The FCA will take over regulation of binary options from the Gambling Commission from 3 January in the wake of a growing number of investment scams which have cheated investors out of millions.

Since 2012, there have been a reported 2,605 victims who have lost £59.4m on binary options scams. Many believe they are trading or investing in the price movement of investments but many lose money quickly.

The FCA said today that from 3 January 2018, firms offering binary options will be regulated by the FCA and will no longer be licensed by the Gambling Commission.

The regulator also issued a public warning to consumers about the risk of investing in these “high-risk, speculative products.”

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), says the FCA.

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. Binary option scams are often run through trading platforms and some operators use social media to promote them to investors.

The FCA says that UK consumers may 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, says the watchdog.

The FCA says it has these 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.

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.

From 3 January, 2018 firms offering binary options will be regulated by the FCA. This means that firms will be authorised and supervised by the Financial Conduct Authority, individual complaints can be referred to the Financial Ombudsman Service and consumers will have access to the Financial Services Compensation Scheme.

However, the FCA warns that any binary options firms based in other EU states will still be regulated by their home regulator although they will appear on the FCA register if they operate in the UK.