ASIC banning on the issue and distribution of binary options to retail clients has been extended until 1 October 2031.
What are you required to do?
As the ban has been in place since 2021, licensees should have made appropriate modifications to their service offering and marketing material at that point. However it is worthwhile for all AFSL holders to do a quick stocktake to ensure there have been no inadvertent breaches of the order subsequently.
Some suggestions include:
- Where you are continuing to offer binary options to clients who qualify as wholesale, ensure you have the appropriate controls in place to qualify these clients as wholesale and provide them with the appropriate disclosure documents which are clear they are not being treated as a retail client.
- For marketing materials, carry out a regular review to ensure all references to the sale or issue of binary options to retail clients by your AFSL are removed.
Firms that find instances that need fixing should also review their breach reporting requirements.
In April 2021, ASIC made a product intervention order in respect of binary options (“Binary Options Order”) to prohibit the issue and distribution of over-the-counter (“OTC”) binary options to retail clients. The Binary Options Order became effective on 3 May 2021.
In September 2022, ASIC released Report 736 Response to submission on CP362 Extension of binary options product intervention order, and extended the Binary Options Order until 1 October 2031.
“Binary options are harmful, high-risk financial products”
What are binary options? Binary options are OTC derivatives that allow clients to speculate on the occurrence or non-occurrence of a specified event in a defined timeframe.
According to Report 736, in the 13 months to 3 May 2021,
- 74-77% of active retail clients lost money trading binary options; and
- Retail clients made net losses of $14 million in aggregate.
In CP362, one respondent provided submission tried to distinguish ‘fifty-fifty’ binary options and ‘volatility’ binary options and stated that a separate regulatory approach for volatility binary options would not be unreasonable. ASIC responded to this submission in Report 736 and confirmed that the Binary Options Order should include all binary options, noting that volatility binary options resulted also in significant detriment to retail clients.
“68% of wholesale clients made a loss in each of the two full quarters”
It should be noted that the Binary Options Order is only applicable to retail clients and not applicable to wholesale clients. Report 736 noted that after the ban took place in May 2021, very few retail clients were reclassified by AFS Licensees as wholesale clients, and on average, 68% of wholesale client accounts made a loss in six months after 3 May 2021.