After fining Metro Bank and Starling, which challenger bank will the FCA target next?
The Financial Conduct Authority (FCA) has signalled that it is ready to take a hard line against challenger banks for financial crime failings after dishing out hefty fines to young lenders.
Starling and Metro Bank have been hit with penalties totalling almost £46m over the last two months in fresh blows to their ambitions to unseat the UK’s dominant banks.
This figure would have been almost £65m, but the banks qualified for a 30 per cent discount by agreeing to resolve the issues.
Financial services lawyers told City PM that challenger banks should be increasingly wary of potential further penalties after the regulator broke ground in its supervision of the sector.
The Starling fine was the FCA’s first financial penalty against a neobank and underscores its close scrutiny of digital lenders in recent years.
In 2021, the FCA launched a review into financial crime controls at challenger banks, which involved six firms and found some were failing to conduct adequate checks on customers.
“Not long ago, challenger banks were notorious for failing to undertake AML checks,” said John Binns, a partner at law firm BCL.
“There was then something of a snap-back,” he added. “The challengers realised the risks to them from refusing and ruining customers’ business were much less than the risks they faced from the FCA.”
Starling was handed a £29m penalty in October after the FCA found its “shockingly lax” anti-money laundering and sanctions framework “did not keep pace” with the bank’s rapid growth from 2017 to 2023.
The bank failed to comply with a requirement, agreed after the 2021 review, that restricted its opening of new accounts for “high-risk customers” by opening more than 54,000 between September 2021 and November 2022, the FCA said.
“Its mistakes on sanctions were both basic and serious, as reflected in the size of their fine,” Binns said. “I would be surprised if many banks, challengers or otherwise, were making mistakes of that nature.”
David Sproul, Starling’s chair, apologised for the failings and said the bank had invested heavily to put things right.
Still, it was not the first time the 10-year-old bank had fielded criticism for its monitoring of suspicious activity.
In 2022, Starling vehemently denied public accusations from ex-Tory minister Theodore Agnew that it failed to run proper checks on borrowers while handing out taxpayer-backed loans during the Covid-19 pandemic.
“I don’t think we’ve yet reached an equilibrium where challengers are either doing the right thing entirely or acting similarly to their more conventional competitors,” Binns said.
“Indeed, it would be complacent to think the latter’s house was completely in order.”
With its branch-focused business model, Metro Bank stands apart from other challengers that are exclusively digital.
The bank was fined £16.7m on Tuesday after the FCA found it failed to adequately monitor more than 60m transactions, worth a combined £51bn, for money laundering risks between June 2016 and December 2020.
The FCA said that despite junior staffers raising concerns in 2017 and 2018, Metro Bank did not completely fix problems with its automated system for monitoring transactions for financial crime risks until the end of 2020 – more than four-and-a-half-years after it was introduced.
“Like its fellow challenger Starling Bank, a rapid rise has been followed by a spectacular penalty for blatant failings when it comes to financial controls,” said Niall Hearty, a partner at Rahman Ravelli.
“Both cases are a sharp reminder of what can be expected if a bank’s screening processes do not keep up with its growth and it does not have a monitoring system that acts decisively on any red flags.”
Metro Bank’s CEO, Daniel Frumkin, said the fine “draws a line under this legacy issue” and would enable the bank to “focus on the future”.
The lender was added to the regulator’s financial crime watchlist in June 2023. Firms on the list are placed under “enhanced supervision” by senior watchdog officials and required to show progress and address issues that are of concern.
The FCA has publicly given few further details, but City PM understands that firms on the list may have to provide weekly updates to the regulator, be ordered to fire staff and allow officials to attend company meetings.
Tuesday’s fine comes after a rocky period for Metro Bank that saw it saved from potential collapse by Colombian billionaire Jaime Gilinski Bacal, who took a 53 per cent stake in the lender as part of a £925m rescue deal last year.
It ran into problems in 2019 when the bank admitted it had misclassified some loans and fell short of regulatory capital requirements, eventually leading to £15.4m in fines.
More to come?
The FCA has taken a tough stance on money laundering across the board, which has proven contentious within other fast-growing financial sectors like digital assets and cryptocurrency.
Starling’s rival Monzo said in its June annual report that the FCA was conducting a civil probe into its money laundering controls, having downgraded it from a criminal matter.
The FCA has been examining potential breaches of anti-money laundering and financial crime rules at the neobank since 2021, focusing on activity between October 2018 and April 2021.
“There is still a lot for challenger banks to play for, and the FCA will welcome growth in this sector,” said Abdulali Jiwaji, a partner at Signature Litigation. “But that is not going to be at the expense of financial crime control. It is important that challenger banks learn the lessons from the various regulatory announcements.”
Fintech juggernaut Revolut has come under increasing scrutiny for its approach to financial crime this year as it prepares to launch as a fully-fledged lender in its home market.
A BBC Panorama investigation last month revealed that Revolut, which received a provisional UK banking licence in July, was named in more police fraud reports than any major British bank last year.
“If the eye-catching challenger banks were enjoying a honeymoon period of speedy growth and admiration from certain quarters, it would appear to be over now,” Hearty said.
“The authorities were never likely to take an overly-romantic view of the new kids on the block. And, as has been shown, any failings are bound to lead to less than harmonious relations. More needs to be done if they are to continue to thrive without attracting further penalties.”