The European financial services regulator is considering a ban on the marketing, distribution and sale of binary options to retail clients.
The European Securities and Markets Authority is also considering whether to restrict the marketing, distribution and sale of contracts for difference.
It has announced that it will launch a public consultation on the matter next month.
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.
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.
The FCA had been investigating contracts for difference after it noticed an increase in the number of firms offering them, including spread bets and rolling spot foreign exchange products, which raised concerns retail investors were trading products they did not understand.
In June it decided to hold back from making final conduct rules while Esma considered its own interventions.
In a statement, the European regulator has now said: "Esma has been concerned about the provision of speculative products such as CFDs, including rolling spot forex, and binary options to retail clients for a considerable period of time and has conducted ongoing monitoring and supervisory convergence work in this area.
"Some competent authorities have also adopted national measures to limit the provision of these products to retail clients.
"Notwithstanding these actions, Esma remains concerned that the risks to investor protection are not sufficiently controlled or reduced."
The FCA’s analysis of client accounts for CFD firms found that 82 per cent of clients had lost money on these products – and there is evidence these losses tend to be higher when sold on an advised basis rather than a non-advised basis.
Among the measures Esma is considering are leverage limits on the opening of a position between 30:1 and 5:1, negative balance protection to provide a guaranteed limit on client losses, a restriction on benefits incentivising trading and a standard risk warning.
The FCA has warned that binary options are "high-risk" and "speculative" and that the majority of those who invest in them lose money.
It has also pointed out that in most cases, the firm a consumer buys options from benefits when they lose.
From January the FCA will take over the regulation of binary options from the Gambling Commission as part of the introduction of Mifid II.
In response to Esma's announcement on CFDs and binary options, the FCA said: "The FCA supports Esma in its consideration of potential EU-wide product intervention.
"Our domestic policy work on permanent product intervention measures applicable to firms offering CFDs and binary options to retail clients is ongoing. Any permanent FCA policy measures would take in to account any prospective Esma measures."
damian.fantato@ft.com
