of a stock, commodity, currency, index, or just about anything that is capable of being measured in financial terms.

Retail clients typically bet that the price of the asset will be above or below a specified price at certain time; although firms allow clients to bet on a wide range of outcomes.

As an example, you could bet at 1.25pm that XYZ stock will either increase or decrease in price by 1.30pm. If you guess incorrectly you lose all of your stake, but guess correctly and you can ‘win’ a fixed amount of money.

The time periods involved tend to be very short (30 seconds to 5 minutes) but some firms offer longer periods.

Concerns about binary option trading

Binary option consumers typically lose money, and these losses can be significant.

A key risk of the product is the fact that they are typically priced in a similar manner to fixed odds bets, since their value is determined by the probability of an event happening. Investors are offered higher returns for lower probability events and lower returns for higher probability events. For investors to make a profit from trading they need to ‘beat the odds’ on a regular basis, which a majority of investors do not.

This factor, along with the short duration of trades, can cause addictive behaviour typically associated with gambling.

Regulation of binary options in the UK – What’s changing?

The regulation of binary options is changing from 3 January 2018.

Binary options are currently regulated by the UK’s Gambling Commission, but only if the firm has remote gambling equipment in the UK. Consumers do not currently have the protections offered by the UK’s financial services regulatory framework when purchasing binary options.

To check whether a company holds an operating licence from the Gambling Commission, consumers can search its public register of licensees . The Gambling Commission cannot offer compensation to consumers if they lose money when engaging with unlicensed operators. 

If you want to make a complaint against a binary option firm relating to a bet made before 3 January 2018, you should register your complaint with the dispute resolution body of the firm. For more information, visit the Gambling Commission's website.

From 3 January, 2018 binary options will be regulated in the same way as investment products and will be regulated by the FCA. This means that:

  • firms will be authorised and supervised by the Financial Conduct Authority
  • any individual complaints will be resolved by the Financial Ombudsman Service
  • consumers will have access to the Financial Services Compensation Scheme

Binary options are also regulated as investment products in many other European Union (EU) countries. Therefore under EU financial services law, firms which are legally established and authorised in one European Economic Area (EEA) country are entitled to do business in any other EEA country once certain procedural safeguards are met. This means that although the FCA does not currently regulate binary options, firms offering binary options trading and operating as financial services firms in other EEA countries, are able to do business in the UK.

Should you have any concerns or complaints when trading with firms in other EEA countries, you should contact the responsible authority in that jurisdiction.  

Binary option scams

UK consumers are being increasingly targeted by binary options investment scams, which commonly promise higher than average returns for bets that never occur and manipulate software to distort prices and payouts. They also commonly refuse to return client funds and break all contact with customers.

 Binary option traders often advertise on social media – the advertisements link to websites that are well-designed and professional looking. 

If in doubt, where you think a firm offering binary options may not be trustworthy or legitimate, do not transfer money to them or provide them with your bank details.

A firm authorised in an EEA state may be able to offer certain products or services in the UK and therefore may appear on the FCA Register of financial services firms. In most cases the firm will still be regulated by its home-state regulator. If a firm does not appear on the register and is not licensed by the Gambling Commission then you should take extra care.

For more information on these types of scams, see our Scamsmart pages.