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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 been profitable for the past three years, the Chrysalis-backed lender is 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 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 opened 54,359 accounts for 49,183 high or higher-risk customers.
According to the FCA’s final notice, the bank’s 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 it had opened new accounts for 294 customers that it had previously ejected for financial crime reasons. 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 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.”
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.”
They “failed to adequately oversee and monitor the day-to-day compliance,” with several members of senior management having “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 business.
The FCA’s final notice is here, and it’s a doozy.
Further reading:
— Can Starling Bank make tech its business? (FT)