Starling Bank, you could say perversely, has joined the big league: it has copped a thumping regulatory fine for having “shockingly lax” controls to combat financial crime, the sort of thing that happens to proper grownup banks.
But, no, the glib line doesn’t work. Read the Financial Conduct Authority (FCA)‘s final notice on Starling’s failures and you can understand why the regulator was so damning. The findings tell a tale of shambles and an absence of basic accountability at the top. “The bank built for you”, as the marketing slogan has it, was built on a wing and a prayer when it came to anti-money-laundering controls.
Not only did Starling leave the financial system “wide open to criminals and those subject to sanctions”, the FCA says – it then compounded its offence by failing to clean up its act promptly when directed to do so. Almost unbelievably, it opened 54,000 accounts for 49,000 high- and higher-risk customers after it had agreed in 2021 to accept no business of that type until it had got its controls up to scratch.
The FCA mentions how Starling’s measures to tackle financial crime “did not keep pace with its growth”, but the span of time is extraordinary. It was only in January 2023 that Starling identified that the automated financial sanctions framework it had been using since 2017 had been screening just “a fraction” of the names it should have been checking.
What was senior management doing after the FCA, in September 2021, issued its order – referred to as a voluntary requirement, or VREQ – to raise standards?
Here are a few lowlights from a “lessons learned” review conducted by an external consultant (and accepted in full by the bank). Senior management “lacked the experience and capability to effectively implement the VREQ”. Those same managers lacked awareness of “the seriousness of not complying”. Several members “had different understandings of whom at Starling had responsibility for the VREQ”. Engineering teams, given responsibility for upgrading the systems and controls to implement the VREQ were not told of the existence of the regulatory order.
Starling has better procedures in place now, the FCA agrees, and the bank’s chair, David Sproul – on the board since 2021 (and, incidentally, also the new chair of South West Water’s owner, Pennon) – is full of apologies. A £29m fine will hurt, but Starling should count itself lucky: under the fining system for this type of offence, the FCA could have imposed a much larger sum but deemed it “disproportionate” to do so.
The other damage, surely, will be to any short-term hopes Starling held of listing on the stock market. The possibility of a flotation has been bubbling away since founder Anne Boden stepped down as chief executive last year, with the baffling explanation that there was a potential conflict between that day-to-day job and her status as a near-5% shareholder. If she were still in the top job today, her position would be uncomfortable. She left the board entirely in June this year.
The other running story has concerned Starling’s handling of state-backed Covid loans to small- and medium-sized (SME) companies. Theodore Agnew, anti-fraud minister in the last government before his resignation, alleged in 2022 that Starling did not run adequate checks on borrowers and so acted “against the government and taxpayers’ interests”. Starling furiously denied the allegation, but it could hardly be more central to its business: almost 90% of its £832m SME loan book at the end of its last financial year carried a government guarantee.
In short, Starling needs a long period of controversy-free stability before it contemplates the public markets. That means years. The big league will have to wait.