The corporate regulator has banned the distribution of binary options to retail clients after it found that 80 per cent lost money over separate studies in 2017 and 2019.

ASIC lodged a product intervention order on April 1 to stop the “issue and distribution” of binary options to retail clients after estimating the net losses from trades at $490 million in 2018 alone.

The steep losses prompted ASIC to issue a warning in April 2019, which had the effect of reducing losses to $6.7 million in 2019.

In the 2017 and 2019 studies ASIC found that binary options were “likely to result in cumulative losses to clients” because of three characteristics; the ‘all or nothing’ payoff structure, short contract duration and “negative expected returns”.

The regulator’s primary concern was the all or nothing structure of binary options. As an over-the-counter derivative with the outcome being determined by the “occurrence or non-occurrence” within a certain timeframe, the structure of the offering put them at odds with the risk framework of retail investors.

“Binary options product characteristics make them incompatible with investment or risk management use by retail clients,” commented ASIC commissioner Cathie Armour. “ASIC’s product intervention order will protect retail investors from these harmful products at a time of heightened vulnerability.”

ASIC said the order will remain in effect for 18 months, after which it may extend or make permanent the ban.

“Civil and criminal penalties apply to contraventions of the product intervention order,” the regulator warned.

 

Tahn Sharpe is a Sydney-based financial services journalist with a background in financial planning. He writes on advice, superannuation, investment, banking and insurance issues, is a certified SMSF Adviser and holds an Advanced Diploma of Financial Planning. Contact at [email protected]
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