What Are Binary Options and Why Are They Banned in the UK?

Binary options are a type of financial trading instrument that has gained notoriety for its simplicity and high-risk nature. While once widely available, binary options have been restricted in the UK since 2019 due to their association with gambling-like behaviour, high-risk, and fraudulent activities. More specifically, brokers are banned from selling binary options to non-professional traders (retail traders). The ban is permanent and has been active since 2 April, 2019.

The ban, enforced by the Financial Conduct Authority (FCA), aims to protect retail investors from financial harm. The FCA prohibits not only in the sale, but also the marketing and and distribution of binary options to retail investors in the UK, and this restriction applies to both UK-based brokers and non-UK based brokers targeting UK residents.

Marketing, selling and distributing binary options to non-professional traders is banned in the UK due to the binary option´s gambling-like nature, high-risk, and association with fraud. While they may appear simple and appealing, their lack of transparency and unfavourable odds make them unsuitable for retail investors.

The ban reflects the FCA’s commitment to safeguarding retail investors from high-risk and unsuitable financial products. It also highlights the importance of understanding the risks associated with trading instruments before participating.

What Are Binary Options?

Binary options are financial contracts where traders predict whether the price of an underlying asset, such as a stock, currency pair, or commodity, will rise or fall within a specific time frame.

The name “binary” reflects the two possible outcomes:

1. In the Money: If the trader’s prediction is correct, they receive a fixed payout (e.g., 60%–80% of the initial stake).
2. Out of the Money: If the prediction is wrong, the trader loses the entire amount staked.

For example, a trader might predict whether the price of the GBP/USD currency pair will rise above a specific level within the next 10 minutes. If the prediction is correct, they get the predetermined payout. If not, they lose their money.

Binary options are often short-term, with expiry times ranging from seconds to hours. (Long binary options are available, but much less popular.) The short lifespans makes them fast-paced and appealing to inexperienced traders, but also highly speculative.

You can learn more about binary options by visiting https://www.binaryoptions.net/.

Why Were Binary Options Banned in the UK?

Binary options as a whole are not banned in the UK, but the FCA has banned brokers from marketing and selling binary options to non-professional traders (retail traders). Several different factors contributed to the FCA decision to impose this restriction. When the restrictions were put in place in 2019, the FCA stated that binary options posed a “significant risk of harm” to retail consumers.

Gambling-Like Nature

Short-term binary options resemble gambling more than traditional financial trading. Instead of investing in an asset’s long-term value, traders essentially bet on very short-term price movements. This setup often leads to impulsive and emotionally driven decisions, similar to casino games. Psychologically, short-term binary options trading can be more similar to putting your money on red at the roulette table than trading financial instruments.

High Risk with Low Returns

When you see an add promising a payout of 70% on a binary option, that might look like a really great number. If you do the calculations and take the high risk level into account, however, it is actually a very poor reward.

The risk-to-reward ratio in binary options is heavily skewed against traders. While payouts are fixed and usually lower than the stake, losses are 100% of the invested amount. For instance, a trader might risk £100 to earn a £70 payout, meaning a 50% win rate results in net losses over time.

To put it in other words: When you are right in this scenario, the broker must give you a £70 profit. When you are wrong, you must give the broker £100 a profit. That is not a fair contract to enter.

This inherent imbalance makes consistent profitability very difficult to attain.

Widespread Fraud and Scams

Binary options became a hotbed for fraudulent activities. Since the binary options turned out to be so popular among inexperienced traders, many scammers began using binary options to lure in suitable victims.

Examples of widespread deceptive practices among dishonest brokers:

• Manipulating prices to ensure trades result in losses.
• Refusing to process withdrawals.
• Misleading traders with false promises of guaranteed profits.

Fraudulent platforms often use aggressive marketing tactics, luring inexperienced traders with claims of quick and easy wealth. Once funds are deposited, these brokers can manipulate outcomes or make it nearly impossible to retrieve money.

Lack of transparency is another problem, and it can be more difficult to do something about from a legal perspective. A binary options broker can for instance make the terms and conditions of their financial products deliberately vague, making it difficult for a trader – especially an inexperienced one – to fully understand how payouts are calculated or how asset prices are determined. This creates an environment with fertile soil for exploitation.

The Temporary ESMA Ban

In their decision, the UK FCA was also inspired by the temporary binary options restrictions enacted for the European Union in 2018.

When the UK-specific binary options restriction were introduced by the UK FCA in 2019, the UK was still a part of the European Union, and the UK FCA restrictions were largely in line with the temporary restrictions that had been imposed by the European Securities and Markets Authority (ESMA) in 2018.

ESMA enacted the temporary restrictions in 2018 to protect non-professional traders within the European Union and give the membership countries time to develop and enact their own restrictions on the national level, if they wanted to. The UK was one of the membership countries that decided to develop and enact national restrictions to protect non-professional traders.

After some time, ESMA announced that they would not renew the temporary restrictions, as the membership countries now had gotten enough time to enact national restrictions.

When the UK left the European Union at 23:00 GMT on 31 January 2020 (00:00 1 February 2020 CET), this did not effect the UK binary options ban, as it is a UK FCA ban and not an ESMA ban.

Note: As mentioned above, the UK FCA rules from 2019 are largely in line with the temporary ones imposed by the ESMA in 2018, but the UK FCA rules are more comprehensive, as they also target the securitised binary options that were not included in the ESMA restrictions. In a March 2019 statement, the UK FCA noted that securitized binary options were not currently being sold in or from the UK, but the FCA still elected to include them in the restrictions, as they deemed them just as risky for traders, and wanted to prevent their market from developing.

I Want To Know More

If you want to know more, you can visit the UK FCA web site and read their official statement where they explain the permanent ban on the sale of binary options to retail consumers and the reasons behind the ban. It was published on March 29, 2019.

In their official statement from March 2019, the FCA noted that the new rules aimed to tacked widespread concerns about the the inherent risks of these products, and the poor conduct of the firms selling them. The FCA stated that consumer harm had occurred in the UK and internationally, through large and unexpected trading losses.

“Binary options are gambling products dressed up as financial instruments. By confirming our ban today we are ensuring that investors don’t lose money from an inherently flawed product,” said Christopher Woolard, Executive Director of Strategy & Competition at the FCA.

According to FCA estimates from 2019, the permanent ban on binary options could save retail consumers up to £17 million per year.

Safer Alternatives for UK Traders

The fraudulent activities linked to binary options underscore the value of working with regulated brokers. In the UK, the FCA requires brokers to adhere to strict standards, providing better transparency and protection for consumers.

For non-professional traders in the UK interested in financial markets, there are safer and more transparent alternatives available than binary options; alternatives where you can pick a broker that is authorized by the FCA.

• CFD Trading: While CFDs are high-risk, these derivatives offer a high degree of convenience and flexibility, and unlike binary options, you can buy them from an FCA regulated broker.
• Forex Trading: A dynamic and regulated market where traders can profit from currency fluctuations.
• Stock Trading: Short-term or long-term investments in company shares are backed by strict regulatory oversight.
• ETFs and Mutual Funds: These allow for diversified investments and are suitable for building wealth over time.

For those looking to explore financial markets, it’s crucial to choose regulated and transparent trading instruments that offer better long-term potential and align with your risk tolerance. Always prioritize education, research, and due diligence to make informed trading decisions.