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Can UK Regulation Put an End to Binary Option Scams?

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Binary options offer investors a 50-50 chance of winning. Now the trades face similar odds of survival in the UK. 

Britain’s financial regulator has said it will begin overseeing the market in the controversial derivatives from January, warning that the “high-risk and speculative” trades have the potential to ruin investors.

Legit Traders Fear They’ll be Banned

The move also follows bans imposed by other nations amid mounting evidence the industry is being exploited by online fraudsters conning millions of pounds out of unwary investors.

Opponents, including consumer magazine which are calling for the outright abolition of the market. But trading firms on the legitimate side of the industry fear authorities will bow to public pressure and impose tough regulations, putting their businesses at risk.

“It could go either way – it all depends on how hard they make it for the industry,” said Toby Robinson, CEO of comparison website binaryoptions.co.uk. “If they come down in a very strict way, some legitimate brokers are concerned they will be banned.”

Binary options are a simple trade. Investors bet on the movement of a stock, currency or any other asset over a set period of time, usually mere minutes. A correct bet wins the investor a return and a wrong loses the stake.

Stock market green and red graph with black background , Forex market , trading
In 2015 Her Majesty’s Treasury decided to move Binary Options regulations from the gambling commission to the financial conduct authority.

Because payouts or losses are fixed, not dependent on an asset’s relative performance, the trades have been compared with bets at casinos or bookmakers. Indeed, the industry has hitherto been under the gaze of the Gambling Commission, but disquiet over huge losses incurred on the trades has prompted the powerful Financial Conduct Authority to take over.

It said the trades are so risky that even seasoned investors should be prepared to lose all their money. It argues that binary options trading requires very specialist knowledge, that informed decisions are impossible to make in the market and that it encourages addictive behaviour. The regulator also noted that there was a conflict of interest in most trades because client losses benefited brokers, a situation that could foster “poor conduct” by agents.

Retail Investors at Risk of Fraud

For the ordinary investor, the FCA was most concerned about the potential for fraud, saying binary options were a significant source of illicit, get-rich-quick schemes that “promise higher than average returns for bets that never occur and manipulate software to distort prices and payouts”.

The FCA cited an investigation by the City of London police force’s white-collar crime unit, Action Fraud, which estimated that almost £60 million had been fleeced from more than 2,000 victims by various scam artists since 2012.

Robinson argues that the bets are a legitimate financial instrument tarnished by criminals: “The trade isn’t the problem – it’s the actions of a few illegal companies that are the problem,” he insisted, calling for a regulatory regime similar to that in France, where binary options are legal but cannot be advertised. “They’re a problem of marketing – if the FCA goes down the French road, it will get to the heart of the problem.”

Sudden Growth of Illegal Traders

At the City of London police’s fraud headquarters, officers are astounded by the speed with which binary options scams have flourished in the UK.

“In the space of two years, we’ve seen it grow from nothing to the biggest problem in the investment world,” said Detective Inspector Chris Felton of the National Fraud Intelligence Bureau, which backs the Action Fraud team.

In the first six months of 2017, almost 700 people were conned in the UK, about a quarter of all recorded incidents. Victims have run up huge debts and, in one case, committed suicide.

Felton says the scams are sophisticated. From behind the veneer of acceptability of a registered company, the operations first recruit an army of agents, or “affiliates” who earn commission by seeking new victims.

Data on UK binary option scams committed since 2012

Once hooked, victims are put in the hands of agents who pose as brokers, offering to invest huge sums of their money on binary options. After some small payments are made as “winnings” the agents procure more and more money. But the bets are never placed.

“The companies are shams and the results data they show victims are a sham too,” he said. “Most victims are left in the dark about their investments. Many don’t even realise they’ve been conned.”

Simplicity Enables Exploitation

Felton said the simplicity and novelty of binary options makes them attractive to criminals.

“They seize on new, unregulated markets and search out loopholes they can exploit,” he said. “They’ve been successful because the trade is easy to explain to people who don’t understand markets.”

The scammers have profited by harnessing the selling power of social media. Both affiliates and victims are recruited online through ads on mainstream websites. These operators also influence and manipulate online search results to give their ads greater prominence.

“It’s a completely different demographic,” said Felton. “They’re preying on younger targets, using social media because that gives them the appearance of credibility.”

Authorities Begin Crackdown on Scam Binary Option

High-profile exposés of swindles have already had an impact on the legitimate market, argues Robinson, who says many jurisdictions accused of ignoring the practices have since tightened regulations. Belgium, the US, Australia and Canada have so far banned binary options along with Israel, which had been the hub of the illicit trade. Cyprus, another prominent venue for the traders, is in the process of tightening regulations.

But many, like Robinson, doubt regulators will ever outrun illegal operations.

World Recovery International, a New York company of lawyers and investigators that has traced millions of dollars of assets lost to binary options fraud, says the pervasiveness of the internet has fueled the rapid spread of the rip-offs.

London police officers during activity
The London Police recent arrests have raised the awareness to Binary Options frauds.

“Even if you have regulation in the UK it won’t stop them,” said founder Austin Smith. “They’ll just relocate somewhere else and continue defrauding British investors over the internet. They make the Wolf of Wall Street look like an amateur.”

Much of Smith’s work is focused on Israel, where fraudsters took advantage of the country’s cutting edge fintech base and lax regulations to set up scams on an industrial scale. The Times of Israel, which has been at the forefront of a campaign to outlaw the industry, said more than 100 companies had fleeced thousands of victims of billions of dollars. Few will ever see their money again and thousands of “affiliates” will lose lucrative employment.

“As soon as you close one loophole, they open another,” Smith said. Felton agrees, saying Bulgaria appears to have become a focal point since crackdowns in Israel.

Regulation May Not Help

Felton concedes that regulation in the UK will do little to eradicate illicit trades, and may even harm the legitimate binary options sector. But he’s adamant that the UK should demonstrates its determination to stand up to the criminals.

“More and more countries are tightening regulations to outlaw the illegal traders, and doing so in the UK will send a message to the industry that it is being watched,” he said.

Smith isn’t as optimistic.

“We’re already seeing them [Scam Companies] move to cryptocurrencies,” he said. “In many ways the binary options scam is over. The crypto scam is just beginning.”

Note: The opinions expressed in this article are the author's own and do not necessarily reflect the view of Alvexo on the matter.