Financial watchdogs are warning consumers about the risks of buying into binary options and other speculative investments.
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The European Securities and Markets Authority (ESMA) wants to make investors more aware of the losses that can pile up when money is staked in binary options and contracts for differences (CFDs).
The announcement follows action by regulators in different countries against a host of companies marketing the products from Cyprus.
ESMA revealed that aggressive sales tactics had led to an increasing number of complaints from investors who have lost large amounts of money on CFDs and binary options.
ESMA chairman Steve Maijoor explained that the workings of CFDs and binary options were hard to understand for consumers and effectively amount to betting on how the prices of shares, commodities and currencies perform on financial markets.
Unexpected losses
“These products are often advertised to the retail mass market via online platforms and sold without investment advice,” he said.
“When these products are marketed and sold in an aggressive manner or when firms otherwise fail to comply with their regulatory obligations, this creates the conditions for retail investors to suffer significant detriment, including unexpected losses.
“ESMA and national regulators are committed to working together to ensure investors receive proper protection across Europe.”
Maijoor voiced his concerns after months of coordinated action against eight companies in Cyprus who have paid fines of 2 million euros for ignoring rules about how they should run their businesses.
The licence of another company, Pegase Capital, has also been withdrawn by regulators in Cyprus pending an inquiry.
Scam warning
Warnings about dealing with unregulated firms trading in binary options regularly appear on the web site of the International Organisation of Securities Commissions, which collects alerts about suspicious and unregulated financial firms from around the world.
CFDs are agreements between buyers and sellers to pay any difference in value of an asset now and at some agreed date in the future, such as the price of shares.
Binary options operate in a similar way to CFDs, but many unregulated firms offering them to consumers are scams run by fraudsters.
ESMA and other regulators argue that brokers bet against their customers and manipulate price data to stop them making money.
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