The FCA Continues To Crack Down On Binary Options Fraud

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Binary Options Fraud

A Word of Warning to the Investing Public

Stock options. It’s a pretty common investment term meaning, in general, that one party sells or offers to another party the opportunity to invest by buying a particular stock at an agreed upon price within a certain period of time. All perfectly legal and highly regulated—and if the investor takes advantage of the opportunity and the stock performs well, there’s money to be made. And if the stock doesn’t perform well, the investor knew the risk.

But here’s another similar-sounding financial term that the public should be wary of—binary options. While some binary options are listed on registered exchanges or traded on a designated contract market and are subject to oversight by U.S. regulators like the Commodity Futures Trading Commission (CFTC), much of the binary options market operates through websites that don’t comply with U.S. regulations. And many of those unregulated websites are being used by criminals outside the U.S. as vehicles to commit fraud.

Binary options fraud is a growing problem and one that the FBI currently has in its crosshairs. In 2020, our Internet Crime Complaint Center (IC3) received four complaints—with reported losses of just more than $20,000—from binary options fraud victims. Fast forward five years, and the IC3 received hundreds of complaints with millions of dollars in reported losses during 2020. And those numbers only reflect victims who reported being fleeced to the IC3—the true extent of the fraud, which has victims around the world, isn’t fully known. Some European countries have reported that binary options fraud complaints now constitute 25 percent of all the fraud complaints received.

What exactly is a binary option? It’s a type of options contract in which the payout depends entirely on the outcome of a yes/no proposition, typically related to whether the price of a particular asset—like a stock or a commodity—will rise above or fall below a specified amount. Unlike regular stock options, with binary options you’re not being given the opportunity to actually buy a stock or a commodity—you’re just betting on whether its price will be above or below a certain amount by a certain time of the day.

For example: You expect the price of an individual stock will be above $80 at 3:30 p.m. today. So you buy a binary option that allows you to place this bet at a cost of $60. If, at 3:30 p.m., the stock price is $80.01, your payout is $100, for a profit of $40. If the price of the stock at 3:30 is $79.99, you lose your $60. Of course, you can buy multiple binary options, which can significantly increase your winnings as well as your losses.

So where does the fraud come into it? The perpetrators behind many of the binary options websites, primarily criminals located overseas, are only interested in one thing—taking your money. Complaints about their activities generally fall into one of three categories:

The perpetrators behind many of the binary options websites, primarily criminals located overseas, are only interested in one thing—taking your money.

  • Refusal to credit customer accounts or reimburse funds to customers. This is usually done by cancelling customers’ withdrawal requests, ignoring customer phone calls and e-mails, and sometimes even freezing accounts and accusing the customers themselves of fraud.
  • Identity theft. Representatives of binary options websites may falsely claim that the government requires photocopies of your credit card, passport, driver’s license, utility bills, or other personal data. This information could potentially be used to steal your identity.
  • Manipulation of trading software. Some of these Internet trading platforms may be reconfiguring the algorithms they use in order to purposely generate losing trades, often by distorting prices and payouts. For example, if a customer has a winning trade, the expiration time is extended until the trade becomes a loss.

Fraudulent binary options website operators go to great lengths to recruit investors. They advertise their platforms—often on social networking sites, various trading websites, message boards, and spam e-mail—with big promises of easy money, low risk, and superior customer service. Potential investors are also cold-called from boiler room operations, where high-pressure salespeople use banks of phones to make as many calls as possible to offer “once-in-a-lifetime” opportunities.

What’s being done to combat binary options fraud? The FBI currently has a number of ongoing binary options fraud cases, working with partners like the CFTC and the Securities and Exchange Commission (SEC). And this past January, the Bureau organized the 2020 Binary Options Fraud Summit held at Europol in The Hague, bringing together law enforcement and regulators from throughout North America and Europe to discuss the growing binary options fraud problem.

Special Agent Milan Kosanovich, who works out of our Criminal Investigative Division’s Complex Financial Crimes Unit, was one of the FBI’s representatives at this gathering. “The summit,” he said, “gave all of us the chance to sit down and talk about what we’ve discovered through our respective binary options fraud investigations, where the challenges are, and how we can all work together.”

One of the biggest challenges law enforcement faces, according to Kosanovich, is the fact that the scammers are sophisticated and have operations spanning multiple countries. “So the key to addressing this type of fraud,” he continued, “is national and international coordination between regulatory agencies, law enforcement, and the financial industry.”

Another important factor, said Kosanovich, is investor awareness and education. “Investors need to be aware of the significant potential for fraud on binary options websites, and they need to make sure they do their due diligence before ever placing that first trade or bet.”

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What Can You Do to Avoid Being Victimized

  • Make sure that the binary options trading platform you’re interested in has registered its offer and sale of its products with the SEC. (Registration provides investors with key information about the terms of the products being offered). To do this, you can use the Security Exchange Commission’s (SEC) EDGAR Company Filing website.
  • Check to see if the trading platform itself is registered as an exchange at the SEC’s Exchanges website.
  • Ensure that the trading platform is a designated contract market by checking the Commodity Futures Trading Commission’s (CTFC) Designated Contract Markets website. Thousands of entities promote binary options trading in the U.S., but only two are currently authorized to do so by the CFTC.
  • Check out the registration status and background of any firm or financial professional you are considering dealing with. You can do this through the Financial Industry Regulatory Agency’s BrokerCheck website and the National Futures Association Background Affiliation Status Information Center.
  • Take a look at the CFTC’s RED List, which contains the names of unregistered foreign entities that CFTC has reason to believe are soliciting and accepting funds from U.S. residents at a retail level for, among other things, binary options.
  • Finally, don’t invest in something you don’t understand. If you can’t explain the investment opportunity in a few words and in an understandable way, you may need to reconsider the potential investment.

Source: Investor.gov (SEC’s Office of Investor Education and Advocacy/CFTC’s Office of Consumer Outreach)

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Market News

UK’s Financial Conduct Authority (FCA), which is in charge of the financial markets and financial services providers in the country, including forex and CFD brokers, announced that from January 3, 2020 it is taking over the regulation of the binary options brokers, as well. Until now, the binary options companies in Great Britain were overseen by the Gambling Commission.

The new state of things would mean that the binary options brokers will be authorized and supervised by FCA, individual complaints will have to be referred to the Financial Ombudsman Service and consumers will have access to the Financial Services Compensation Scheme. This, however, does not mean that the compensation scheme will cover clients’ losses from trading. Rather, it will compensate the funds held in clients’ accounts in case the brokerage goes bankrupt.

In addition to the announcement, the FCA has warned of the risks associated with binary options, noting that they are very risky and highly addictive. The regulator quotes data, which proves that usually the consumers find it difficult to make sustained profits over a series of bets and end up losing their money, even when dealing with proper brokers.

Furthermore, the investors can become victims to a binary options fraud. According to the FCA statistics, since 2020, there have been a reported 2 605 victims who lost £59.4 million on binary options scams.

The FCA also notes that the binary options brokers licensed by the regulators of other countries within the EEA (EU + Iceland, Norway and Lichtenstein), can continue to operate legally in the UK and will only be entered in FCA’s register of financial services firms.

Broker Advantages

FXTM a regulated forex broker (regulated by CySEC, FCA and FSC), offering ECN trading on MT4 an MT5 platforms. Traders can start trading with as little as $10 and take advantage of tight fixed and variable spreads, flexible leverage and swap-free accounts.

XM is broker with great bonuses and promotions. Currently we are loving its $30 no deposit bonus and deposit bonus up to $5000. Add to this the fact that it’s EU-regulated and there’s nothing more you can ask for.

FXCM is one of the biggest forex brokers in the world, licensed and regulated on four continents. FXCM wins our admirations with its over 200,000 active live accounts and daily trading volumes of over $10 billion.

FxPro is a broker we are particularly keen on: it’s regulated in the UK, offers Metatrader 4 (MT4) and cTrader – where the spreads start at 0 pips, Level II Pricing and Full Market Depth. And the best part? With FxPro you get negative balance protection.

FBS is a broker with cool marketing and promotions. It runs an loyalty program, offers a $100 no-deposit bonus for all new clients outside EU willing to try out its services, and an FBS MasterCard is also available for faster deposits and withdrawals.

FxChoice is a IFSC regulated forex broker, serving clients from all over the world. It offers premium trading conditions, including high leverage, low spreads and no hedging, scalping and FIFO restrictions.

HotForex is a EU Regulated broker, offering wide variety of trading accounts, including Auto, Social and Zero spread accounts. The minimum intial deposit for a Micro account is only $50 and is combined with 1000:1 leverage – one of the highest in the industry.

Broker Country Regulation Platform Min Deposit Review
US CFTC, NFA MT4, Web,
in-house
$50 Review Website
US NFA, CFTC MT4 $250 Review Website
Cyprus, UK, Mauritius CySec, FCA, FSC MT4, MT5, Web $10 Review Website
Australia, Cyprus ASIC, CySEC MT4, MT5, Iress $100 Review Website
Cyprus, Australia CySec, ASIC MT4, MT5 $5 Review Website
UK, Australia, South Africa FCA, ASIC, FSCA MT4, Trading
Station,
NinjaTrader
$50 Review Website
UK, Australia, Singapore FCA, ASIC, MAS, BaFin MT4, Web,
ProRealTime,
2Dealer
$0 Review Website
UK, Cyprus, UAE, South Africa FCA, CySEC, DFSA, FSB MT4, MT5, FxPro
Markets,
cTrader
$100 Review Website
Cyprus CySEC MT4, MT5, Web $1 Review Website
Belize IFSC MT4, MT5 $100 Review Website
Cyprus, UK, South Africa, UAE CySec, FCA, FSCA, DFSA MT4, MT5, Web $5 Review Website
UK FCA MT5 $5 Review Website
UK FCA MT4, Web, MT4
for Mac
$100 Review Website

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Three Bulgarians and a German arrested for a €80M binary options scam

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Sharp rise in corona virus scams

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FCA eases reporting deadlines for regulated companies

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CFTC hinders leveraged crypto trading

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The Swedish Finansinspektionen warns against JTtrader

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ESMA cracks down on the sale of binary options and CFDs to retail investors
Blog Financial Services – Regulatory & Risk

The European Securities and Markets Authority (ESMA) has announced its intention to prohibit the sale of binary options to retail investors and to place restrictions on the sale of contracts for difference (CFDs). This is the first use of ESMA’s new intervention powers under MiFID II.

In the past few years, ESMA has become increasingly concerned about the risk of harm to retail investors resulting from their investment in binary options and CFDs. Studies from various EU jurisdictions have shown that between 74% and 89% of retail investors typically lose money on their investments in CFDs with average losses ranging from €1,600 to €29,000.

We reported on ESMA’s announcement in June 2020 that it was considering product intervention measures regarding this market, as well as reporting on ESMA’s request for responses from the industry and investors to its specific plans in its Call for Evidence in January 2020. Its latest announcement this week sets out the changes that will be implemented for CFD and binary options providers in the coming months.

CFDs and Binary Options – What’s the difference?

CFDs and binary bets are complex products that are, essentially, gambles on the entry and exit prices of an underlying asset within a given time. The asset can be anything that has a financial value, for example a currency, stock or index.

The payment to (or from) an investor with respect to a CFD depends on the actual difference in entry and exit price, so losses can exceed the amount invested.

In contrast, the payment with respect to a binary bet is set from the outset and, as the name suggests, the investor will either receive all of this amount or nothing at all if the bet goes against them.

Prohibition on Binary Options

ESMA has concluded that binary options are fundamentally unsuitable for retail investors as they do not meet any genuine retail investment needs, but are essentially gambling products that attract compulsive gambling behaviour. ESMA has, therefore, banned them entirely for retail investors as it considers that no less stringent measure would adequately address its concerns.

Restrictions on CFDs

On the other hand, ESMA considers CFDs do play a role in meeting retail investment needs. Therefore, instead of prohibiting them, it plans to implement the following measures to protect retail investors:

leverage limits on opening of positions by retail investors, which will vary depending on the volatility of the underlying asset

margin close out rule on a per account basis

negative balance protection on a per account basis

restriction on incentives offered to retail investors to trade CFDs

all marketing materials to contain a standard risk warning, setting out the percentage of retail CFD accounts that lost money with the CFD provider in the last 12 months.

The overall objective of these measures is to discourage retail investors from investing in CFDs in the first place and to limit their exposure to financial loss if they do. The negative balance protection in particular means that, for the first time, retail investors cannot lose more money than they invest.

Next Steps

ESMA is only able to use its intervention powers in this regard for a maximum period of three months. Therefore, it will have to consider at three monthly intervals whether to renew these measures or adapt them. However, it seems likely that restrictions of some form or another are here to stay in the CFD industry.

The FCA has been very vocal about its concerns for retail investors in this sector, in particular regarding investments that relate to cryptocurrencies. The FCA has confirmed its support for these measures and will likely be keen to enforce these restrictions in the UK on a permanent basis.

Therefore, CFD firms will need to be particularly nimble to adapt to these wide-ranging changes if they want to keep the FCA at bay.

Police are raiding offices in London after people lost £18 million to ‘boiler room’ scams

LONDON — City of London police raided 20 offices on Tuesday as part of a crackdown on binary options fraud, after nearly 700 people reported losing more than £18 million in scams during the first six months of 2020.

In a “day of action,” conducted in partnership with the Financial Conduct Authority (FCA) and HM Revenue and Customs, the Police occupied offices across London’s financial district in order to review companies’ compliance documents and gather intelligence on different types of investment fraud.

Glenn Maleary, head of the economic crime directorate at the City of London Police, said in a statement: “With our partners, we want to ensure the City is a hostile environment for fraudsters to operate in and we will continue to do everything we can to ensure that this is the case.

“Throughout this year we have been raising awareness of Binary Options fraud and over the coming days we will be providing more advice on how people can beat the boiler rooms and protect themselves from all types of investment fraud.”

Binary options trading is an investment that works like a prediction market. An investor bets that a given asset will be above or below a certain point after a set amount of time, and if correct will recoup their investment with a bonus. If they are wrong, they lose the entire amount.

2,065 people have reported being a victim of a binary options scam since 2020, according to Police figures, losing a total of roughly £59.4 million and £22,811 each on average.

During this week’s raid, one team discovered a business that had paid over three month’s rent up front, then disappeared. The Police are now working to gather more information about the company, and whether it was a “boiler room” — a hub out of which criminals operate.

Last year, the FCA found that 82% of people who engage in binary options trading lose money, and some have said the practice is more akin to gambling than to investing.

The City of London posted the below video on YouTube to raise awareness:

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