In June, Raman Bhatia walked into the fifth-floor office at Starling Bank’s headquarters in east London with a clean slate. It was set to be an antidote to a turbulent two years steering his former employer, Ovo, through an energy crisis and fines for overcharging customers.
At the digital-only challenger bank, where he was taking over from the founder, Anne Boden, things looked more rosy, with a possible stock market listing on the horizon. He began his term by rubbing shoulders with new Labour ministers in No 10’s rose garden, and charming staff during a tour of Starling offices in Cardiff, London and Southampton.
But autumn brought the honeymoon to an abrupt end. In October, Starling was hit with a £29m fine for “shockingly lax” financial crime controls, which the City regulator said had left the financial system “wide open to criminals and those subject to sanctions”.
It threatened to take a hefty chunk out of Starling’s 2024 profits, and raised questions over the bank’s vehement defence of its customer screening process two years earlier when a former fraud minister challenged the bank’s handling of Covid loan applications.
It meant that when Bhatia addressed a London banking conference at the start of December, one of the first questions he was asked was not about Starling’s bright future but its recent failings.
A rising star
Starling once seemed poised for unwavering success. It was part of a trio of online-only neo-banks, alongside Revolut and Monzo, which emerged in the mid-2010s to disrupt traditional banking.
Boden, a former Royal Bank of Scotland executive, presented Starling as a grown-up among the upstarts, with 30 years of banking experience and £48m of seed funding from the reclusive Austrian billionaire Harald McPike.
Not everyone agreed with her leadership style – as illustrated by a staff rebellion that led to a former colleague launching a rival, Monzo. But in 2016, two years after its launch, Starling clinched a coveted UK banking licence, allowing it to hold its own customers’ deposits and issue lucrative loans. It would take Monzo another year, and Revolut until 2024, to do the same.
And although the pandemic loomed, the government-backed schemes that followed would fuel Starling’s growth: it was among a number of smaller lenders that eagerly queued to distribute bounce-back loans (BBLs). Meant to support businesses during lockdown, banks offered companies loans of up to £50,000 at 2.5% interest, but carried little risk, with taxpayers picking up 100% of losses if borrowers defaulted.
Large banks restricted BBLs to their own customers. But challengers such as Starling opened applications to new clients and experienced exponential growth as a result. The bank had only issued £23m of its own loans before the pandemic in November 2019, but had distributed £1.6bn in BBLs by the time the scheme closed in March 2021.
Meanwhile, its business customer base swelled from 87,000 to 330,000: equivalent to onboarding 15,000 a month. High street banks, by comparison, were onboarding 1,500 to 8,000 on average. Starling – which had 1,245 staff at the time – credited the feat to its cutting-edge tech. , a feat that the bank – which had 1,245 staff at the time– chalked up to its cutting-edge tech. Within months, it was toasting its first annual profit.
Serious setbacks
Not everyone was celebrating. In May 2022, Lord Agnew, a former Treasury minister with an anti-fraud brief, accused Starling of acting against taxpayers’ interests and using BBLs as a “cost-free marketing exercise to build their loan book and so their company valuation”. He added that the bank was “one of the worst when it came to validating the turnover of businesses or submitting suspicious activity reports”.
Boden was incensed. She accused Agnew of making “defamatory statements” and threatened to take legal action against the Tory peer, and said the bank had reported his comments to regulators. She also insisted Starling was one of the “most active and effective banks fighting fraud”.
In the background, the Financial Conduct Authority (FCA) had been raising serious concerns about Starling’s financial crime controls.
In late 2020, during a sample review of challenger banks, the watchdog said it had “identified several issues” with Starling’s anti-money-laundering and financial sanctions controls, as well as its governance and oversight.
But this would not have been news to some, at least, of Starling’s management. In 2018, an internal audit report had identified “several significant gaps” in Starling’s financial crime procedures. However, those shortcoming were not adequately conveyed to either Starling’s board or the regulator, FCA documents said.
The regulator flagged “wide-ranging concerns” in a letter to Starling bosses in March 2021, just as the BBL programme was winding down, but further tests found problems in Starling’s client screening. By September, Starling had agreed to a VREQ – or voluntary requirement – that banned it from processing applications for any high-risk customers while it improved controls.
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Months passed. In July 2022, Starling realised that a key check was not working properly. It meant that nearly 300 customers who had previously been booted out of the bank for “financial crime reasons” had been able to reopen accounts. By November, Starling’s financial crime rating was raised to “red”. And two months later, in January 2023, it found that an automated screening system had only been checking against a partial list of individuals under sanctions since 2017.
Starling ultimately breached the VREQ, opening 54,000 accounts for 49,183 high-risk customers between September 2021 and November 2023, earning £900,000 in interest and fees along the way. An external consultancy later chalked up the failings to an inexperienced management team that lacked sufficient anti-money laundering and regulatory expertise. Engineering teams, given responsibility for upgrading the systems and controls, were not told of the existence of the regulator’s order.
It was only in April this year that Starling managed to go a full month without breaking the rules. The VREQ remains in place today.
Dampened hopes
The regulator did not refer to the BBL scheme in its report. But Agnew revived his concerns in October. The digital bank has so far claimed £94m of taxpayer money through the BBL scheme on loans that were later flagged for fraud, a figure only surpassed by the four largest high street banks.
“The government should consider the FCA’s findings and examine whether there needs to be a clawback on any of the taxpayer funds paid to Starling to cover fraud losses,” Agnew told the Times.
The new revelations have undoubtedly hurt Starling’s reputation and kicked the prospect of a stock market listing – and payouts to investors such as Goldman Sachs and McPike – down the road.
“It makes it harder to ‘sell the story’ to investors,” said John Cronin, an independent banking analyst and founder of SeaPoint Insights. “I would be surprised to see a successful IPO within the next two to three years,” he added.
Boden stepped down as chief executive in 2023 citing a “conflict of interest” between being a boss and a large shareholder, leaving Bhatia to weather the storm.
Starling said: “We fully accept and have apologised for the FCA’s findings. Their fine related solely to breaches of the VREQ and to sanctions controls. The loans issued during the Covid crisis were to a small proportion of our new customers. In line with other banks, we were supporting the government’s efforts to keep the economy alive and small business owners active.
“We’re moving forward with plans for new products and services and are excited about the prospects for 2025.”
Boden and the Treasury declined to comment.
