Interview: Cyrille Sallé de Chou, Chief Risk Officer

Cyrille Sallé de Chou recently joined RateSetter as our new Chief Risk Officer. We talked to Cyrille about managing risk, underwriting loans and the Provision Fund.

What’s your role at RateSetter?

I’m RateSetter’s Chief Risk Officer. I ensure that we grow in a way that is safe and sustainable and that risks are actively managed. This doesn’t just cover lending – it also covers things like conduct risk (i.e. making sure we treat customers fairly), cyber security and operational risk (which encompasses internal process, people and systems). I’m also responsible for ensuring that we comply with FCA rules.

On a day to day basis, a big focus of my job is going through all our lending activities and ensuring that they are appropriate. That doesn’t mean that we take no risk, rather that the risk is well understood, measured and priced in, which includes making an appropriate contribution into the Provision Fund.

What’s your background?

I’ve spent my career in banking. Most recently, I spent 8 years at Lloyds, where I had a few different roles. I was responsible for the credit risk of the bank’s credit card portfolio, the current account portfolio then for their mortgage portfolio, which is by far the largest mortgage book in the UK.

What are your priorities for RateSetter?

RateSetter has performed fantastically over the last six years: it’s gone from launch to a significant player in our industry, having a real impact.

I’d like to help RateSetter to reach the next stage, which would mean that it’s considered a significant financial services company in its own right. Still a peer-to-peer market of course, but competing with the wider financial industry, and top of mind for investors and borrowers.

In the short term, my focus is on ensuring that we’re writing good loans. The interesting thing, which people don’t always appreciate, is that our credit process is really similar to that used by banks, using data as well as judgement.

At our scale it makes sense for us to underwrite more loans manually, but as we grow we’re bringing more automation to lending to individuals (something that banks do too), which can mean faster, better decisions. So of course I want to ensure changes in this area happen as smoothly as possible.

How does RateSetter calculate how risky a loan is?

In broad terms the way we underwrite loans is very similar to banks. For lending to individuals, it’s very data-focused. We have access to many data sources – both from credit bureaux such as Equifax and Call Credit and from customers themselves (income, occupation, etc) – and this data allows us to form a good picture of how likely a particular borrower is to repay a given amount. For business lending, we have a team of commercial underwriters, people with a lot of experience who can assess a business – often in person – and give a specific view on whether that business can afford to repay a given loan.

For property development lending, we also factor in the value of the property – these loans are always secured, and we build in prudence with a conservative loan to value ratio, giving a good buffer should things go wrong.

How creditworthy are RateSetter borrowers?

These days, fewer and fewer customers approach their bank for a loan in the first instance - they’d be more likely to use a comparison site and check the best available rates. That helps us compete effectively for good quality borrowers.

The credit-worthiness of our customers is also a function of our risk appetite. Our board-level risk committee (similar to those in banks) considers our overall risk appetite and ensures that we’re managing risk prudently. It’s not surprising therefore that the loan book is – in credit terms – broadly in line with what you’d expect from a bank and other mainstream lenders.

We are planning to publish a summary of our credit policy soon – we’ll be one of the first UK finance providers to do so.

RateSetter recently said it will include expected future income in the Provision Fund Coverage Ratio. What’s the thinking behind this?

The Coverage Ratio is simply a measure of the Provision Fund’s ability to cover expected future losses. Given that this measure includes future losses on loans that we’ve already written, it makes sense that we include not just the contribution to the Provision Fund that we collect upfront but also contractual future income on these loans too. This will make the comparison truly like for like.

You said that you’ll also build more prudence into the Expected Loss number. Can you tell us more about this?

The economy is going through more uncertain times and it’s prudent for us to account for this across all existing loans. This is what drives the increase in Expected Future Loss figure, in addition to our usual regular review of expected loss based on actual risk performance observed to date.

So, how prepared is RateSetter for an economic downturn?

You can never be too prepared, but I think the steps we have taken are appropriate. If we need to do more, we will.

Our lending is well diversified – that means we lend not just to consumers, but also to businesses and on property, which helps us avoid being overly exposed to one particular sector.

One of the advantages of being a smaller player is that we can be nimble and react quickly. Whenever a default occurs, we analyse it in detail very quickly, and this means that we can learn swiftly from our mistakes (and like every business, we do make them) and, if necessary, adapt our lending decisions.

Every month, we review the performance of every segment of our business and, when necessary, have tightened our lending criteria. We have already tightened across a number of channels and, if need be, will do more. Protecting our reputation as a prudent lender is very important to us.

Choosing to spread more fees over the lifetime of loans, rather than take them purely upfront, is also helpful. It provides an ongoing income stream which reduces pressure in tougher times to write new business purely for revenue, or income for the Provision Fund.

Finally, we have announced that we will aim to build a good buffer into the Provision Fund. Our intention is to have a Coverage Ratio of 1.25-1.50x (125-150%). This will take some time and will fluctuate month on month. However, this is a target we will be measuring ourselves against on a regular basis and will do our best to deliver against.