Binary options - potential changes in regulation

Binary options allow consumers to speculate on the short term movement in price of financial instruments such as shares. Find out how the FCA may start regulating them.

  • The FCA does not currently regulate binary options
  • You do not currently enjoy the protections offered by the UK’s financial services regulatory framework when purchasing binary options
  • The UK Government is currently consulting on whether the FCA should regulate binary options in future

What are binary options?

Binary options allow consumers to speculate on the short term movement in price of a stock, commodity, currency, index, or just about anything that is capable of being measured in financial terms.

For example, you could bet at 1.25pm that XYZ stock will either increase or decrease in price by 1.30pm. The time periods involved tend to be very short (5 or 10 minutes) but some firms offer longer periods to bet over.

If you guess incorrectly you lose any money staked, but guess correctly and you can ‘win’ a fixed amount of money.

Regulation of binary options in the UK

At present binary options are regulated by the UK’s Gambling Commission, but only if the firm has remote gambling equipment located in Britain. 

If this is not the case, any binary options that the firm offers will not be regulated either by the Gambling Commission or by us, the FCA. 

However, other European Union (EU) countries consider binary options to be a financial, rather than a gambling product.

Under EU financial services law, firms which are legally established and authorised in one European Economic Area (EEA) country - the EEA encompasses all EU countries as well as Norway, Lichtenstein, and Iceland - 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 which operate as financial services firms in other EEA countries, are able to do business in the UK and consequently appear on our Register of financial services firms.

What is changing?

The UK Government is consulting on proposals to treat binary options as a financial rather than a gambling product. 

This would mean binary options would be regulated by us, the FCA, in line with practice across most of the EU, and no longer be regulated by the Gambling Commission.

If you would like to reply to the consultation, you can do so here. The consultation closes on 18 June 2015.

Concerns about binary options trading

UK consumers who engage in binary options trading might not be aware that it is not, currently, an FCA-regulated activity.  

Consumers might think that they are investing and that they have the standard protections of the UK’s financial services regulatory framework, when this is not the case.

The Gambling Commission advisesthat UK consumers should research the market carefully before participating in such activities. 

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 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.