Starling Bank fined £29m over ‘stunningly lax’ crime regulations

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Starling Bank has been fined £29 million by the UK Financial Regulator, which accused challenger banks of having “stunningly lax” regulations against financial crime.

Starling’s efforts to identify potential money laundering and sanctions breaches and screen high-risk customers “have not kept pace” with the bank’s growth, the Financial Conduct Authority says. said on wednesday. Starling’s customer base grew from about 43,000 in 2017 to 3.6 million by 2023, according to the watchdog group.

Therese Chambers, joint executive director of enforcement and market supervision at the FCA, said: “Sterling’s financial sanctions review controls were surprisingly lax.” “The financial system remained wide open to criminals and sanctioned parties.”

The FCA said Starling had repeatedly failed to comply with previous agreements with regulators to halt new account openings for high-risk customers until financial crime regulations 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.

According to the FCA, Starling discovered in January 2023 that its automated screening system had been “only screening customers against a subset of the full list of financial sanctions” for six years.

This led to an internal investigation that found “systemic issues” in the financial sanctions framework, and the bank has since reported “several possible financial sanctions violations” to authorities.

The fine is the first of its kind against a digital bank and comes as watchdogs step up scrutiny of neobanks’ financial crime regulations.

In 2022, the FCA warned that a sharp increase in reports to the National Crime Agency “raises concerns about the adequacy of criminal investigations”. [neobanks’] The watchdog is conducting a separate civil investigation into money laundering regulations at Starling rival Monzo Bank, and has downgraded the bank from a criminal case, the bank said in an annual report in June. This was revealed in the report.

In recent years, the FCA has awarded UK Santander £108 million in 2022 and NatWest £265 million in 2021 for failings in the major banking system to stop financial crime and money laundering. It has imposed the highest fines ever, including a fine of 10,000 pounds.

Claire Cross, partner at law firm Coker Binning, said: “We expect to see further action by regulators against fintechs, as these represent an area of ​​the market that is under intense scrutiny by the FCA. be.”

Startups are struggling to tighten financial crime regulations as quickly as they are attracting new customers, while a wave of sanctions imposed after Russia’s invasion of Ukraine in 2022 has made it difficult for banks to attract new customers. The amount of due diligence that must be carried out is increasing.

Mr Stirling’s co-operation with the FCA entitled him to a 30% reduction in his fine, which would have otherwise amounted to £41m, according to the findings.

“We apologize for the shortcomings identified by the FCA and would like to reassure them that we have made significant investments to put things right, including strengthening the governance and capacity of our boards,” Sterling Chairman David Sproul said in a statement. .

Starling’s executives include Mr Sproul, who previously led the UK operations of Big Four accountancy firm Deloitte, as well as Tracy Clark, former head of Europe and Americas at Standard Chartered.

Kathryn Westmore, a senior fellow at the Center for Finance and Security at the Royal United Services Institute think tank, said the FCA had been “very critical” of Sterling’s senior management.

The FCA said the bank’s “senior management team collectively lacked the experience and capacity to effectively implement its voluntary agreements with regulators regarding high-risk customers”.

“Challenger banks and fintechs often struggle to gain senior buy-in on financial crime compliance, including understanding the threat and ensuring adequate resources for compliance,” Westmore said. said.

“This is a hefty fine and many businesses, especially digital banks and payment companies, should pay attention,” she added.

Starling founder Anne Bowden last year over fund manager Jupiter’s decision to sell its stake in the bank in February 2023 at a price that would reduce Starling’s valuation from £2.5 billion to £1 billion to £1.5 billion. He resigned as CEO after getting into an argument with investors. .

Sproul said the failure was “historic” and that lessons had been learned from the investigation.