On 3 January 2018, binary options came under the auspices of the Financial Conduct Authority as a regulated investment product, but there are some who believe the sector should be banned entirely.
Other countries have taken a tougher approach – this form of investment, or some would call it gambling, is banned in countries such as Canada, Belgium and Israel. Some of the worst fraudulent operators were trading from Israel and last October, the country’s Knesset announced operatives would have three months to shut down their operations and if not, they would face up to two years in jail.
Meanwhile, the European Securities and Markets Authority is currently conducting a consultation with a view to banning the sale of binary options to retail clients across the European Union.
What are binary options?
- There are two options in binary options – hence the name - if the investor is correct, they ‘win’ and see a return on their investment, if not, they lose the lot
- Investors bet on a share, currency or commodity moving above or below a set price in a given time frame, this could be as little as 30 seconds
- Binary options providers seek to convince investors they can gain large amounts from a small stake
- The odds are not 50/50 – if the bet is successful, a return of 80% could be made plus the original stake, but if it loses, then 100% of the stake is lost
- Victims are often drawn in via social media and pop-up advertising as well as via cold calls.
But surely, adults should be able to gamble to their heart’s content provided they realise this is a high-risk and speculative area? While this is true, the big problem with binary options is the widespread criminality that exists. The sector now has a tarnished reputation and few risk managers would choose to gamble their professional reputations by joining it.
There remain many unregulated firms operating, usually based abroad, and according to figures from Action Fraud, the amount of money lost by victims of binary options trading in the UK has risen by 400,000% in six years, meaning it increased from £6,200 in 2012, to £27 million in 2017 alone and with the total currently standing at £61 million.
The FCA found that some binary options providers may “manipulate software to distort prices and payouts – then they suddenly close consumers’ trading accounts, refusing to pay back their money.”
The regulator has also issued warnings about the dangers of trading with an unauthorised firm, pointing out that there is no recourse to the Ombudsman or the Financial Services Compensation Scheme if things go wrong. It also published a list of some 94 firms it believed were unauthorised and targeting people in the UK, although many are based abroad.
The fraud has affected many, with vulnerable older people targeted to students who have lost their tuition and maintenance loans.
Which? also carried out its own probe into the sector and found evidence of "bad practice across the board", including high-pressure sales tactics and "unfair" terms and conditions. According to Jenni Allen, managing director at Which? Money: "Most worryingly, we also found examples of where the actual data being used was rigged by the company so that your initial investments would return some form of profit in return but thereafter you would receive loss after loss."
Unregulated binary options operators have been described as criminals and amoral – and no one knows the full extent of their crimes since some of those who have been defrauded may be too embarrassed to admit it.
Despite the FCA’s regulatory efforts, there are still going to be some who do not check where a platform is based and if it is genuine. Binary options firms are known for their impressive websites and technology and can also claim to be based in the UK, when all that exists is a shell company, along with polished sounding sales people in their boiler rooms.
If regulation does not stop people being scammed, then the FCA may well need to press for a permanent shutdown.