Chief Risk Officer’s UK update – Protecting your returns over the coming months

Jerome Le Luel joined Funding Circle as Global Chief Risk Officer four years ago; bringing with him more than 20 years of experience in risk management. His previous roles include Global Head of Risk Analytics at Barclays Bank and Global Chief Risk Officer at Barclaycard, where he successfully navigated their global portfolio through the 2008/9 recession.

Jerome leads a team of more than 100 risk professionals across the markets Funding Circle operates in: including data scientists, credit risk analysts and credit assessment experts.

In this update, Jerome talks through how the current coronavirus developments may affect the businesses you lend to, and the work we have done to protect your returns throughout this period.

We are prepared for this period of uncertainty

Firstly, I hope that you and your loved ones are keeping yourself safe and healthy during this time; your wellbeing is important to us. At the same time, I am aware that many of you will be feeling anxious about what the current situation means for your investments. As the impact of the coronavirus continues to make itself felt across our country, I wanted to provide you with an update. 

Over more than twenty years in risk management, I have experienced three credit crises and a recession. While economic disruption and dislocation causes short-term pain, economies do bounce back as people return to their daily lives. While we do not yet know the full effects of this crisis on the UK economy, this time will be no different. Part of my role as Chief Risk Officer is to prepare for these events, and my team has been working hard to protect your investment.

Coronavirus has restricted economic activity

The spread of coronavirus has restricted the ability to take part in economic activity. As people temporarily cut back on spending, small businesses are affected in different ways. Some, such as restaurants, have felt an immediate impact as they are forced to temporarily close. Some businesses may start to feel the effects later if the economy slows down. Many businesses, like farmers or doctors, are likely to continue to trade normally throughout. As your lending is diversified across lots of small businesses, your portfolio will contain a mix of the above. 

However, I firmly believe that we are entering this challenging time in a strong position. We have leveraged over ten years of business lending data to build powerful risk controls, my team has a wealth of experience in risk management, and our loanbook contains quality and creditworthy businesses. In addition, over the last week the Chancellor has announced a range of unprecedented and wide-ranging measures to provide ongoing support to the UK’s small businesses. This will go a long way towards mitigating the economic impact of the virus.

Protecting your returns is a key priority

Funding Circle has the right tools to navigate the coming months. Operationally, our staff are already equipped to operate remotely, they are working from home and continuing to serve our customers efficiently. We are also the best-capitalised lending platform in Europe. When we became a public company in 2018, we raised a significant amount of capital and at the end of last year we had c. £320m in equity capital.

This means that Funding Circle has sufficient cash to weather uncertain periods. Importantly, we are also able to make decisions that prioritise protecting investor returns over short-term commercial interests. As part of this, my team has introduced the following measures: 

• We have tightened our credit risk parameters – Last year we tightened our lending in response to changes in the macroeconomic environment. In light of the current situation we have decided to initially take a prudent approach and extend this tightening, strengthening our criteria for businesses from vulnerable areas of the economy. We have also adjusted our pricing—taking into account how the economy may perform—to maintain projected returns for new loans at current levels. We are focused on originating loans that we expect to be resilient during this period.
• We have enhanced our risk monitoring – We have always paid close attention to changes in both our loanbook and the wider environment. This has been heightened, with my team frequently analysing data for more detailed insights, in order to quickly spot and understand signs of stress as they emerge. With this, we are ready to make rapid and effective adjustments to our credit parameters if needed.
• We have strengthened our collections and recoveries capabilities – We are dedicating extra resources to our Collections and Recoveries team to support the businesses you are already lending to. Some businesses may need help to cover short-term costs in the coming months; ensuring we have the people and tools to bridge these periods will help support these businesses and get them back on their feet, maintaining your monthly repayments over the long-term. Ultimately, our goal is to minimise any credit losses that could have been avoided.

Our loanbook has been built to remain resilient

Forecasting is never an exact science. It’s impossible to predict exactly how the economy will perform in the future, especially in a fast-moving situation. However, a key pillar of our risk management function has always been to build a resilient loanbook that is well-positioned to withstand an economic downturn.

For example, our loans have been priced so that if bad debt were to increase multiple times over, our loanbook would still be likely to deliver positive returns overall, once loans have been repaid and recoveries received. We will continue to monitor the environment closely, and regularly refresh our loan projections through our loan statistics page using the latest available data.

Your lending is supporting the economy at a vital moment

Small businesses are vital to the success of the UK economy; they provide 50% of GDP and 60% of private-sector jobs. Over the coming months, there will be good, creditworthy businesses in need of help. Their ability to access finance will be more vital than ever, and your lending will form an integral part of this support.

We hope you have found this information useful. If you have any questions, please don’t hesitate to get in touch. Remember, by lending to businesses your capital is at risk, and is not covered by the Financial Services Compensation Scheme.

Jerome Le Luel

Disclaimer

This material contains certain tables and other statistical analyses that have been prepared by Funding Circle. Numerous assumptions have been used in preparing this statistical information, which may or may not be reflected in the material. The statistical information should not be construed as legal, tax, investment, financial, or accounting advice. The Information is provided as of the dates shown and is subject to updating and revision, and may change materially without notice. Subject to applicable regulations, no person is under any obligation to update or revise the information. The information may contain various forward-looking statements, which are statements that are not historical facts and that reflect Funding Circle’s beliefs and expectations with respect to future events and financial and operational performance. These forward-looking statements involve known and unknown risks, uncertainties, assumptions, estimates and other factors, which may be beyond the control of Funding Circle and which may cause actual results or performance to differ materially from those expressed or implied from such forward-looking statements. Nothing contained within the information is or should be relied upon as a warranty, promise, or representation, express or implied, as to the future performance of any loans. Any historical information contained in this statistical information is not indicative of future performance.