The Financial Conduct Authority has issued a warning on binary options, saying the majority of consumers who invest in them lose money.
From January the regulator will take over the regulation of binary options from the Gambling Commission as part of the introduction of Mifid II.
This means these firms will need to be authorised and supervised by the FCA, and individual complaints will be handled by the Financial Ombudsman Service and consumers will have access to the Financial Services Compensation Scheme.
But the regulator has now sought to inform consumers that these investments are "high-risk" and "speculative".
Binary options allow an investor to make a bet on the price of value of a stock, commodity, currency, index or anything capable of being measured in financial terms.
The time periods involved tend to be very short, ranging from between 30 seconds to five minutes.
The FCA stated its data found the majority of consumers who invest in binary options lose money and find it hard to make sustained profits over a series of bets.
The City watchdog stated: "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 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 has also pointed out that in most cases, the firm a consumer buys options from benefits when they lose.
This means the firm's interest is in direct conflict with the consumer and increases the risk of poor conduct by firms offering these products.
The FCA said binary options have become 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.
The FCA is not the first government agency to warn about binary options.
Action Fraud, which is part of the City of London Police, issued a similar warning last month.
Action Fraud stated binary options was a "growing problem", with £18m lost in the first half of 2017 alone.
In the first six months of this year 697 people reported having lost money to this type of fraud.
Binary options are currently regulated by the Gambling Commission but only if the firm has gambling equipment in the UK.
The FCA has also renewed its warning about cryptocurrencies, particularly contracts for difference using these as the underlying investment.
In September the FCA warned investors they should be prepared to lose all their money if they invested in initial coin offerings, which is a way of raising money from investors using virtual coins or tokens where these are issued and put for sale in exchange for fiat money for other virtual currencies such as Bitcoin or Ether.
Cryptocurrency CFDs allow investors to speculate on the change in a price of a virtual currency, like Bitcoin.
The FCA said investors should only use these products if they are experienced with a sophisticated knowledge of financial markets, and they fully understand the risks involved with cryptocurrencies and CFDs.
It said: "The value of cryptocurrencies, and therefore the value of CFDs linked to them, is extremely volatile. 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 per cent in a single day.
"When compared with currencies, there can be more significant variation in the pricing of cryptocurrencies used to determine the value of your CFD position. There is a greater risk you will not receive a fair and accurate price for the underlying cryptocurrency when trading."
damian.fantato@ft.com
