Update November 2017: FCA to Regulated Binary Options! For more information read below
The regulatory environment of binary options has changed substantially since their inception. Back in the day, finding a regulated broker was almost impossible, but now “Are you regulated?” is one of the first questions asked by traders when they “meet” a new broker. Once traders started to demand regulation, the brokers started to get regulated and so far, CySEC (Cyprus Securities and Exchange Commission) has been the main watchdog. However, a more prolific authority – the British FCA (Financial Conduct Authority) – is now taking under consideration making binary options a mainstream financial instrument.
Cyprus is Ahead of the Curve but the FCA Step In
The first authority to recognize binary options as a financial instrument and therefore to regulate the activity was CySEC and while this was happening, in Britain binaries were still considered gambling, falling under the jurisdiction of the UK’s Gambling Commission. CySEC regulation is cheaper and less bureaucracy is involved so most brokers turned to this authority in order to receive a legal platform and at the same time a “passport” to operate in the European Union. Trading with a broker regulated by the CySEC is better than having to deal with a shady one, without even a proper address, but a real step up would be FCA regulation and hopefully, this is going to happen sometime in 2016.
What we know so far is this: the FCA currently doesn’t regulate binary options, the UK Government conducted a consultation regarding a future FCA regulation for binary options (the consultation ended in July 2015 and the result will be made public in early 2016). Last but not least, currently clients do not enjoy the high level of protection offered by the UK’s FCA framework and are exposed to high risks when dealing with binary options broker. To check for the latest updates from the FCA – use this link to FCA.
Legal Implications of Possible FCA Regulation
Let’s state the obvious: even when/if the FCA will start regulating binary options, problems with brokers will still occur, whether it’s an honest mistake or a dirty trick. Traders will still make poor trading decisions and then lash out at their broker on public forums; however, key requirements of the FCA regulation will most likely include segregated accounts (traders’ and brokers’ funds are kept in separate accounts), suitability checks to ensure the products are not mis-sold (selling a service or investment to a customer in a deceitful or misleading way). Also, dispute resolution processes will be implemented, making it easier for clients to resolve any issues that may arise. As a recent addition, the British Register now includes firms that are or have been regulated by the FCA and known scammers are highlighted with red text to make it clear that the FCA doesn’t recommend doing business with such firms. Bottom line: traders, rejoice if the FCA steps in and your broker will seek their regulation because you will benefit from a way higher standard of security.
What Do Brokers Have To Gain From Possible FCA Regulation?
From the client’s point of view it’s clear that more regulation means more safety against scams and improper marketing tactics, but brokers might resent a new set of rules and restrictions as those are viewed as costly and time-consuming. In fact, brokers have to gain from this possible new regulation just as much as the clients. The main advantage for brokers is the fact that the client base will increase substantially. Binary options as a financial product offer many advantages (hedging other instruments, ease of use, high profitability, etc.) but many traders are put off by the bad reputation that surrounds the industry. Given the lack of tight regulation, binary brokers abuse phone calls, pressure their clients to invest more than they afford, make the withdrawal procedure as hard as possible and overall just give binary options a bad name. If the British FCA steps in, the level of professionalism among binary brokers will go up and this will attract more clients, even those who have been reticent so far. I’d say that’s a win-win situation, for both traders and brokers.
The costs of business for binary brokers might go down, which would be a major benefit for them. Not all brokers have a bad reputation of course, but the “bad apples” actually cast a shadow of doubt over the entire industry, thus making it hard for the “good” brokers to get a low cost of banking, borrowing, transferring money and other financial activities related to their business. Also, with the new FCA regulation in place, the doors for new markets/countries will open and this also means more clients and better business opportunities.
The Best is it Yet to Come
We all know there’s still much room for binary options to grow and to attract more serious traders but so far the maximum potential hasn’t been reached. It is likely that the new Financial Conduct Authority regulation will be the catalyst for a new age in binary options, but for that, we will have to wait for 2016 and see what the British Government will decide. We welcome such regulation as it would mean we could finally be trading in a professional environment.
Binary Options Regulation Comes To The UK!
Britain’s FCA has agreed to take on a grudging regulation of the notorious binary options industry. The move is due to mounting pressure from governmental agencies. The agency says that since 2012, the year binary options rose to prominence, 2,605 UK citizens have been victimized by total losses in excess of £54.4 million. Up until now, the countries legal binary options brokers have all been regulated by the GSC.
A host of others has taken advantage of loopholes, a lack of active enforcement and virtual offices to set up vast fraud networks. The GSC is the Gambling Supervision Commissions, a body located on the Isle of Mann and overseeing UK casinos. To date, there is only broker operating with a such a license, Marketsworld, and they are in process of compliance.
Beginning January 3rd, 2018 all brokers operating in the UK will need to have FCA regulation. This means that all clients will be able to complain to the Financial Ombudsman Service and have accounts covered by the Financial Services Compensation Scheme. Brokers that are operating with licenses in other European Economic Arena nations (CySEC) are currently legal in the country but will have to re-apply with the FCA before resuming operations after the cut off date.
The FCA has 3 main complaints against binary options. The first is that most who trade with them lose, to them they are a tool for gamblers. The second is that they are addictive, once you start trading it is easy to catch the bug. Third, binary options have a high propensity for fraud which makes them tough to regulate. The new regulation does not protect investors from losses incurred by trading or fraud.
In recent months the agency has been cracking down on binary options frauds. In the beginning of October, it assisted the London police busting 20 binary options brokers operating in the London area. Later that same month they assisted in rolling up 2 more operations both of which are in a provisional liquidation situation. The question is, just how many brokers did they actually arrest and how many turned out to be dead-end front companies working from virtual offices?
The FCA is also concerned about cryptocurrencies and more specifically cryptocurrency CFD’s. Because of the highly volatile nature of cryptocurrencies and the large amounts of leverage offered it is possible for large accounts to be wiped out in minutes. The agency points out recent moves in Bitcoin where the BTC/GBP fell more than 30% within days and then bounced back more than 100% just a few weeks later.