Challenger Banks Under the Financial Conduct Authority’s Scrutiny
Since 2022 in the United Kingdom, the community of so-called ‘challenger banks’—ie newly established financial institutions that seek to ‘disrupt’ the traditional banking sector by using technology to offer retail banking products and services remotely—has been on notice that they, like traditional banks, must maintain effective financial-crime and money-laundering controls. At that time, the Financial Conduct Authority (FCA) issued a report in which it warned that although ‘many challenger banks depend on rapid customer growth for survival[’], ‘this must not come at the detriment of complying with customer due diligence (CDD) obligations as set out in the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs).’
On 2 October, the FCA made clear that a challenger bank’s failure to establish and maintain effective financial crime controls could have severe consequences. It announced that it was imposing a financial penalty of £28,959,426 on a prominent United Kingdom challenger bank, Starling Bank Limited (Starling), for financial crime failings related to its financial sanctions screening and repeated breaches of the FCA’s requirement not to open accounts for high-risk customers.
The Final Notice that the FCA issued to Starling provided multiple examples of how Starling had failed to meet its financial crime controls obligation. Even before its 2022 report, in 2021 the FCA ‘identified serious concerns with Starling’s anti-money laundering and financial sanctions framework.’ Although Starling accepted the FCA’s requirement that it ‘not . . . open any new accounts for high or higher risk customers while it improved its AML control framework’, over a four-year period ending November 2023 Starling opened 54,359 accounts for 49,183 high or higher-risk customers in breach of the terms of the FCA agreement.
Moreover, a consultancy firm that Starling engaged in 2023 to conduct an independent review of Starling’s implementation of the FCA requirement found that ‘Starling’s senior management as a whole lacked the experience and capability to effectively implement’ the FCA requirement. In particular, it stated that Starling’s senior management ‘lacked the required AML skills or experience’, ‘were inexperienced when dealing with significant regulatory changes’, and ‘failed to adequately oversee and monitor the day-to-day compliance’ with the FCA requirement. In view of Starling’s numerous and repeated failures, a senior FCA official described its financial sanction screening controls as ‘shockingly lax.’
The FCA did credit Starling not only with ‘fully cooperat[ing] with the Authority’s investigation, proactively offering and delivering presentations to the Authority and voluntarily providing important additional information’, but with ‘establish[ing] programmes to remediate these breaches and to enhance its wider financial crime control framework.’ By agreeing to resolve the matters with the FCA, Starling qualified for a 30 percent discount of the fine under the FCA’s processes.
The FCA’s actions in this case provide a potent reminder to the entire United Kingdom banking community—not merely the challenger bank community—that all banks, including their senior management, must maintain consistently effective financial crime and money laundering controls. Banks should peruse the FCA’s findings and conclusions in this case, and ‘benchmark’ their corporate-compliance programmes against the signal and persistent failures that the FCA identified at Starling.
Jonathan J. Rusch is Director of the Anti-Corruption Law Program and Adjunct Professor at American University Washington College of Law.
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