How did SpotOption establish physical presence in London when UK considers binary options to be gambling?
“Many consumers report having been scammed by these firms and we have concerns that UK consumers are being increasingly targeted by fraudsters who offer opportunities to invest in binary options” – FCA, July 2016.
Binary options technology provider SpotOption, which out of the six major binary options platform firms, all of which are based in Israel, has the most white label partners with 80 of the 500 current binary options brands using SpotOption’s platform, has established an office in London.
Whilst it may appear a landmark move, in that a company which solely provides a binary options trading environment to sales-led binary options firms whose roots are in the gambling, affiliate marketing, lead buying and adult entertainment industry rather than the electronic trading, technology and financial markets industry that has positioned London as the world’s most sophisticated and highly regarded financial center, there is much more to consider than taking this at face value.
Firstly, SpotOption UK, led by CEO Semi Vahap who recently moved from Tel Aviv to London to manage the new operations having been promoted from his position as Chief Commercial Officer which he held from December 2013 when he joined SpotOption from binary options brand iOption where he was CEO, has its location as the Royal Exchange Building, which is a very prestigious venue next to Bank station in the heart of the Square Mile, and a longstanding institution with which generations of financial sector executives are very familiar.
It is important to note that despite the extremely prestigious connotations, Royal Exchange these days is home to a cafe in the main entrance hall, two restaurants on the upper gallery, and the remainder of the building is serviced office space operated by i2 which can be rented by the square meter.
Secondly, and of vastly greater importance, Britain’s financial markets regulatory authority, the Financial Conduct Authority (FCA) does not regulate binary options as a financial services product, instead the Gambling Commission taking that responsibility in Britain.
In the United Kingdom, gambling is legal, and the omnipresence of betting shops adorning the high streets of every town are immediately noticeable to any visitor, however online giants William Hill, Ladbrokes and Betfred are also British.
The FCA took a look last year at regulating binary options as a financial services product, however just last week, over a year after making an investigation into such a possibility, the regulator shelved the plans completely based on the litany of scams and fraudulent activity that has come to light recently, therefore binary options trading in Britain remains very much a gambling product rather than an asset class of the financial markets.
The FCA’s statement on the matter reads
The Financial Conduct Authority (FCA) does not regulate binary options and the consultations we mentioned in the article in May 2015 have not yet resulted in changes to UK law to bring binary options under the FCA’s remit. Firms dealing in binary options with remote gambling equipment located in Great Britain need to be regulated by the Gambling Commission (note the Gambling Commission’s remit is Great Britain rather than the UK).
Since publishing this article, the FCA has received an increasing number of reports from consumers about their experiences with illegitimate binary options firms that do not appear to be regulated by any agency, either in the UK or abroad. Many consumers report having been scammed by these firms and we have concerns that UK consumers are being increasingly targeted by fraudsters who offer opportunities to invest in binary options. The purpose of this warning is to provide some further specific detail about binary options trading and the risks posed to consumers by fraudulent firms operating in this market.
NB: This statement from the FCA refers to binary options firms that are completely unregulated. SpotOption has a CySec license, however does provide services to unlicensed brands that solicit business internationally. Also, a CySec license does not cover binary options firms with physical offices in London.
While binary options can, in some instances, undoubtedly be a high risk activity in the sense that an investor’s entire investment can be lost, there are legitimate means for firms to offer binary options. Therefore the FCA strongly recommends that if consumers wish to deal in the binary options market, they do so with a firm that is either:
•A firm based in Great Britain with a current licence to offer bets on binary options from the Gambling Commission. Such firms may or may not be authorised by the FCA for other financial services business but the FCA states that customers should note that, even if they deal in binary options through an FCA authorised firm, they will not be protected by the UK’s financial services complaints and compensation scheme. This is because binary options are not currently an FCA regulated financial instrument.
•An EEA firm based in a Member State outside the UK which is authorised to deal in binary options and supervised by its home Member State’s financial services regulator, and which is passporting its services into the UK (however this is for firms with NO office in the UK, as an office in the UK would need to be regulated by the Gambling Commission as passporting is not extended to physical premises in the UK).
•A non-EEA firm that is appropriately authorised or licensed and supervised in its home country – again the premises must not be in the UK.
SpotOption, which has its main headquarters in Ramat Gan, Israel, has a CySec regulated office in Cyprus, which is in keeping with the rulings in Cyprus whereby CySec considers binary options to be a financial instrument, however the regulator is tightening up on various practices which are carried out by binary options brands such as high pressure sales.
Three years ago, Banc de Binary, one of SpotOption’s largest brands, was censured by the US Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) for soliciting customers in the US for off-exchange binary options trading, which is illegal across the federal United States.
Banc de Binary settled the claim against the company by reaching an $11 million settlement with US authorities.
Under the settlement, Banc de Binary agreed to pay $7.1 million in disgorgement and restitution, $2 million in civil penalties to the CFTC and $1.95 million in SEC civil penalties. From the money, a $9.05 million fund will be set up to repay harmed U.S. customers of the trading platform. Banc de Binary took net deposits of $11 million from 6,614 U.S. customers, according to the CFTC.
SpotOption offers a complete, end to end platform for binary options brands, which includes the front end user interface, back office, and market making facilities. In retail binary options, there is no liquidity feed, with customers trading on a ‘customer vs house’ basis, which is very much contrary to London’s established financial markets structure, the city being home to the lion’s share of institutional electronic trading companies ranging from prime of prime brokerages to Tier 1 banks, liquidity providers and multi -billion dollar CFD and spread betting firms with proprietary platforms.
FinanceFeeds approached SpotOption’s senior management today in order to gain clarity on how the corporate structure of an office in London would work, asking if the firm will be targeting UK-based retail customers with binary options platforms that resemble the current one on offer which markets binary options as a financial markets product, or if the firm intends to partner with large betting companies in the UK and provide binary options via bookmakers and gambling sites.
SpotOption states that its London office is for providing ‘sales and client services’ which includes risk management (market making) as well as platform provision, selling end to end solutions to new brokerages and supporting existing brands.
When inquiring about the corporate and regulatory structure, Tammy Levy, Director of Marketing explained to FinanceFeeds “The FCA in fact, is still highly considering regulating the binary industry. We know that the project is underway, and we believe the announcement will be made in the upcoming months. We recognize the FCA as credible and modernized regulators, who will mature the industry and bring it to higher levels.”
“To answer your questions” continued Ms. Levy, “Our London office is another branch, for SpotOption technology, that offers platforms for binary options, CFDs, and Forex along with licensed market making through our partnership with CySEC licensed SpotOption Exchange.”
“This will continue in London, only with local representatives to give our clients accessible, efficient, and comfortable service. This office is also another step in global expansion, in the regulated environment that we encourage. Regarding your comment on partnerships with Ladbrokes or William Hill – we have nothing to do with that, that’s misinformation. Our partnerships from the London office will be for brokerages, entrepreneurs, Introducing Brokers, and online operators, who recognize the potential of this growing industry, and want to offer simplified trading to the masses” – Tammy Levy, Director of Marketing, SpotOption.
Quite a different view to that stated in writing by the FCA just six days ago.
This is absolutely fine under CySec rules, however when FinanceFeeds made a call to SpotOption via its London telephone number, the call was answered in Israel. We asked if British customers will be signing on via the London office as British ruling requires Gambling Association regulation and binary options companies with physical offices in the UK are not regulated by the FCA and are not able to use CySec licensing for passporting if there is an office present in London, and on this note the response was less clear and no actual answer was provided.
On the company’s press release which signaled the opening of the London office, a click on the ‘Regulation’ tab details the entire structure, and makes no reference to British regulatory licensing, instead referring to its CySec license, and lists itself as a Business Partner of SpotOption Exchange in Cyprus.
SpotOption is not regulated by the Gambling Commission in the UK to provide binary options in Britain, and as it is a binary options provider, falls outside the remit of the FCA as far as regulation is concerned. The firm also does not have an FCA license for providing market making and enterprise solutions to FX and CFD companies.
Photograph: Royal Exchange Buildings, London. Copyright FinanceFeeds