In May 2015, we published an article about the regulation of the binary options market in the UK.
The Financial Conduct Authority (FCA) does not regulate binary options and the consultations we mentioned in the article in May 2015 have not yet resulted in changes to UK law to bring binary options under the FCA’s remit. Firms dealing in binary options with remote gambling equipment located in Great Britain need to be regulated by the Gambling Commission (note the Gambling Commission’s remit is Great Britain rather than the UK).
Since publishing this article, the FCA has received an increasing number of reports from consumers about their experiences with illegitimate binary options firms that do not appear to be regulated by any agency, either in the UK or abroad. Many consumers report having been scammed by these firms and we have concerns that UK consumers are being increasingly targeted by fraudsters who offer opportunities to invest in binary options. The purpose of this warning is to provide some further specific detail about binary options trading and the risks posed to consumers by fraudulent firms operating in this market.
How binary options work
Binary options are a form of fixed-odds betting on movements in financial markets. Typically a trade in binary options involves a simple question of whether an event will happen or not – for example, will the price of a particular share or asset go up. The outcome is either yes or no, hence the term binary option. If the investor is correct, they ‘win’ and should see a return on their investment. If the investor is wrong, they lose their full investment.
Because trading in binary options is not currently regulated by the FCA, firms involved in binary options may not necessarily require authorisation by the FCA to operate legitimately. They should, however, have a license with the Gambling Commission if they have remote gambling equipment located in Great Britain.
While binary options can, in some instances, undoubtedly be a high risk activity in the sense that an investor’s entire investment can be lost, there are legitimate means for firms to offer binary options. We strongly recommend that if consumers wish to deal in the binary options market, they do so with a firm that is either:
- A firm based in Great Britain with a current licence to offer bets on binary options from the Gambling Commission. Such firms may or may not be authorised by the FCA for other financial services business but please note that, even if you deal in binary options through an FCA authorised firm, you will not be protected by the UK’s financial services complaints and compensation scheme. This is because binary options are not currently an FCA regulated financial instrument
- An EEA firm based in a Member State outside the UK which is authorised to deal in binary options and supervised by its home Member State’s financial services regulator, and which is passporting its services into the UK
- A non-EEA firm that is appropriately authorised or licensed and supervised in its home country
Unfortunately many of the reports we have received are from consumers who have dealt with fraudulent binary options firms that have no regulatory status either with the FCA, Gambling Commission or other EEA or non-EEA regulators. Most consumers describe having lost substantial sums of money. While this might be expected given the high risk win or lose nature of the activity, we are particularly concerned about the experiences many consumers report to us when trying to deal with unauthorised or unlicensed binary options firms. We regularly hear about such firms suddenly closing consumers’ trading accounts, refusing to pay back their funds and ceasing any further contact with the consumer.
Fraudulent firms operating in the binary options market without the necessary authorisations or licenses tend to be based outside the UK yet often claiming to have some kind of presence here, often at prestigious City of London addresses.
How to protect yourself
Binary options are not currently regulated by the FCA so your investment is not protected by the UK’s financial services complaints and compensation scheme. If you do wish to deal in binary options, do so through one of the channels we set out above.
You may also wish to read the Gambling Commission's article about binary options trading. In addition, the City of London Police recently published a warning about binary options trading.