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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The toughest challenge when setting up a UK neobank is to achieve critical mass.
Starling Bank did it, growing from nothing in 2016 to 3.16mn customers and £452.8mn in revenue by its 2023 year end. Having been profitable for the past three years, the Chrysalis-backed lender is was widely expected to seek a public listing at a market value of up to £10bn.
The FCA today offers an insight into one driver of this rapid growth: AML policies you could drive a bus through.
“Starling’s financial sanction screening controls were shockingly lax,” said Therese Chambers, FCA’s Joint Executive Director of Enforcement and Market Oversight, in a press release.
It left the financial system wide open to criminals and those subject to sanctions. It compounded this by failing to properly comply with FCA requirements it had agreed to, which were put in place to lower the risk of Starling facilitating financial crime.
The FCA said it has fined Starling £28,959,426 for failings with its financial sanctions screenings and repeatedly breaching a requirement not to open accounts for high-risk customers. The fine would have been £41mn but Starling agreed not to fight the rap sheet in exchange for a 30 per cent discount.
From the press release:
When the FCA reviewed financial crime controls at challenger banks in 2021, it identified serious concerns with the anti-money laundering and sanctions framework in place at Starling. The bank agreed to a requirement restricting it from opening new accounts for high-risk customers until this improved. Starling failed to comply and opened over 54,000 accounts for 49,000 high-risk customers between September 2021 and November 2023.
In January 2023, Starling became aware that its automated screening system had, since 2017, only been screening customers against a fraction of the full list of those subject to financial sanctions. A subsequent internal review identified systemic issues in its financial sanctions framework. Starling has since reported multiple potential breaches of financial sanctions to the relevant authorities.
Starling had been asked by the FCA in September 2021 not to open new accounts for high or higher-risk customers while it strengthened its AML framework, an agreement it calls the voluntary requirement or VREQ. However, Starling failed to apply the VREQ in full and had by November 2023 opened 54,359 accounts for 49,183 high or higher-risk customers.
According to the FCA’s final notice, the financial sanctions screening framework Starling put in place 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 spotted that its systems were not updating and it had been opening new accounts for customers that had previously been ejected for “financial crime reasons”. The total then was 294 customers, 112 of whom were on the blacklist compiled by fraud prevention service Cifas.
The bank applied a fix within a day, but did not inform the FCA until a month later. So began a to-and-fro between the bank and the regulator that identified hundreds, then thousands, of dodgy accounts.
Can open, worms everywhere. The investigation uncovered “wider systemic issues including Starling’s assessment of its financial sanctions risk, policies and procedures, testing and calibration of screening systems, and a lack of MI [market intelligence] regarding alert volumes and trends,” the FCA said.
A “lessons learned” independent report demanded by the regulator in 2023 found that Starling’s senior management had “lacked the required AML skills or experience”, were “inexperienced when dealing with significant regulatory changes”, and “lacked awareness of the impact of the VREQ and the seriousness of not complying with the VREQ.”
Management had also “failed to adequately oversee and monitor the day-to-day compliance,” with no reporting lines as several members had “different understandings of whom at Starling had responsibility for the VREQ”. Engineering teams at the bank “were not informed of the existence of the VREQ or the seriousness and potential consequences of not implementing the VREQ appropriately.”
Starling said in June 2023 that founder Anne Boden was stepping down as chief executive. The story at the time was that Boden’s departure was to remove any potential conflict of interest stemming from her 4.9 per cent shareholding in the bank. This made little sense at the time, as we noted, given there are plenty of listed company bosses who have larger stakes in their businesses.
The FCA’s findings also bring back into focus Starling’s role in brokering so-called Covid business bounce-back loans underwritten by the UK government.
Theodore Agnew, a former anti-fraud minister, in 2022 accused Starling of acting “against the government’s and taxpayer’s interests”. The Conservative life peer called Starling “one of the worst when it came to validating the turnover of businesses or submitting suspicious activity reports”, an accusation the bank vehemently denied at the time.
Per the MainFT story, Starling chair David Sproul said the failings were “historic issues” and that it had learned the lessons of this investigation. London-listed shares in Chrysalis Investments, which has Starling providing 30 per cent of its net asset value, are unchanged at pixel time so maybe investors are seeing things the same way.
The FCA’s final notice is here, and it’s a doozy.
Further reading:
— Can Starling Bank make tech its business? (FT)
— Starling Bank faces questions over reliance on state-backed funding (FT)
— Thirty UK premium stocks that have more conflict-of-interest risk than Starling Bank (FTAV)