The European Union's financial services regulator has said it will ban the marketing, distribution or sale of binary options to retail investors.
The European Securities & Markets Authority (Esma) has said it will also place restrictions on the marketing, distribution or sale of contracts for difference (CFDs).
It follows widespread concern among regulators, including the Financial Conduct Authority, that retail investors risked losing money by investing in these instruments.
Esma, along with national regulators, came to the conclusion there was a "significant investor protection concern" to CFDs and binary options being freely available to retail investors.
The Financial Conduct Authority said it supports ESMA’s application of EU-wide temporary product intervention measures, and expects to consult on whether to apply these measures on a permanent basis to firms offering CFDs and binary options to retail clients.
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.
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 between €1,600 (£1,405) to €29,000 (£25,465).
Meanwhile Esma found investors in binary options made "consistent losses".
Steven Maijoor, chairman of Esma, said: "The new measures on CFDs will for the first time ensure that investors cannot lose more money than they put in, restrict the use of leverage and incentives, and provide risk warning for investors.
"For binary options, the prohibition we are announcing is needed to protect investors due to the products’ characteristics.
"The combination of the promise of high returns, easy-to-trade digital platforms, in an environment of historical low interest rates has created an offer that appeals to retail investors.
"However, the inherent complexity of the products and their excessive leverage – in the case of CFDs – has resulted in significant losses for retail investors.
"A pan-EU approach is required given the cross-border nature of these products, and Esma’s intervention is the most appropriate and efficient tool to address this major investor protection issue."
The measures for CFDs mean there will be leverage limits on the opening of a position by a retail client from 30:1 to 2:1, varying according to the volatility of the underlying asset - for example the limit will be 30:1 for major currency pairs but 2:1 for cryptocurrencies.
There will also be restrictions on incentives offered to trade CFDs, a standardised risk warning, including the percentage of losses on a CFD provider's retail investor accounts, and negative balance protection on a per account basis, providing an overall guaranteed limit on retail client losses.
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.
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 took over the regulation of binary options from the Gambling Commission as part of the introduction of Mifid II.
damian.fantato@ft.com
