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The greatest hurdle in launching a UK neobank is achieving sufficient scale.
Starling Bank has successfully navigated this challenge, expanding from inception in 2016 to 3.16 million customers and £452.8 million in revenue by the end of 2023. Having been profitable for the last three years, the Chrysalis-backed bank is was poised to pursue a public offering with a market valuation of up to £10 billion.
The FCA today sheds light on one reason for this rapid expansion: AML policies that were alarmingly inadequate.
“Starling’s financial sanction screening measures were surprisingly ineffective,” stated Therese Chambers, FCA’s Joint Executive Director of Enforcement and Market Oversight, in a press statement.
This left the financial system vulnerable to criminals and sanctioned individuals. Moreover, the bank failed to comply with FCA stipulations designed to mitigate the risk of Starling being used for financial crimes.
The FCA has imposed a fine of £28,959,426 on Starling for deficiencies in its financial sanctions screenings and repeated violations of a requirement not to open accounts for high-risk clients. The original fine was set at £41 million, but Starling agreed to accept the penalty without contesting it for a 30% reduction.
According to the press release:
When the FCA examined financial crime controls at challenger banks in 2021, it discovered substantial issues with the anti-money laundering and sanctions strategies employed by Starling. The bank consented to a requirement that prohibited it from opening new accounts for high-risk customers until enhancements were made. However, Starling did not adhere to this, resulting in the opening of over 54,000 accounts for 49,000 high-risk clients between September 2021 and November 2023.
In January 2023, Starling realized its automated screening system had, since 2017, only been screening clients against a limited portion of the full list of individuals subject to financial sanctions. An ensuing internal review uncovered serious flaws in its financial sanctions strategy. Since then, Starling has notified the appropriate authorities of several potential breaches of financial sanctions.
Starling was instructed by the FCA in September 2021 not to open new accounts for high or higher-risk clients while it strengthened its AML framework, under an agreement known as the voluntary requirement or VREQ. However, Starling did not fully enforce the VREQ and by November 2023 had opened 54,359 accounts for 49,183 high or higher-risk customers.
The FCA’s final notice indicated that the financial sanctions screening framework Starling implemented in 2017 “had only been screening the names of new and existing customers against a fraction of the names on the Consolidated List” of financial sanctions targets.
In June 2022, Starling discovered that its systems were outdated and it had been opening new accounts for clients who had previously been denied for “financial crime reasons.” At that point, this included 294 customers, 112 of whom were listed on the blacklist maintained by fraud prevention service Cifas.
The bank implemented a solution within a day but did not inform the FCA until a month later. Thus began a back-and-forth dialogue between the bank and the regulator, which revealed hundreds, then thousands, of problematic accounts.
Can open, worms everywhere. The investigation uncovered “broader systemic issues including Starling’s assessment of its financial sanctions risk, policies and procedures, testing and calibration of screening systems, and inadequacies in MI [management information] regarding alert volumes and trends,” noted the FCA.
An independent “lessons learned” report mandated by the regulator in 2023 concluded that Starling’s senior management “lacked the necessary AML expertise or experience,” were “inexperienced when handling significant regulatory changes,” and “were unaware of the implications of the VREQ and the seriousness of failing to comply with it.”
Management also “failed to effectively supervise and monitor day-to-day compliance,” with no clear reporting lines, as several members had “different interpretations of responsibility for the VREQ.” Engineering teams at the bank “were not made aware of the VREQ’s existence or the importance and potential consequences of not implementing it correctly.”
In June 2023, Starling announced that founder Anne Boden was stepping down from her role as chief executive. At the time, the narrative was that her departure aimed to eliminate any potential conflict of interest due to her 4.9% stake in the bank. This reasoning seemed unconvincing, as previously noted, considering many listed company executives own larger shares in their businesses.
The FCA’s findings also revive scrutiny of Starling’s involvement in facilitating the so-called Covid business bounce-back loans, which were backed by the UK government.
Theodore Agnew, a former anti-fraud minister, in 2022 accused Starling of acting “against the interests of the government and taxpayers.” The Conservative life peer described Starling as “one of the worst in terms of validating business turnover or reporting suspicious activities,” an allegation the bank strongly refuted at the time.
According to the MainFT report, Starling chair David Sproul stated that the issues were “historical” and that the bank had absorbed the lessons from this inquiry. Shares of Chrysalis Investments, which has Starling constituting 30% of its net asset value, remain steady, suggesting investors may perceive matters similarly.
The FCA’s official notice can be found here, and it’s quite revealing.
Additional reading:
— Can Starling Bank leverage technology to its advantage? (FT)
— Starling Bank under scrutiny for reliance on state-supported lending (FT)
— Thirty UK premium stocks with higher conflict-of-interest risk than Starling Bank (FTAV)