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The C-Suite returns.
This is a once a month interview where we speak to a senior executive in the industry.
In this month’s edition, we speak to Matt Basi, Managing Director at London Capital Group. Matt will be a familiar face to many of you – as will London Capital Group.
But there have been some big changes at the broker in the last 12 months, so we spoke to Matt to find out what those are and what the thinking behind them is.
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A lot of people reading this will know you but, for those that don’t, can you give you some background on yourself and how you ended up at London Capital Group?
The short version is that I worked on the sales desk at IG Group for five years. I left in 2012 and moved to CMC Markets. I spent eight years there, working in a sales role and then as Head of Commercial for Europe and the Middle East.
In 2020, I started my own consulting business and the possibility of acquiring London Capital Group’s UK entity came up for a client. So that was how the business came on to my radar and from there, the idea of launching the company as it operates now started to take shape.
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London Capital Group has obviously been around for a while but you are in the process of separating from the wider group. Can you talk through what the plan is and what’s going on there?
Sure, so firstly, the UK entity is operating completely separately and independently from the prior owners. We’ve recently rebranded and launched a new website and all of that is the first step to make it clear to clients and the market that we are operating under our new model.
In terms of the plan, when we first came in and looked at the business, it was clear that it all needed to be stripped out and started again. The operating costs were huge, all the flow was being passed on to Flowbank in Switzerland, and the company was loss-making. It could not continue.
So we thought, we have this group of guys that can do all the sales and client-facing roles. They have good books of business. Why not just set things up under an introducing model and remove all the overheads that come with managing risk and holding client funds.
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And so are you now the owners?
Our goal since day one has been for me and Dave [Worsfold, London Capital Group’s CEO] to buy the business and to distribute equity amongst our team. That has been complicated by the situation with FlowBank and the challenges London Capital Group was facing when we arrived, but we hope to take control of the business later this year, with the approval of the FCA.
Given none of the employees at the firm have the appetite to work for a new, third-party shareholder, I think it is very unlikely anyone will come in, undertake due diligence and think it’s a good idea to pay more than we will for the business. So we are hopeful we will be in control of the company this year, but we need to go through the correct regulatory process first.
If you look at the model you are operating – or planning to operate – it is counter to what most companies are doing, which is a highly digitised, mass market product. Why do you think it will work?
The team that we have working for us have long-standing relationships with their clients. They have all been in this industry for more than two decades. There are very few people with that tenure and the clients they have aren’t going anywhere. So in that sense, we don’t need to do lots of traditional marketing.
The other point is that I’d say this industry is over broked but under serviced. What I mean by that is you have a lot of brokers, all running a book, and all doing mass marketing. But because of that you can lose the personalised, white glove service that higher end clients want. If you have £1m with your bank, for example, are you going to be happy talking to the same chat bot that someone with a £1,000 deposit is? I don’t think so.
The situation is not quite the same in the trading industry, but it’s similar. Our clients know they can pick up the phone and call us for whatever problem they have, at any time. On average, I’d say we are talking to our clients at least twice per week.
So that’s why we thought the model would work. There are lots of companies running risk, taking client deposits, and so on. Where we can do something different is by offering that personalised, white glove service, with a really experienced team behind it.
Is there enough revenue there to make that work though?
The short answer is yes. We moved into profitability in the second half of last year. And I believe there is room to increase our revenues by three or four times. But even if we only see a small increase, we’re still at a point where we’re running profitably.
Because of the service and long-standing relationships, I’d say our clients have a higher than normal propensity to refer other clients and it’s also worth noting that our clients don’t pay any extras, in terms of markups or commissions. So they are not paying extra for the service they are getting.
Where does growth come from here?
Like I said, I think this is a market that is under serviced. There are still lots of clients out there looking for that high touch service, which we continue to see in the form of client referrals.
I also think this is a model that can be replicated elsewhere. If you look at the UAE, for example, there is lots of demand for what we are offering. Because the operational costs are low, that is something we can explore, without having to invest huge resources.
Another area is other products, like futures and options. That is something you see in the US and it seems like whatever happens there, ends up happening here a couple of years later.
I remember speaking to someone a couple of years ago, who made the argument we’d see more of a switch back to an IB model. Do you think you’ll see other companies like London Capital Group start up in UK in the near future?
I don’t think so because the number of people who would actually be able to bring the level of experience and number of clients with them to make it work is tiny.
If I think of who I could hire, in an ideal world, there are probably only 30 people. We already have six of them working for us and a big chunk of the remainder are working at our partner firms, so we aren’t going to hire them.
So it’s not because there is a lack of demand or potential clients, it’s just that the industry is actually quite small and the people with the experience needed to make it happen on a large scale is not there.
High net worth clients are always a bit of a mystery to me. There are some famous names out there, who you occasionally see in the papers, but can you give some sense of who the people are that are trading with you?
There is a bit of a stereotype, which brokers may want to be true, that these are all financial professionals that are all doing this as some extension of their normal investing or because they’ve retired and are doing it to make some extra cash.
Those people definitely exist and they make up a decent chunk of the London Capital Group client book. But equally, we have people who have never worked a day in financial services in their lives. We have one person who is a horse trainer, for example.
Those people are just as valuable to us and are great clients. Sometimes they just have a curiosity about financial markets, or they just want to speculate. Some of them do also use spread bets or CFDs as part of some wider investment activity.
So let’s say you do succeed and see some solid growth, do you think you’d get to a point where you upgrade the license, start doing risk in house and so on?
No and if you start to run through the numbers, you quickly see why. The additional compliance cost to facilitate the license upgrade would probably exceed £1m. Then you have all the technology needed. That’s probably at least another £1m to build and maintain a worthwhile product. Then you need to hire upwards of 20 people in operations, risk, marketing and so on. That’s probably going to be another £2m. Market data is a huge cost consideration too.
It’s basically taking all the operational costs, which we cut by about 80%, and putting them back into the business. That means our revenue would have to treble – minimum – to maintain our current levels of profitability. Alternatively, we can pursue that revenue growth under the current model and see the majority of it feed through to our bottom line.
So I look at that and I think of all the stress and heartache of running a book and everything else that comes with it, and I just don’t want to do it. I’d much rather expand by running the same model in different regions and adding new products. That way we can work with our partners to build mutual value rather than trying to compete with them. As a sales guy, that makes much more sense to me.
