Following consultation, the Financial Conduct Authority (FCA) announced on 29 March 2019 that, as of 2 April 2019, the sale, marketing and distribution of binary options (including securitised binary options) to retail consumers will be prohibited indefinitely.

This development should come as no surprise, given the similar prohibition announced by the European Securities and Markets Authority (ESMA) on 1 June 2018 (reported here). The FCA began its consultation on a proposed prohibition in December 2018.

Binary options are products where a bet is made on the difference between the entry and exit prices of an underlying asset, to be measured after a set period of time. Key to the definition of such instruments is that the potential payment available to investors is set from the outset, and the outcome is "all or nothing". The FCA believes that there is an inherent risk to retail consumers from such products, such as their complex pricing structure and highly speculative nature making them akin to gambling products, and promoting addictive behaviours in a similar way.

In its policy statement, the FCA has taken pains to confirm the position post-Brexit, confirming that it intends that the rules will continue to apply to the same firms as they applied under EU law pre-Brexit. Whilst the FCA has also confirmed that compliance with the FCA's rules will necessarily mean compliance with the ESMA equivalent, there are a few key differences which should be highlighted:

  • ESMA has authority to impose restrictions for a three month period only, therefore its prohibitions must be renewed to remain in effect (ESMA's latest renewal will also take effect on 2 April 2019, for a period of three months), whereas the FCA's rules are made on a permanent basis; and

  • the FCA's prohibition is more wide ranging than ESMA's, taking in securitised binary options which are exempt from ESMA's ban.

On the second point, the FCA has addressed the view (raised by respondents to its consultation) that securitised binary options do not expose retail consumers to the same amount of risk as "over-the-counter" binary options. The FCA found that whilst securitised binary options are arguably less prone to aggressive marketing, and their longer duration may limit the risk of compulsive gambling behaviour, it still considers the products pose an "inherent risk of harm to retail consumers", which is not sufficiently reduced by the additional features of securitisation such as being sold with a prospectus.

The FCA's concerns with binary options appear to be, at least partly, due to the probability of retail consumers being left with less than their initial investment: in responding to respondents' requests for clarification, the FCA has noted that structured products where the lower of two pre-determined fixed amounts is at least equal to the retail consumer's total payment (i.e., the consumer is guaranteed to get at least their investment back) will not be considered to be binary options.

The prohibition comes into force on 2 April 2019, and will impact UK MiFID investment firms and EEA MiFID investment firms who are marketing, distributing or selling binary options in, or from, the UK to retail clients.