Restrictions on marketing of binary options to retail clients extended

In July ESMA issued a temporary ban on the marketing of binary options, which allow investors to speculate on the performance of financial indices. The ban was part of wider action which also imposed restrictions on the marketing and sale of contracts-for-difference (CFD) products.  

It has since been carrying out a review of the intervention and concluded that although the ban on binary options should be extended, certain products are less risky and would be excluded from the scope of the prohibition.

ESMA said some binary options had specific features which “mitigate the risk of investor detriment”. These include products which are accompanied by a prospectus and are fully hedged by the provider or another entity within the same group as the provider, as well as having an investment term of at least 90 days.

In addition, products that at the end of the term have one of two predetermined pay-outs, neither of which is less than the initial investment of the client, will be excluded from the ban as investors would not lose money compared to their total investment.

Products meeting these requirements will be allowed for sale to retail clients from 2 October, although ESMA said it would keep them under review.

When ESMA announced the prohibition in July the move was supported by the UK’s Financial Conduct Authority, which said it would support action to extend the scope of the intervention.

The original ban followed a consultation with the industry that focused on CFDs but also raised the prospect of a total ban on the marketing, distribution or sale of binary options to retail investors. The prohibition was enabled by new powers given to ESMA by the Markets in Financial Instruments Directive II, which came into force in January 2018.

Last year financial services regulation expert Michael Ruck of Pinsent Masons, the law firm behind Out-Law.com, warned that restricting access to CFDs and binary options to retail investors could increase risk.

“As with other restrictions on retail customer access to financial services products, the risk is that those wishing to trade go elsewhere in order to do so,” Ruck said.

“ESMA will need to carefully consider such consequences, and others which may not be foreseen but increase the risks to retail customers, if it pursues prohibition of retail customer access to CFDs rather than implementation of a structured regulatory framework to control trading of the same,” Ruck said.