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Starling Bank has been hit with a £29mn fine by the UK financial regulator, which criticized the challenger bank for having “shockingly lax” measures in place to combat financial crime.
The Financial Conduct Authority (FCA) stated that Starling’s measures to detect potential money laundering, sanctions violations, and screen high-risk customers “did not keep pace” with the bank’s rapid growth, growing from about 43,000 customers in 2017 to 3.6 million in 2023.
“Starling’s financial sanction screening measures were shockingly inadequate,” commented Therese Chambers, joint executive director of enforcement and market oversight at the FCA. “This left the financial system vulnerable to criminals and those subject to sanctions.”
The FCA reported that Starling had repeatedly disregarded a prior agreement with regulators to halt new account openings for high-risk customers until enhancements were made to its financial crime controls.
In violation of this agreement, the bank opened 54,000 accounts for 49,000 high-risk customers between September 2021 and November 2023, the regulator stated.
In January 2023, Starling discovered that its automated screening system had “only been screening customers against a fraction of the full list of those subject to financial sanctions” for six years, according to the FCA.
This prompted an internal review that revealed “systemic issues” within its financial sanctions framework, resulting in the bank reporting “multiple potential breaches of financial sanctions” to authorities.
The fine, noted for being the first of its kind against a digital bank, arrives as the regulator intensifies its scrutiny of neobanks regarding their financial-crime controls.
In 2022, the FCA expressed concerns over a spike in reports to the National Crime Agency, pointing to “inadequacies in [neobanks’] checks on new customers.” Separately, the FCA is conducting a civil investigation into money-laundering controls at Monzo Bank, Starling’s competitor, which was downgraded from a criminal inquiry according to the bank’s annual report in June.
In recent years, the FCA has issued significant fines for failures in large banks’ systems to prevent financial crime and money laundering, including a £108mn penalty for Santander UK in 2022 and a £265mn fine for NatWest in 2021.
Claire Cross, a partner at Corker Binning, remarked: “I anticipate that we will witness further regulatory actions against fintechs. They represent a market segment currently under close examination by the FCA.”
Start-ups have faced challenges scaling their financial crime controls to match the rapid growth of their user bases, with recent sanctions following Russia’s 2022 invasion of Ukraine increasing the due diligence required for onboarding new customers.
Starling cooperated with the FCA, earning a 30% discount on a fine that could have reached £41mn, as established in the findings.
David Sproul, chair of Starling, stated: “I want to apologize for the shortcomings highlighted by the FCA and assure stakeholders that we have made substantial investments to rectify these issues, including enhancing our board governance and capabilities.”
Starling’s high-profile board also includes Tracy Clarke, former head of Europe and Americas at Standard Chartered, in addition to Sproul, who led Deloitte’s UK practice.
Kathryn Westmore, a senior research fellow at the Centre for Finance and Security at the Royal United Services Institute think tank, noted that the FCA was “very critical” of the senior management at Starling.
The FCA highlighted that the bank’s “senior management as a whole lacked the experience and capability” to implement their voluntary agreement concerning high-risk customers with regulators effectively.
“Challenger banks and fintechs frequently appear to struggle with securing senior management support for financial crime compliance, including comprehending the risks and ensuring adequate resources are allocated for compliance,” Westmore explained.
“This fine is significant and should serve as a warning to many firms, particularly digital banks and payment providers,” she added.
Starling founder Anne Boden stepped down as chief executive last year following a dispute with investors regarding fund manager Jupiter’s decision to divest its holding in the bank, which reduced Starling’s valuation from £2.5bn to between £1bn and £1.5bn in February 2023.
Sproul described the failings as “historic issues” and affirmed that the bank has learned from the findings of this investigation.