The Financial Conduct Authority has proposed new rules which would permanently ban the sale, marketing and distribution of binary options to retail consumers.
They would also restrict the sale, marketing and distribution of contracts for difference (CFDs) and similar products.
The FCA has said its rules are the same in substance as the Europe-wide restrictions introduced by the European Securities & Markets Authority, but they would take effect permanently and apply slightly more widely to products such as turbo certificates.
Esma's ban, which came into effect in June, is only temporary and was introduced so its effect could be assessed.
But the FCA has since concluded the inherent risks of these products, and the poor conduct of the firms selling them, had led to harm to consumers through large and unexpected trading losses.
Christopher Woolard, executive director of strategy and competition at the FCA, said: "We remain very concerned about the harm to retail consumers that’s being caused by the design and distribution of some complex derivative products.
"This is despite focused supervisory work over several years to try and improve firms' conduct. Today’s proposals will enhance consumer protection by banning binary options and ensuring CFDs are only marketed and sold to consumers who understand the risks from trading these types of products."
For CFDs to be sold to retail clients, the FCA will require firms to provide protections that guarantee a client cannot lose more than the total funds in their CFD account, stop offering monetary and non-monetary inducements to encourage trading and provide a standardised risk warning, which requires firms to tell potential customers the percentage of their retail client accounts that make losses.
Firms will also have to limit leverage to between 30:1 and 2:1 by collecting minimum margin as a percentage of the overall exposure that the CFD provides and close out a customer’s position when their funds fall to 50 per cent of the margin needed to maintain their open positions on their CFD account.
CFDs are a contract between an investor and an investment bank or spread-betting firm where, at the end of the contract, the parties exchange the difference between the opening and closing prices of a specified financial instrument, including shares or commodities.
Analysis across the European Union found that between 74 and 89 per cent of retail accounts trading in CFDs typically lose money, with average losses per client ranging from €1,600 (£1,425) to €29,000 (£25,838).
Meanwhile Esma found investors in binary options made "consistent losses".
The FCA has warned binary options were "high-risk" and "speculative" and the majority of those who invested in them lost money.
It has also pointed out that in most cases, the firm a consumer buys options from benefits when they lose.
A consultation on these proposals is open until February 7, 2019.
The FCA has said it will consult separately in early 2019 on a potential ban on the sale of derivative products referencing cryptocurrencies, including CFDs, to retail consumers.
damian.fantato@ft.com
