Central Bank of Ireland bans sale of binary options and restricts sale of contracts for difference

• The Central Bank today announced that it will ban the sale of binary options to retail investors and restrict the sale of contracts for difference (CFDs) to retail investors.
• This will be the first time that the Central Bank uses its product intervention powers introduced in 2018, which allow it to prohibit or restrict the sale of certain products.
• These interventions reflect the Central Banks’s significant concerns relating to the sale of CFDs and binary options to retail investors and will take effect immediately after the European Securities and Markets Authority (ESMA) intervention measures lapse.

The binary options measure will prohibit the marketing, distribution or sale of binary options to retail investors. The CFD measure will restrict the marketing, distribution or sale of CFDs to retail investors. This restriction consists of limits on leverage, a margin close requirement, a requirement that retail investors cannot lose more money than they put into their CFD account, a prohibition on the use of incentives by a CFD provider and a standardised risk warning.

On 27 March 2018, the Central Bank issued a warning to investors on CFDs and binary options. EU competent authorities had undertaken reviews over previous years, which revealed that between 74% and 87% of retail clients incurred losses when investing in binary options. On CFDs, a Central Bank inspection published in 2015 found that 75% of retail CFD clients made a loss, of which the average loss was €6,900. A follow-up review of a sample of the largest CFD providers in Ireland in 2017 found that, in the two-year period up to 31 December 2016, 74% of retail clients lost money with an average loss of €2,700. Based on this supervisory work, the Central Bank consulted in 2017 on specific proposals to protect consumers in relation to CFDs (CP 107).

The Central Bank has worked closely with ESMA on this investor protection issue. In 2018 ESMA imposed temporary product intervention measures in relation to the sale of CFDs and binary options to retail investors, measures for which the Central Bank had advocated. Once these temporary measures expire, the Central Bank’s national product intervention measures will immediately take effect in order to ensure ongoing protection of retail investors.

Director General (Financial Conduct) Derville Rowland said: “The use of our new national product intervention powers demonstrates our continuing commitment to act decisively and robustly to address investor protection concerns. The Central Bank is banning the sale of binary options to retail investors as we consider them a fundamentally flawed product, which have no place in the investment plans of retail investors. They are no more an investment than betting on a horse.

Based on our ongoing work on CFDs at a domestic and EU level, we have concluded that retail investors must be protected from excessive levels of leverage, which can result in unexpectedly high levels of losses and from the risk of losing more money than they put into their CFD account. We also want to stop firms using incentives to entice retail investors to trade in these short term, speculative products.’’

Note:

ESMA is an independent EU authority that contributes to safeguarding the stability of the European Union's financial system by enhancing the protection of investors and promoting stable and orderly financial markets.

The product intervention measures will be published on the Central Bank website prior to entering into effect. The exact date on which the measures will come into effect is dependent on the date on which the ESMA temporary measures will expire, with the current ESMA measures due to expire on 1 July 2019 for binary options and 31 July 2019 for CFDs.

CFDs are complex, leveraged, derivative instruments which enable investors to speculate on the short-term price movements of an underlying reference asset.

Binary options allow an investor to speculate on the short-term price movements of an underlying reference asset. The potential outcome is predetermined, with an investor usually losing their initial investment if their prediction is incorrect or receiving a fixed pay-out if they are correct.