In June 2018 the European Securities and Markets Authrity (ESMA) for the first time formally adopted new, temporary rules on the provision of contracts for difference (CFDs) and binary options for retail investors. ESMA temporarily banned the marketing, distribution and sale of binary options to consumers (effective from 2 July 2018), and has restricted the marketing, sale and distribution of CFDs (effective from 1 August 2018).
Binary options and CFDs are high risk investment products unsuitable for average consumers. They allow 'betting' on financial indices such as the price of gold, or currency will rise or fall over a fixed period of time, with such an uncertain outcome that they can also be classed as gambling products (see also an interesting article here). Binary options and CFDs became specially dangerous when their online marketing consumers as a way to get rich quickly took up. Unfortunately, instead of getting rich, 74-89% of consumers suffered detriment. As a result, countries around the world started to regulate, and ban these products, and now the EU has joined these efforts.
ESMAs action is landmark because it is the first time that an EU supervisory authority (ESA) has used its product intervention power. The ESAs that have been established following the financial crisis, has been vested product intervention powers to protect EU consumers from the marketing and sale of dangerous products. This power is provided in Article 9 of the regulations establishing the authorities (Regulation 1093/2010, Regulation 1094/2010, and Regulation 1095/2010) and has been concretized in more specific legal acts, such as Regulation 600/2014 of Markets in Financial Instruments (MiFIR). In this case ESMA relied on Article 40 MiFIR.
With its decision from 24 August 2018 ESMA decided to extend the prohibition related to binary options for another 3 months (effective from 1 October 2018), this time refining its approach, and excluding some types of binary options that it found not to impose a sufficient degree of risk onto consumers. The decision is limited to binary options and makes no reference to CFDs, restriction of which came into force a month later than binary options.
While ESMAs actions is undeniably a positive step towards improving the protection of consumers on EU financial markets, one may wonder why are the powers of the EU supervisory authorities limited in time? Binary options (at least some kinds of binary options) are not going to get to be better products. Should the EU supervisory authorities have extended product intervention powers, powers that would enable them to ban products from the EU internal market permanently?
