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Starling Bank has been fined £29 million by the UK financial regulator, which accused the challenger bank of “shockingly lax” financial crime controls.
Starling’s efforts to identify potential money laundering schemes, breach sanctions and screen high-risk customers “have not kept pace” with the bank’s growth, the Financial Conduct Authority said said Wednesday. Starling grew from about 43,000 customers in 2017 to 3.6 million in 2023, the watchdog said.
“Starling’s financial sanctions controls were shockingly lax,” said Therese Chambers, joint executive director of enforcement and market surveillance at the FCA. “It left the financial system wide open to criminals and those subject to sanctions.”
The FCA said Starling had repeatedly failed to comply with a previous agreement it made with regulators to stop opening new accounts for high-risk customers until financial crime controls were improved.
Despite the agreement, the bank opened 54,000 accounts for 49,000 high-risk customers between September 2021 and November 2023, the watchdog said.
Starling realized in January 2023 that its automated screening system had been “only screening customers for a fraction of the full list of those subject to financial sanctions” for six years, the FCA said.
This led to an internal review which found “systemic issues” in its financial sanctions framework, with the bank since reporting “multiple potential financial sanctions breaches” to authorities.
The fine, the first of its kind against a digital bank, comes as the watchdog steps up its scrutiny of neobank financial crime controls.
The FCA warned in 2022 that a wave of reports to the National Crime Agency had “raised concerns about the adequacy of the [neobanks’] checks when taking on new customers”. The watchdog is separately conducting a civil investigation into anti-money laundering controls at Starling’s rival Monzo Bank after it downgraded the bank’s rating to a criminal matter, the bank said in its June annual report.
The FCA has imposed some of its largest fines in recent years for failings in major banks’ systems to stop financial crime and money laundering, including Santander UK’s £108 million fine in 2022 and a £265 fine million for NatWest in 2021.
Claire Cross, partner at law firm Corker Binning, said: “I expect the regulator will take more action against fintechs. They represent a part of the market that is being closely watched by the FCA.”
Startups are struggling to scale up their financial crime controls at the same speed they have attracted new users, while a wave of sanctions imposed following Russia’s 2022 invasion of Ukraine has reduced the amount of due diligence banks must conduct on new customers increased.
Starling cooperated with the FCA and was therefore eligible for a 30 percent discount on a fine that would otherwise have been as much as £41 million, according to the findings.
Starling chairman David Sproul said: “I would like to apologize for the shortcomings outlined by the FCA and provide reassurance that we have invested heavily to put things right, including strengthening our governance and capabilities.”
In addition to Sproul, who led the UK practice of Big Four accounting firm Deloitte, the Starling heavyweight also includes Tracy Clarke, the former head of Europe and the Americas at Standard Chartered.
Kathryn Westmore, a senior research fellow at the Center for Finance and Security at the Royal United Services Institute think tank, noted that the FCA was “highly critical” of Starling’s senior management.
The FCA said the “senior management of the bank as a whole lacks the experience and ability” to effectively implement their voluntary agreement around high-risk customers with regulators.
“Challenger banks and fintechs often appear to struggle to get senior buy-in when it comes to financial crime compliance, including understanding the threats and ensuring there are adequate resources for compliance,” Westmore said.
“This is a significant fine and one that many businesses, especially digital banks and payment companies, should take note of,” she added.
Starling founder Anne Boden stepped down as CEO last year after a row with investors over fund manager Jupiter’s decision to sell its stake in the bank at a price that cut Starling’s valuation from £2.5 billion to between £1 billion and £1.5 billion by February 2023. .
Sproul said the shortcomings were “historical issues” and that it had learned the lessons of this investigation.