ASIC has made a product intervention order banning the issue and distribution of binary options to retail clients.
The ban will take effect from Monday 3 May 2021 after ASIC found that binary options have resulted in and are likely to result in significant detriment to retail clients.
ASIC reviews in 2017 and 2019 found that approximately 80% of retail clients lost money trading binary options. ASIC found that binary options are likely to result in cumulative losses to retail clients over time because of their product characteristics:
- the ‘all or nothing’ payoff structure, where one of the two possible outcomes for a binary option contract is that the retail client will lose their entire investment amount;
- short contract duration (the average contract duration of binary options traded with one provider was less than six minutes); and
- negative expected returns (that is, the present value of the expected payoff for a binary option contract is lower than the initial investment).
Commissioner Armour said, ‘Binary options’ product characteristics make them incompatible with investment or risk management use by retail clients. ASIC’s product intervention order will protect retail investors from these harmful products at a time of heightened vulnerability.’
ASIC estimates that retail clients’ net losses from trading binary options were around $490 million in 2018. The size of the market in Australia has since reduced significantly after ASIC issued a warning in April 2019 against providing unlicensed or unauthorised services to clients located in several foreign jurisdictions. Australian retail clients are estimated to have made net losses of more than $6.7 million in 2019.
ASIC’s binary options ban brings Australian requirements into line with prohibitions in force in comparable markets and follows the commencement on 29 March 2021 of ASIC’s product intervention order imposing conditions on contracts for difference offered to retail clients.
The order will remain in force for 18 months, after which it may be extended or made permanent. Civil and criminal penalties apply to contraventions of the product intervention order.
A binary option is a cash-settled, over-the-counter (OTC) derivative entered into by two counterparties—the binary option issuer and the client. The ‘all-or-nothing’ payout under a binary option contract is determined by the occurrence or non-occurrence of a specified event in a defined timeframe. This can include an event related to movements in the price of a financial product or a market index (for example, the price of gold increasing in 30 seconds) or an economic event (such as a central bank interest-rate decision).
Regulatory Guide 272 Product intervention power provides an overview of ASIC’s product intervention power, when and how ASIC may exercise the power and how a product intervention order is made.
On 22 August 2019, ASIC released CP 322, seeking feedback on proposals to use its product intervention power to address significant detriment to retail clients resulting from binary options and CFDs (refer 19-220MR). CP 322 attracted more than 400 responses from consumers, consumer groups, CFD issuers, industry bodies and other stakeholders.
On 23 October 2020, ASIC made a product intervention order imposing conditions on the issue and distribution of contracts for difference (CFDs) to retail clients (refer 20-254MR). From 29 March 2021, ASIC’s order strengthens consumer protections by reducing CFD leverage available to retail clients and by targeting CFD product features and sales practices that amplify retail clients’ CFD losses.
In addition to the product intervention orders, ASIC’s actions to address concerns about binary options and CFDs include:
- enforcement action to address misconduct
- public warning notices and other statements
- surveillance projects and thematic reviews
- stronger regulations
- extensive retail client education campaigns and guidance for binary option issuers.