On 2 July 2018, the European Securities and Markets Authority (ESMA) prohibited the marketing, distribution or sale of binary options to retail clients. On 24 August 2018, ESMA issued a press release confirming that this prohibition would continue for a further three months from 2 October 2018. However, responding to feedback from industry, ESMA has decided to exclude certain types of binary option from the prohibition going forward.
In the run up to the prohibition that was effected on 2 July 2018, ESMA claimed that 80% of binary options entered into resulted in losses for the respective consumer. For this reason, ESMA utilised its product intervention powers under MifiD for the first time, and banned the sale of binary options to retail consumers for the maximum period of three months. MiFiD requires that a product intervention is revisited every three months and only renewed if required.
In its press release dated 24 August 2018, ESMA explained that it considered "the specific features of binary options currently within the scope of the measures," when reviewing the product intervention that was in effect. In doing so, ESMA concluded that certain binary options, which already incorporate investor protection measures, should necessarily be excluded from any ban going forward.
Following its review of the intervention, ESMA decided to exclude the following types of binary option from any prohibition going forward:
The upshot of the above is that where the two outcomes of a binary option are such that it is not possible for an investor to lose more than was originally invested, this type of product would fall outside of the intervention. Similarly, where a binary option is subject to a term of at least 90 days, is backed by a prospectus and is fully hedged by the provider or a company in its group - it would also fall outside of the scope of the intervention.
The intervention that was brought into effect on 2 July 2018 is still in force and will remain in force until 2 October. Therefore, those binary options that will be excluded in future, remain prohibited and should not be sold to retail consumers until that date. Some may recall that the original product intervention of 2 July also placed severe restrictions on the sale and marketing of contracts for difference (CFDs). It is currently unclear as to whether this will continue in its current form. Interested firms and individuals are advised to check the ESMA website for updates or stay tuned for more E-Alerts from Taylor Wessing.
Taylor Wessing is ideally placed to advise on financial regulatory matters, including ESMA's product intervention. For more information, please contact one of our experts.