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What are binary options?

Binary options allow a consumer to make a bet on the value or price of a stock, commodity, currency, index, or just about anything that is capable of being measured in financial terms. The time periods involved tend to be very short (often around 30 seconds to 5 minutes).

FCA data suggest that a majority of consumers lose money when making bets and that consumers find it difficult to make sustained profits over a series of bets.

What are binary option scams?

UK consumers may also be targeted by binary options 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 firms often advertise on social media. The advertisements link to websites that are well-designed and appear professional. 

What are the risks? 

The FCA has concerns about these products:

  • Losses from trading: FCA data suggest that a majority of consumers lose money when trading binary options. To make a profit, a consumer is likely to need both a sophisticated knowledge of financial markets and to ‘beat the odds’, which is always difficult to do.
  • Difficult to make an informed decision: The short duration of trades with the complex method used to price binary options, means that it is difficult for consumers to value these products accurately.
  • Addictive behaviour: The fact that binary options are similar to fixed odds bets, along with the short duration of contracts, means that they can be addictive and can result in consumers accumulating significant losses.
  • Conflicts of interest: In most cases, the firm you are buying options from benefits when you lose. This places the firm’s interest in direct conflict with yours, which increases the risk of poor conduct by firms offering these products. 
  • Potential for fraud: Binary options are a significant source of fraud in the UK. Since 2012, there have been a reported 2,605 victims who lost £59.4m on binary options scams.

Are binary options regulated by the FCA?

Binary options are currently regulated by the UK’s Gambling Commission, but only if the firm has gambling equipment in the UK. Consumers do not currently have the protections offered by the UK’s financial services regulatory framework when purchasing binary options.

However, the regulation of binary options is changing. From 3 January, 2018 firms offering binary options will be regulated by the FCA. Therefore:

  • firms will be authorised and supervised by the Financial Conduct Authority
  • individual complaints can be referred to the Financial Ombudsman Service
  • consumers will have access to the Financial Services Compensation Scheme

However, those protections will not compensate you for any losses from trading. You should still be careful and consider whether the products are right for you.

Binary options are also regulated as investment products in many other European Union (EU) countries. Therefore, under EU financial services law, firms which are legally established and authorised in the European Economic Area (EEA) 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 and operating as financial services firms in other EEA countries, are currently able to do business in the UK and will continue to be after 3 January 2018. If they are, they will appear on the FCA Register of financial services firms. In most cases the firm will still be regulated by its home-state regulator.

Protect yourself from scams

Be wary if you are contacted out of the blue, pressured to invest quickly or promised returns that sound too good to be true.

Check the FCA Register of financial services firms. If a firm does not appear on the register and is not licensed by the Gambling Commission then the best option is to not to trade with that firm, transfer funds, or provide any banking details.

We strongly advise you to get independent professional advice before paying any money to a firm offering binary options.

Visit our ScamSmart pages for more information on how to protect yourself from fraud and binary options scams.