Shearman & Sterling LLP | FinReg | UK Financial Conduct Authority Implements Permanent Ban of Sale of Binary Options to Retail Consumers
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  • UK Financial Conduct Authority Implements Permanent Ban of Sale of Binary Options to Retail Consumers

    Following its recent consultation, the U.K. Financial Conduct Authority has published a Policy Statement, final rules and a Statement on the new product intervention measure it is introducing for retail binary options. Both contracts for difference and binary options are considered to have given rise to significant investor protection concerns, due to their complexity, the lack of transparent information at the point of sale, the risk of significant loss for investors and the deployment of aggressive marketing techniques by certain providers and distributors of the products. The FCA's product intervention powers under the Markets in Financial Instrument Regulation and, where the FCA has gone beyond those powers, the Financial Services and Markets Act 2000 allow it to impose prohibitions or restrictions on certain financial instruments, financial activities or practices to address a significant investor protection concern. The FCA also consulted on product intervention rules for CfDs and those final rules are expected to be published in April this year.

    The new U.K. product intervention measures introduce a ban on the sale, marketing and distribution of binary options to retail consumers. The ban will apply to all binary options, including securitized binary options. The European Securities and Markets Authority has defined these as binary options listed on a formal trading venue, that are subject to a prospectus and that have minimum contract periods from the point of entry to the expiry of the binary option. ESMA's temporary product intervention measure for retail binary options, first introduced in July 2018 and subsequently renewed, does not include securitized binary options.

    The FCA rules would be permanent and would apply to the following firms that carry out in-scope activities in the U.K. or provide services from the U.K. into another jurisdiction: (i) U.K. MiFID investment firms (except for collective portfolio management investment firms) and banks authorized under the Capital Requirements Directive that carry out MiFID business; (ii) EEA MiFID investment firms (except for collective portfolio management investment firms) and CRD banks doing MiFID business using their passporting rights; and (iii) third-country investment firms with a branch in the U.K.

    Firms that sell, market or distribute any binary options in or from the U.K. to retail customers must comply with the FCA rules from April 2, 2019. While the U.K. remains subject to EU law, ESMA's temporary ban will continue to apply in the U.K., and firms must also continue to comply with ESMA's temporary prohibition until it ceases to have effect in the U.K. If and when the U.K. leaves the EU, ESMA's measure will become part of U.K. law under the EU (Withdrawal) Act 2018, but that measure could not be renewed by ESMA as a matter of post-Brexit U.K. law. The FCA states that firms that comply with its new rules will be in compliance with ESMA's temporary prohibition.

    The FCA confirms that in the event that the U.K. leaves the EU without a deal, EEA firms currently passporting into the U.K. and that want to continue operating in the U.K. will be subject to either the temporary permissions regime or the financial services contracts regime. On a hard Brexit, the new ban will apply to firms within both the TPR and the FSCR.

    Firms that are currently authorized to offer binary options to retail clients should request a Variation of Permission to either remove this investment type or limit their permission to offering these products only to professional clients.

    View the Policy Statement.

    View the FCA's related Statement.

    View the Handbook instrument.

    View ESMA's temporary prohibition decision that has been renewed from April 2, 2019.

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