British Financial Regulator FCA Fines Digital Bank Starling £29 Million

The monitoring mechanisms of Starling in the area of financial sanctions were shockingly inadequate," said Therese Chambers, Co-Director of the Enforcement and Market Oversight Division at the FCA. "This has left the financial system wide open to criminals and sanctioned individuals.

Starling, which has grown from 43,000 customers in 2017 to 3.6 million customers in 2023, has repeatedly violated an agreement with regulators in recent years not to open new accounts for high-risk customers until control systems were improved. Between September 2021 and November 2023, the bank opened 54,000 accounts for around 49,000 high-risk customers despite the regulations, the FCA stated.

At the beginning of 2023, Starling internally discovered that its automated screening system had only checked a fraction of the sanctions list for six years. This discovery led to a comprehensive internal review, during which "systematic problems" in sanction control were identified. As a result, the bank reported numerous potential violations to the relevant authorities.

The FCA criticized that Starling's leadership team, overall, lacked the necessary experience and competence to effectively implement the voluntary agreement to review high-risk customers. "Fintechs and challenger banks often seem to have difficulty in recruiting top management for compliance with regulations to combat financial crime," stated Kathryn Westmore, Senior Research Fellow at the Centre for Finance and Security at the Royal United Services Institute.

Starling founder Anne Boden resigned last year following internal disputes with investors. The background was the decision of the fund manager Jupiter to sell its stake in Starling at a price that reduced the bank's valuation from 2.5 billion pounds to between 1 billion and 1.5 billion pounds. David Sproul, the former head of Deloitte's UK practice, took over as the new chairman and assumed responsibility for addressing the shortcomings.

We have massively invested in improving our compliance processes in recent years," explained Sproul. He referred to the current issues as "historical matters" from which the company has drawn the appropriate lessons. Starling has sought cooperation with the FCA and was able to reduce the original penalty by 30 percent through this collaboration. Without the discount, the amount would have been 41 million pounds.

The Case of Starling Exemplifies the Challenges Neobanks Face When Scaling Compliance Systems During Rapid Growth. The Increasing Sanctions Following the Russian Invasion of Ukraine Have Significantly Increased the Due Diligence for Banks When Onboarding New Customers. The FCA Also Noted in 2022 that an Increase in Reports to the National Crime Agency Raised Doubts About the Quality of the Checks.

The British regulatory authority is also tightening the reins on other digital banks. According to the FCA, a civil investigation into the anti-money laundering controls at Starling's rival Monzo is currently underway. Previously, this was downgraded from a criminal matter to a civil one.

Claire Cross, partner at the law firm Corker Binning, expects further actions from the FCA against fintechs: "They represent a part of the market that is under intense scrutiny.