Consumer group Which? has issued an alert on what it describes to be the UK’s ‘biggest investment con’.
The warning came on the back of its investigation into binary options, which are one of the fastest growing financial products in the world.
Binary options essentially place a bet on whether the price of a share, stock market or other asset will be above or below a set price in future. Every bet has only two possible outcomes: get it right and you’ll win your stake back, plus profits of 50% to 90%. If you’re wrong, you lose the lot.
The products first appeared a decade ago and the industry has grown to hundreds of companies. The sector is currently not supervised by the Financial Conduct Authority (FCA), but this will change at the start of 2018 when the regulator takes it under its watch.
While the FCA, Gambling Commission and City of London Police have all warned fraud is rife in the industry, Which? feels awareness among potential victims is still relatively low. Binary options are not currently regulated as financial products in the UK, but this will change in January 2018 when the FCA takes control of the industry
On the face of it, binary options appear to be a potentially lucrative but ultra-high-risk way to make money by speculating on short-term market movements,’ Which notes.
'There are some legitimate companies selling binary options, but even the genuine products should be considered gambling, not investments,' the consumer group said in its study, titled Inside binary options – Britain’s biggest investment con.
It also warned that most binary brokers are not really brokers at all.
‘When you trade with a real broker, your buy trade will effectively be paired against another trader who wants to sell, or vice versa, and you’ll be charged a modest fee for the service. If you win, you’ll trade more, and the broker will earn more commissions,’ Which? said.
‘Instead, binary options companies work more like bookmakers. Customers bet directly against the house. Your losses are their gains, and vice versa. They might let you win in the early stages, but only to encourage you to bet more. They know it’s the house that will win in the end.’
Which? believes if companies were upfront about the way they worked it would not necessarily be a problem, but noted often they lack transparency.
UK investors have reported losses of more than £50 million to binary option scammers, according to police figures, including £18 million in the first of 2017 alone.
However, Which? fears the true number could be much higher, with its Money helpline receiving up to 15 calls a month from victims. While losses typically tend to be a few thousand pounds, in the worst cases the firm says it has spoken to victims who have lost hundreds of thousands.
The investigation exposed unfair contracts used by dodgy firms, including clauses that let brokers rig the market against you, or treat your money as their own.
‘We found salespeople willing to say anything to get us to invest, and uncovered smokescreen tactics that make it hard for potential victims to see who they’re dealing with – or who they can really trust,’ Which? said.
The explosion of binary options brokers is largely down to a franchise model, according to Which?, with hundreds of brands out there and huge industry to promote them.
It added that ads for jobs for brokers, or to write fake reviews are easily found, as are commissions for people who refer new customers.
‘These fake reviews – along with heavily influenced search results, make it hard for people to work out when a binary broker is genuine.'
High pressure tactics
The probe also shone a light on high pressure tactics from firms, naming 24option.com, which is regulated through Cyprus, as an example.
‘During the registration process we were asked to confirm we were ‘sophisticated investors’ – a technical term that basically means we know what we’re doing and waive our rights to regulatory protections. One of its representatives called us during the registration process, telling us to sign the declaration, even though we told them we had no experience,’ Which? said.
‘The implications of doing so weren’t explained to us – and any regulated financial company found doing this in the UK could face severe repercussions.’
Which? was also concerned by the terms and conditions imposed by all of the binary options sites it examined.
‘Many had initial bonuses, like 72option.com, which required investors to gamble huge amounts before they had a chance of seeing their money back. Others had clauses that meant customers could only withdraw profits, rather than their initial stake.’
Which? also highlighted that some charge fees for withdrawals, or limit withdrawals to levels well below the minimum deposit.