Starling Bank, one of the UK’s leading digital banks backed by Goldman Sachs, was recently fined by the Financial Conduct Authority (FCA). The move came as a surprise to many, especially given Starling’s reputation as a pioneering digital bank focused on financial technology innovation. However, as is the case with many fintech companies, regulatory challenges remain a major risk to their growth. The FCA’s decision shows that even the most innovative players in the financial industry must abide by strict rules.
Why Was Starling Bank Fined by the FCA?
The specifics of the breaches that led to the fines vary, but generally, the Financial Conduct Authority (FCA) sanctions banks for breaches of regulations relating to consumer protection, risk management or compliance with financial regulations. In Starling’s case, the breaches may have related to issues with financial oversight, transparency in operations or inadequate anti-money laundering (AML) processes.
Digital banks like Starling operate under the same stringent regulations as traditional banks, and in some cases, they face even greater scrutiny due to their digital nature and innovative technology. The FCA is particularly careful to ensure that digital banks continue to meet the same regulatory standards as traditional banks, particularly when it comes to data protection, security and transparency.
The Starling Bank banking app on a smartphone. Adrian Dennis | AFP via Getty Images
U.K. financial regulators hit British digital lender Starling Bank with a £29 million ($38.5 million) fine over failings related to its financial crime prevention systems.
In a statement on Wednesday, London’s Financial Conduct Authority said it had fined Starling “for financial crime failings related to its financial sanctions screening.” Starling also repeatedly breached a requirement not to open accounts for high-risk customers, the FCA said.
In response to the FCA penalty, Starling said it was sorry for the failings outlined by the regulator and that it had completed detailed screening and an in-depth back book review of customer accounts.
“I would like to apologise for the failings outlined by the FCA and to provide reassurance that we have invested heavily to put things right, including strengthening our board governance and capabilities,” David Sproul, chairman of Starling Bank, said in a statement Wednesday.
“We want to assure our customers and employees that these are historic issues. 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,” he added.
Starling, one of the U.K.’s most popular online-only challenger banks, has been widely viewed as a potential IPO candidate in the coming year or so. The startup previously signaled plans to go public, but has moved back its expected timing from an earlier targeted an IPO as early as 2023.
The FCA said in a statement that, as Starling expanded from 43,000 customers in 2017 to 3.6 million in 2023, the bank’s measures to tackle financial crimes failed to keep pace with that growth.
The FCA began looking into financial crime controls at digital challenger banks in 2021, concerned that fintech brands’ anti-money laundering and know-your-customer compliance systems weren’t robust enough to prevent fraud, money laundering and sanctions evasion on their platforms.
After this probe was first opened, Starling agreed to stop opening new bank accounts for high-risk customers until it improved its internal controls. However, the FCA says that Starling failed to comply with this provision 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, since 2017, its automated system was only screening clients against a fraction of the full list of individuals and entities subject to financial sanctions, the FCA said, adding that the bank identified systemic issues in its sanctions framework in an internal review.
Since then, Starling has reported multiple potential breaches of financial sanctions to relevant authorities, according to the British regulator.
The FCA said that Starling has already established programs to remediate the breaches it identified and to enhance its wider financial crime control framework.
The British regulator added that its investigation into Starling completed in 14 months from opening, compared to an average of 42 months for cases closed in the calendar year 2023/24.
Impact on Starling Bank and the Fintech Ecosystem
For Starling Bank, the FCA fine is certainly a blow to their reputation. As a fast-growing digital bank backed by major investors such as Goldman Sachs, their reputation for regulatory compliance and security is an important aspect in maintaining customer trust. A fine from a regulator such as the FCA could erode public confidence, especially among more conservative customers.
However, from another perspective, this could also be a wake-up call for Starling and other digital banks to strengthen their risk management and compliance. As a digital-based bank, Starling may face unique challenges in maintaining regulatory compliance due to the scale of their operations that rely heavily on automated technology. With this sanction, Starling may look to fix weaknesses in their systems to ensure better compliance going forward.
More broadly, this incident could provide lessons for the entire fintech ecosystem and financial startups. As the fintech industry continues to grow, especially amidst the COVID-19 pandemic that has accelerated digital adoption, regulators are increasingly scrutinizing these companies. While fintechs are driving rapid innovation, they are also subject to the same regulatory standards as traditional banks. This is a major challenge in balancing innovation and compliance.
What Can We Expect Next?
For Starling, they will likely take corrective action to fix the issues highlighted by the FCA. This could involve improving their anti-money laundering systems, strengthening their customer verification procedures, or improving transparency in their financial reporting. In some cases, fintechs that are fined may choose to work more closely with the regulator to improve their internal processes and ensure that they adhere to the highest standards.
Additionally, Goldman Sachs, as a major investor in Starling, may also play a role in ensuring that the bank gets back on track. Goldman, with its well-established reputation in the financial world, would certainly not want to be involved with a bank that is deemed to be non-compliant.
Conclusion: Growing Challenges for Digital Banks
This case highlights that while technological innovation has brought huge gains in terms of efficiency and accessibility to banking, regulatory compliance remains a critical pillar for long-term success. Starling Bank has proven itself to be one of the best digital banks in Europe, but this FCA fine highlights that there is room for improvement in terms of risk management and compliance.
For fintech players, this incident is a reminder that success is not just about the speed of innovation, but also about maintaining safe operational standards and complying with applicable regulations. For Starling, while this is a challenge, with the right handling, they can use it as a stepping stone to becoming a stronger and more resilient bank.