Dive Brief:

• Britain’s Financial Conduct Authority has hit Starling Bank with a £29 million fine ($38.5 million) over flaws in the challenger bank’s financial crime prevention systems and controls.
• Additionally, the bank “repeatedly” violated a requirement not to open accounts for high-risk customers, the FCA said in a Wednesday release.
• London-based Starling accepted the FCA’s findings and apologized for the shortcomings, noting that this closes an investigation the bank referred to in its annual report in June. In light of the issues identified, the bank “has completed both a detailed re-screening of transactions and an in-depth back book review of customer accounts,” Starling said in a Wednesday statement.

Dive Insight:

Starling’s efforts to thwart financial crime didn’t keep pace with its quick growth, the FCA asserted. 

The digital bank’s client base swelled from 43,000 customers in 2017 to 3.6 million in 2023, the U.K.’s financial watchdog said. But the bank’s financial sanction screening controls “were shockingly lax,” said Therese Chambers, the FCA’s joint executive director of enforcement and market oversight.

That “left the financial system wide open to criminals and those subject to sanctions,” Chambers said in the release. Starling “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.”

In 2021, an FCA review of financial crime controls at challenger banks revealed “serious concerns” with Starling’s anti-money laundering and sanctions framework, the regulator said. The bank agreed to a restriction on new account openings for high-risk customers until its issues were remedied, the FCA said. 

But Starling failed to comply with that restriction, the FCA said, opening about 54,000 accounts for 49,000 high-risk customers between September 2021 and November 2023, including 294 whom Starling had exited over findings related to financial crimes.

In January 2023, the bank discovered its automated system had only screened customers “against a fraction of the full list of those subject to financial sanctions,” going back to 2017, the FCA said. 

An internal review that followed revealed “systemic issues” in the lender’s financial sanctions framework, and Starling has reported “multiple potential breaches of financial sanctions” to authorities since then, the FCA said. For its part, Starling said it identified breaches and proactively shared them with the FCA.

Starling has set up programs to remediate the issues and bolster its financial crime prevention framework, the FCA said.

On Wednesday, the bank said it’s added “extensive additional safeguards” to ensure regulatory compliance, and has “significantly increased capability, structure and resources across all lines of defence.” 

After investing heavily to step up its financial crime expertise and resources, the bank said it’s satisfied that it has in place the necessary compliance and risk management controls, policies and procedures.

Starling Chair David Sproul apologized for the shortcomings and emphasized that the bank has also strengthened board governance and capabilities. 

“We want to assure our customers and employees that these are historic issues,” he said in a statement. “We have learned the lessons of this investigation and are confident that these changes and the strength of our franchise put us in a strong position to continue executing our strategy of safe, sustainable growth, supported by a robust risk management and control framework.”

Starling would have faced a £41 million fine, but the lender’s agreement to resolve the issues qualified it for a 30% discount, the FCA said.