The UK’s Financial Conduct Authority (FCA) has issued two warnings to retail investors over binary options and cryptocurrency contracts for difference (CFDs).
On binary options, the FCA says it has concerns about the products – namely its 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,” the FCA says.
It is warns investors that 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. The FCA adds that because 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.
In a recurring story when it comes to binary options, the FCA observes that in most cases, the firm an investor is buying options from benefits when they lose – there is a real conflict of interest and, the FCA argues, “increases the risk of poor conduct by firms offering these products”.
The FCA also points out that binary options are a “significant” source of fraud in the UK. Since 2012, it says 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.
The regulation of binary options is changing, however, from 3 January, 2018 firms offering these products will be regulated by the FCA. The Authority warns, however that while this will bring some benefits the increased protections still will not compensate investors for trading losses.
Terming the products “an extremely high risk, speculative investment”, the FCA warns investors seeking to trade in cryptocurrency CFDs that they need to be aware that the value of cryptocurrencies, and therefore the value of CFDs linked to them, is “extremely volatile” and they are vulnerable to sharp changes in price due to unexpected events or changes in market sentiment. “The value of some cryptocurrencies recently fell by more than 30% in a single day,” the FCA warns.
It also has concerns about some firms who are offering leverage of up to 50:1 on cryptocurrency CFDs. “Leverage multiplies your losses and potential profits, and can have a significant impact on fees. It also places you at risk of losing more than your initial investment, meaning you could end up owing money to the firm,” the Authority states.
Charges tend to be significantly higher than for other CFD products also, the FCA says, noting that fees can include the spread, funding charges, and commissions.
Finally, it expresses its concern that, when compared with currencies, there can be more significant variations in the pricing of cryptocurrencies used to determine the value of an investor’s CFD position. “There is a greater risk you will not receive a fair and accurate price for the underlying cryptocurrency when trading,” FCA states.
“You should only invest if you are an experienced investor with sophisticated knowledge of financial markets and you fully understand the risks associated with CFDs and cryptocurrencies.”