Find out how binary options work and what our concerns are.
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 feature, along with the short duration of trades, can cause addictive behaviour typically associated with gambling.
In a statement issued on 15 December 2017, the European Securities and Markets Authority (ESMA) indicated that it was considering measures that would ban the sale of binary options to retail investors in response to significant investor protection concerns in relation to the sale of binary options.
For further information on the risks associated with trading binary options refer to our consumer warning.
Regulation of binary options in the UK
From 3 January 2018, UK firms offering binary options must be authorised by the FCA. This means that:
- firms will be supervised by the Financial Conduct Authority
- binary options will be subject to the regulatory regime for investment products
- individual complaints can be referred to the Financial Ombudsman Service
- eligible consumers will have access to the Financial Services Compensation Scheme
Binary options are also regulated as investment products in other European Union (EU) countries. 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 firms offering binary options trading and operating as financial services firms in other EEA countries, are also 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 options were previously regulated by the UK’s Gambling Commission. 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.
See our list of firms without authorisation that we understand are offering binary options trading to UK consumers.
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.
Fraudulent 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.
You can check if a firm is authorised by the FCA by checking the FCA Register of financial services firms. A firm authorised in another EEA state may be able to offer certain products or services in the UK and may also appear on our register or on the register of the regulator in the jurisdiction that the firm is located or authorised.
For more information on these types of scams, see our Scamsmart pages.