Long-term readers of CFDs Weekly may notice something different, namely that we now have our own website. And to celebrate its launch and our escape from the confines of Substack, we have an interview with Capital.com CEO Peter Hetherington.
Peter is likely to be familiar to most readers from the 25 years he spent at IG Group, the final three yeas of which were spent as CEO. He took up the position of Capital.com CEO just under a year ago.
We caught up one evening at the flashy new offices of said company two weeks ago, where sales team members could be seen playing Fifa and relaxing in sleep pods to relieve the stress of the day. Is any work actually being done? Read on to find out.
Can you talk about how you originally got into the industry?
So I joined the Royal Navy at 18 and I did three years. The Navy then said ‘go to university’ and I agreed and went to do economics – not the usual thing for someone from the navy to do but that’s what I did.
At the end of my degree, I had a choice – either I could leave or I had to serve another six years. And so I thought, ‘well, I’ve done three years in the navy, three years at uni, I don’t want to commit for another six years.’ I wanted to fly, I’d passed all the flying aptitude tests but they wouldn’t give me a start date for training. And I thought, ‘well they’re never going to give this to me’, so I left.
And it was weird actually, I went to pick up my brother at uni, he was at Cambridge. I went into the careers office there and picked up all the flyers for jobs. Among them was one for IG. I applied for all of them and got two responses, one from IG and one to be a local on the LIFFE floor, you know funny coloured jackets and all the rest of it.
It was quite boomy at the time, so they both offered me the job and said I had to start on Monday. So it wasn’t like now where it takes ages to get things sorted. It was, ‘you have the job, you’ll start on Monday’. Luckily I didn’t choose the LIFFE floor, that would’ve been a bad career choice, and I started at IG in January of 1994. There were about 23 people in the company at the time and I think I only got the job because [IG founder] Stuart Wheeler was ex-forces and he liked ex-forces people, so he gave me a chance. And I stayed there 25 years so…fair play.
When you first joined, what was it like, I mean in terms of the technological aspect and the customers?
Obviously there was no internet, so nothing like that. You had a booking system, where you could enter trades and you could see your exposure. Then you’d phone up brokers to hedge your exposure. But it was purely a phone dealing operation.
My early memories, and you probably won’t even know what this is, was that it was all Ceefax. So it was like an on screen text service. You punched in a code and a particular screen would come up.
The financial screens were updated once an hour, so when Teletext updated, you’d get a flurry of phone calls, then it would all die down. Then you sat around for a while and then it would update and you’d get more phone calls.
We didn’t actually use it to make a price but we’d always have it on because we knew, when it updated, we’d get a load of phone calls. And you did because that was the only way people could get a price. That’s another thing, a lot of people would ring you up to get a price because they had no way of getting price discovery.
So who were the people calling? My impression is that it was quite a niche client base back then, relative to today when it’s a mass market product.
It was niche and we’ll probably discuss why it became mass market and the regulators ended up having a problem with it. We used to put ads in the FT. So clients would cut out the coupon and then send them in as a way of showing their interest, then you’d give them a call back. I suppose it sounds ridiculous today but that’s how you got your leads.
I suppose it’s similar today with e-book downloads
Yes, an earlier equivalent. It was a phone operation, the clients were generally quite well healed, fairly sophisticated investors, city types. They knew what they were doing and did it because it was all spread betting, so you had that tax benefit.
Actually that’s an interesting point, which is you had spread bets on FX, indices and so on. But then someone came up with the idea of having them on shares and those were being offered by our hedging counterparties as CFDs. At the same time, spread betting didn’t work abroad but CFDs did, so they became the dominant thing. I think it’s a bad name for a product though, doesn’t really tell you what it does.
Looking back, it seems like the 1990s were really the first phase of IG and the industry beginning to evolve into the sector it is today. Is that a fair point?
I would say it stayed small until the early 2000s. You went from dial-up modems to broadband, so people could get prices. You then had proper internet dealing platforms. Before 2001 the dealing platform was a glorified chat messenger. So if you were particularly good as a broker, you could deal with multiple chats but really it would just slow everything down.
For IG it was when we did the management buyout that we had a fully automated system. So you didn’t have to touch anything, as long as the client passed all the checks, and had the cash and everything, you basically didn’t have to do anything. That’s really what allowed businesses to scale.
Imagine previously, at IG during the night shift you had one dealer on. So if you’re on the phone and you’re the fifth client calling, you are waiting until every client ahead of you has finished being spoken to. And you could have 400 people waiting and there’s still only one dealer. So the internet really allowed the sector to scale.
And then the next thing that happened was in 2008 where you had a lot of clients owing lots of money because of the crash. So before it was like…’ah Mr Kimberley, you seem to have lost some money, would you mind popping a cheque in the post to cover the shortfall in your account?’ And then five days later, I might give you a call saying, ‘awfully sorry David but your cheque doesn’t seem to have arrived, would you mind sending another one?’
So that’s what changed in 2008 and 2009, it was automated close out. And joking aside, speaking to the regulators, that’s when it went for them from being a niche product where most people knew what they were doing, to a mass market product with huge appeal. That’s why there was that change. Regulators, frankly quite rightly, don’t care much about rich, sophisticated investors who know what they’re doing. What they care about is people who don’t know what they’re doing, who don’t have much money. And they’re right.
On the regulatory front, do you think we would have seen the changes we have over the past few years had passporting across Europe not existed?
I think life would have found a way. If the more marketing-led companies had not set up in one jurisdiction, it would have been another. On that point, I think you could say that the companies you are hinting at may not have been operationally perfect but they were much better at marketing. So in that sense, you could turn things around and say that the ‘original’ companies in the sector weren’t very good at that side of the business.
Could you have envisaged the sector getting as large as it is today?
Well I did a Masters in Finance at London Business School. My main piece of work was a dissertation valuing IG, which was a private company at the time. I managed to cook up a valuation of £30m using discounted cash flows and whatever. It went public a couple of years later at £250m. I also did the whole dissertation without mentioning the internet, which in hindsight was a bit of an error. So I’m probably not the best person to come to for advice or predictions.
Ok, so moving on to Capital.com. You mentioned that you had spent your time post-IG hanging out with your family and fixing cool cars. That sounds a lot more fun than being in an office and yelling at sales people. Why did you decide to come back?
Well, I don’t yell at sales people. I’m a reformed character. But really I was keeping busy, I didn’t feel like I had unfinished business or anything. There was nothing I needed to do. So it started with Viktor [Prokopenya, Capital.com’s founder] contacting me. I said, ‘no, not interested’. He told me, ‘ok, just come in and look at some numbers’. And I told him I really wasn’t interested. So he said, ‘ok, come with me to Cyprus for a week’…
Bit of a weird question? What just to hang out?
That’s where our HQ is….
Anyway, I met all the people out there and all the people in the London office, and I just enjoyed the buzz of a business that was doing something quickly. I was having fun, honestly. And I was really jumping out of bed in the morning, full of ideas and I thought, ‘hey, this is actually great’.
The thing that tipped it over for me was the numbers. The thing which every CFD firm in the world finds hard is onboarding clients. And the numbers for Capital were pretty extraordinary. So I thought, ‘ok, there’s lots wrong with this business, but the one thing that everyone else finds really hard, these guys are amazing at, and the things they’re not amazing at are easy to fix.’
So the problems were fixable and this company has got something which everyone else finds really hard, so what’s not to like?
So what are Capital not good at that is easy to fix?
Look there’s plenty. If you look at who we’ve been hiring since I came on board, they haven’t been marketing and they haven’t been tech, with very few exceptions. But I have been recruiting compliance, dealing, risk, operations. So I’d say the fundamentals of how to make a business work were there, it just needed a bit of professionalisation.
One of the problems I have writing about this sector, or I suppose business in general, is that I can come across as making it seem very easy to run a broker or some other company. But that’s obviously not true, it’s very hard. Even taking that into account, I look at OvalX and think that it wasn’t too hard to see that the fintech they acquired wasn’t a great idea. Do you have any thoughts on that?
I think they weren’t very good at recruiting clients.
That’s the only thing?
That’s the only thing, they were good at everything else. CFDs is a high churn business, if you are not onboarding clients, you are going to die – end of. So we did quite a rapid integration with them.
Ah yes, you bought them. I’d forgotten about that.
Well you wrote about it so you probably should remember. So I’d say Oval were operationally fine but not good at marketing and as a result they struggled to make the business work.
From the outside, it seemed like they bought a fintech to then cross-sell products to and that just didn’t work. Was that the case?
I think that’s step two. So step one is they were not good at recruiting clients. I think they tried the fintech-y thing as a last ditch attempt and it didn’t work. But the fundamental problem was they weren’t good at recruiting clients.
And frankly I think you’re going to see a lot more shake out in the industry. The regulatory costs are becoming extremely burdensome. So the ticket to ride is getting more and more expensive. If you aren’t good at recruiting clients then it’s not going to work.
Regarding Oval, part of the problem in the CFD world is the attrition rate but if you get those clients that last a while, they tend to be with you forever. And Oval’s client book is extremely good in that regard. Clients who are new will often fall out of the sector, but if they’ve been with you for five years, they’ll be with you forever.
Can you say how many clients have moved?
I can’t say exactly but it’s thousands. It’s based on clients who consent to move over.
And you’re paying on how many move over
Yes exactly.
Quite a lot has happened in the intervening period, since you left IG in 2018. There was a pandemic. So I recall long ago having to go into the office every day, which is obviously not the case today. Has it been weird to adjust to those sorts of changes?
I already had that sort of deal at IG, way back in 2008. I worked 4 days a week and one of those was from home. So that was unusual at the time but now is much more normal. And then I was at Schroders Personal Wealth.
Oh yea, what happened there?
Well it was a joint venture between Lloyds and Schroders. I think if you looked at the financial companies in the FTSE, you couldn’t get two more different businesses. It was a 50-50 venture, so it was quite a tough gig. Wildly different industries and so on. But I was there during the start of the pandemic, so I experienced all of the changes.
So it’s not weird to be at a CFD place and not be at IG, given you were there for 25 years?
Honestly not at all. It has been five years since I left, so it’s quite a while.
But you have hired quite a lot of people from there?
We haven’t hired that many. It’s a bit of an urban myth.
It’s quite a lot though if we’re honest
Just under 40 people at Capital used to work at IG, I got someone to run a list this morning because I knew you were going to ask me. Which is 1 in 20 of the people who work here.
Right, I’d agree if it was some grad you hired to write about non-farm payrolls, but there is Kypros, the former head of prime, and the dealing guy. So these are pretty senior people.
Well if you’re IG or any company, you have 10% to 20% attrition a year, so of course some people are going to move on, perfectly naturally. Then you have to think, we’re growing fast, we’ve got lots of exciting roles, and that’s a massive appeal as well.
So did you have any role in bringing these people on? A lot of them have joined since you joined.
Not really, certainly not from me talking to them directly. I’m a rubbish recruiter actually, I’m no good at crowbarring people into a role.
One other point I wanted to raise on hirings was on dealing, just because it seems like that’s one area you’ve hired a lot for. You’ve spoken about rough edges at the company, is that one of them?
The ability to make your own pricing is a core competitive strength and I think the way we made our own pricing previously wasn’t great, so that’s definitely part of what we’ve been doing.
We’ve got a dealing desk in Australia, we’ve got a dealing desk in Cyprus and a dealing desk in London. Cyprus and London are complementary and Australia covers overnight.
A lot of companies hired people in the pandemic. Volatility was back, it seemed like business was booming. Things have changed very rapidly and they’re now having to let people go. How has Capital dodged that?
I think it all depends on your natural rate of growth. The pandemic gave everyone a boost and now you’re back on the same lines. So it all depends on the gradient of the growth rate, which brings us back to the beginning of this conversation. This company is great at recruiting clients, so growth was there anyway, even accounting for the pandemic.
So where are those clients coming from? Is it mostly in the UK? And on the on-boarding side, can you talk a bit about what makes you so good – is this a set up similar to one of your Levantine peers?
Well we’ve got a very flash office here but the UK is not our biggest market. If I had to pick an area where we’re strong, I’d say it’s the Middle East.
To your second point, we’re a mobile-first app. If you look at other firms they’d say their web apps are better. So it’s just about philosophy. We build it first on mobile always and that’s where most of our business comes from. If you look at how we do our marketing, it’s geared towards people who are using their phones to search, rather than using their laptops.
That’s the fundamental difference between us and everyone else. You are not going to see us running a massive billboard campaign in Waterloo Station.
I did see a couple of years ago, these ornate cows around London and Capital was sponsoring one of them*
Did we? Must’ve been before my time. I never saw a Capital cow.
Well I see ads on the FT as well. On the tech side, I would imagine IG was quite clunky just because the tech was built so long ago. Has that been a change or is that the wrong supposition to have made?
I was running tech at IG when they built the dealing engine. They had a great architect that built that system. So it’s not completely true, there is a really strong core and foundation there, which you can plug modern systems into and so the ability to do things is more how the company is structured. The age of the architecture, if it’s well set up, which IG’s is, doesn’t matter at all.
If you look at our system, we’re smaller and we can move faster but I think that’s just a function of size. If you say what’s different, the main thing is the order book. So every client gets six layers of pricing, bids and offers all the way down. If you deal in large size, we will do it but your price will be slightly different as you work your way through the order book. There are only two other companies I’m aware of with similar systems, one is [deleted] and the other is [classified], which doesn’t really do retail.
So I’d say our core advantages are marketing, having a decent order book and some speed and nimbleness. And then our people, we’ve got really varied expertise, particularly in the tech sector.
At the same time, I’d say you don’t need to reinvent the wheel. When I joined this was a good CFD business but my job is to make it into a great CFD business. That’s the first thing.
What are the next things?
Well, I’m thinking of how to describe it. I’d say, if you are on your phone, the likelihood is you only have two financial apps that you really engage with. One of them is your bank and the other is…
…Capital.com of course
It’s not at the moment because it’s not a broad enough product. And I’d say the idea that people are going to use more than that number of apps on their phone is silly because people will gravitate to using a couple.
Is it?
Well I use my bank and one or two others.
eToro?
No…
Ok, well going back to the app stuff. What you’re hinting at sounds a bit like the ‘super-app’ idea where you have all your services in one place. From my point of view that doesn’t seem like much of a thing.
A bit of a fool’s paradise?
Yea, well a big factor in this is probably that I think crypto is bullshit and a ponzi scheme. But if you look at other super-app type things, they just seem like loss-making gimmicks that don’t do very much.
I think the idea that you can do everything sounds marvellous but the reality is you have to do one thing really well. And it is hard. If people want to trade they want to trade, and if people want to do banking they want to do banking. It’s hard to say you can do both. So the super-app is nice in theory but hard to do well.
But you just gave the impression that was what you wanted to do?
Yes ultimately, if you can make it work well. Being hard to do doesn’t mean it can’t be done. But I want to do it from the position of being a really good CFD shop. And I’d say, if you look at the wider sector, a lot of established firms are trying to diversify. Therefore they’re not concentrating on their core business. We’re focusing full time on that business, so I can deploy all my resources on that business and making the product better, which I think is a strong advantage.
So I think it will come but it will not come until we’ve got a great CFD business. Now we have a good one but we need to make it a great one.
So is that why you pulled back from share trading?
Yes, we have stopped onboarding new clients in the UK onto that but existing clients keep their portfolios and so on. I only think you should do something if you do it really well, and that product was not mature enough.
But it will come back
Yes but in a different form.
From my point of view, it seems as though the most obvious synergy would be with listed derivatives, so options, futures and so on.
I think that’s right, it’s basically a similar product. If you look at why those are more successful in some regions, it’s really just a case of them getting there first, as opposed to CFDs or spread betting.
Then one step below that is what you do in terms of share trading. And then you go, what else is there? So getting money in and out of your account and doing it cheaply. So that’s your story.
But the thing is I don’t want to build out that story until I’ve got a really strong block in the middle. And if you don’t have that, why would you diversify? And actually CFDs are a good business. There’s loads of demand and margins are good, what’s not to like?
What’s interesting to my mind is, if you look at the major players, they have diversified into other derivatives and share trading. They have not really done much of the other ‘fintech’ type stuff. So do you think that’s the way the sector is going? More similar products as opposed to things like payments or savings?
Well it’s hard to argue that they’re wrong. I think consumer duty rules are going to change things quite a lot as well because the ability to onboard clients may change. So do you still want that client for whom CFDs are not appropriate? Yes you do but what are you going to do if you have no other products aside from CFDs?
In that regard, the amount of work we do on customer feedback is extraordinary. I’ve really never seen the level of work that goes into improving the product based on feedback from our clients.
But on additional products overall, my view is that they can make sense if they are good products in their own right or if they bring other benefits to the broker. Those benefits could be a large pool of people who are advocates for the brand, or a large pool who you could market other appropriate products to. If the product is not a good, profitable product in its own right for me it all depends on whether the cost and distraction of running the other product is worth it in terms of other tangible or intangible benefits.
Do you think you’ll end up doing a B2B offering?
Not yet. I think it’s an obvious evolution and a good way that good firms monetise their tech. If you look at all the large players, they’ve got good pricing, good risk management, good APIs – why wouldn’t you do it? But it only makes sense when you’ve got a great CFD offering in place, which we don’t today. It’s getting better but it’s not great.
So when you do have it, you’re going to advertise on CFDs Weekly, right?
Of course
*I got this wrong, it was actually a green lion near Piccadilly. Cows…lions…what’s the difference?