ASIC Bans the Sale of Binary Options
LegalFinanceCorporateCompliance7/04/2021 12:00:00 AM

Company Law - ASIC Bans the Sale of Binary Options to Retail Clients

The ASIC Corporations (Product Intervention Order – Binary Options) Instrument 2021/240 (Instrument), will commence on 7 April 2021.

The Instrument is a product intervention order which prohibits binary options providers, from issuing, and distributing, over-the-counter binary options, to retail clients. The Instrument also requires financial advisors dealing in binary options, to take reasonable steps to notify their retail clients of the terms of this Instrument.

What are binary options?

A binary option is a type of financial product, specifically a cash-settled, over-the-counter derivative entered into by 2 counterparties — the binary option issuer and the retail client. Over-the-counter, in relation to a derivative, means a derivative which cannot be traded on a licensed market. The “all or nothing” payout under a binary option contract is determined by the occurrence or non-occurrence of a specified event within a defined timeframe. For example, shares having reached a certain market value, the price of gold increasing within a very short timeframe eg 30 seconds, or an economic event occurring, such as a central bank interest-rate decision. Essentially, a client “bets” on a certain event or outcome occurring within the stipulated timeframe. If the client bets successfully, they receive a fixed-cash payout; otherwise they receive nothing.

While binary options promise quick high returns, the high-risk nature of binary options means that most clients will lose their entire investment most of the time. You can read more about binary options on our Pinpoint platform here.

Background

ASIC’s decision to ban the sale of binary options to retail clients, follows an industry-wide consultation process, run by ASIC in August 2019. A Consultation Paper was released on 22 August 2019, with industry submissions sought by 1 October 2019. This consultation process attracted more than 400 responses from consumers, consumer groups, CFD issuers, industry bodies and stakeholders. ASIC had run a similar consultation process in 2017. These consultations found that approximately 80% of retail clients lost money in trading binary options. ASIC found that binary options are likely to result in cumulative losses to retail clients over time because of their inherent product characteristics, including:

  • The “all or nothing” payoff structure, where one of the 2 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 found to be less than 6 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.

ASIC has commented that “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.”

ASIC estimates that Australian retail clients suffered net losses from trading binary options of approximately $490 million in 2018 and $6.7 million in 2019. The size of the Australian market for binary options reduced significantly in 2019 after ASIC issued a warning in April of that year against providing unlicensed or unauthorised services to clients located in several foreign jurisdictions.

The changes in detail

The Instrument is made under s 1023D(3) of the Corporations Act 2001 (Cth). Section 1023D(3) permits ASIC to make product intervention orders in relation to financial products where those financial product(s) are likely “to result in significant detriment to retail clients”. You can read more about ASIC’s ability to make product intervention orders on our Pinpoint platform here. ASIC Regulatory Guide 272: Product Intervention Power also 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.

The prohibitions will apply from Monday 3 May 2021. Any product intervention order imposed will remain in place for a period of 18 months, after which it may be extended or made permanent. The only exception to this is where a shorter period has been specified by the Corporations Regulations 2001 (Cth), pursuant to s 1023G of the Corporations Act. Civil and criminal penalties apply for contravention of a product intervention order.

ASIC’s binary option ban brings Australian requirements into line with prohibitions in force in comparable markets overseas, and follows the commencement, on 21 March 2021, of ASIC’s product intervention order imposing conditions on Contracts for Difference (CFDs) offered to retail clients.

In addition to the product intervention orders, ASIC’s actions to address concerns about binary options and CFDs include:

  • Enforcement action to address any 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.

What next?

The ban on binary option providers issuing, or distributing, over-the-counter binary options to retail clients, will commence on Monday 3 May 2021.
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Sources: ASIC Corporations (Product Intervention Order – Binary Options) Instrument 2021/240, 1 April 2021, accessed 7 April 2021.

ASIC, 21-064MR ASIC bans the sale of binary options to retail clients, [media release], 1 April 2021, accessed 7 April 2021.

ASIC, Public notice – Product intervention order in relation to binary options, 1 April 2021, accessed 7 April 2021.

ASIC Consultation Paper CP 322 Product intervention: OTCs binary options and CFDs, 22 August 2019, accessed 7 April 2021.

ASIC, 19-088MR Some AFS licensees may be breaking overseas laws, [media release], 11 April 2019, accessed 7 April 2021.

ASIC, 21-060MR ASIC’s CFD product intervention order takes effect, [media release], 29 March 2021, accessed 7 April 2021.

ASIC, 20-254MR ASIC product intervention order strengthens CFD protections, [media release], 23 October 2020, accessed 7 April 2021.

CCH Pinpoint, Product intervention orders – Making, amending, revoking, remaking: s 1023D–1023N, 18 September 2019, accessed 7 April 2021.

CCH Pinpoint, ASIC Report 626: Consumer harm from OTC binary options and CFDs, 22 August 2019, accessed 7 April 2021.

CCH Pinpoint, ASIC Regulatory Guide 272: Product intervention power, issued 17 June 2020, accessed 7 April 2021.

CCH Pinpoint, ASIC proposes ban on binary options and restrictions on CFDs, 28 August 2019, accessed 7 April 2021.

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