Binary options: investing or gambling? AFM rebuked by court for rejecting a licence application by a Dutch binary options provider by Justin Franssen and Frank Tolboom of Kalf Katz & Franssen The District Court of Rotterdam (Court), in its decision published on 20 January 2015, found that the Netherlands Authority for the Financial Market (AFM) unjustifiably rejected a licence application by a binary options provider established in the Netherlands. The AFM should not have taken into account that there could be a possible breach of the Betting and Gaming Act (Wet op de kansspelen (WoK)) in their decision to reject the financial licence application. For some time now both the AFM and the Gaming Authority (Kansspelautoriteit) have been passing the question of how to qualify binary options between each other.
The standpoint taken by the Gaming Authority is that binary options have the characteristics of a game of chance but prima facie should be qualified as a financial instrument. In contrast the AFM considers that offering binary options amounts to a game of chance for which a licence pursuant to the Betting and Gaming Act is required. Binary options thus risk falling between the regulatory regimes which the two regulatory authorities supervise. Ultimately this culminated in the AFM rejecting, in mid-2014, a licence application for offering binary options on the basis of According to the AFM – inter alia – an investment firm which breaches the WoK damages the reputation of the financial markets. The provider in question appealed against the decision of the AFM and the Court found in its favour. Whether or not binary options are a financial instrument to which European financial legislation (MiFID and MiFID Directive) is applicable was not a matter in dispute, according to the Court. The Court ruled that such European legislation did not provide a basis for the AFM to reject the application on other grounds (i.e. breach of the WoK). A uniform and strict application of European legislation in this field is necessary, and this marks a sharp contrast to the regulation of gambling for which harmonisation is absent at the European level.
In contrast to a licence offering games of chance a licence for investment services is eligible for passporting within the EU. Several jurisdictions have transferred the regulation and supervision of binary options from the gambling regulator to the financial regulator. The approach of the Court would seem to be in line with this trend. Furthermore the Court highlighted the incoherency in the AFM’s position that offering binary options is undesirable and contravenes the WoK whilst parties offering binary options in other jurisdictions may well have a financial licence and can therefore offer their services in the Netherlands.
Lastly, the Court rejected the AFM’s position that consumers should be protected against this type of financial gambling product. According to the Court the level of protection which flows from MiFID has been considered sufficient to date. This interesting judgment will be of great importance for this sector, which has witnessed immense growth in the past few years. The AFM must come to a new decision within six weeks of the judgment. Quite possibly the AFM will appeal against this decision.