Starling Bank brought down to earth

Bang goes that £10 billion float. The price tag slapped on Starling Bank always looked a fantasyland figure. Even more so now, after a going-over from the Financial Conduct Authority that’s left the lender looking not so much a challenger bank but one it’d be a proper challenge to invest in.
The regulator has just fined Starling £29 million for what it called “shockingly lax” controls that “left the financial system wide open to criminals and those subject to sanctions” — even the types on western government’s blacklists after Russia’s invasion of Ukraine. Indeed, the FCA’s 31-page “final notice” makes gruesome reading — and not least for Starling’s former boss, its founder Anne Boden, on whose watch the failures occurred. Yes, its chairman David Sproul has apologised and said the bank has “put things right”. Yet, given he’s been in the chair since October 2021, he can’t escape the blame.
All newbie banks face the problem of swiftly building scale. But Starling managed to grow from 43,000 customers in 2017 to 3.6 million by 2023, with its revenues rising from £13,000 in 2016 to £453 million in 2023. How did it do it? Well, partly by having an “anti-money laundering and sanctions framework” so full of holes that just about any villain could bank with it. As the FCA put it: “Measures to tackle financial crime did not keep pace with its growth.”
In 2021, the FCA reviewed such controls at all the challenger banks. And it’s here the Starling saga gets worse. It agreed to a voluntary requirement — a Vreq in the jargon — barring it from “opening new accounts for high-risk customers” until it improved its systems. Yet, despite that, it went ahead and opened 54,000 accounts for 49,000 such customers between September 2021 and November 2023. To top things off, even when it discovered it had breached the Vreq in July 2022, it failed to tell the FCA “until the following month”.
In came a “consultancy firm” for an independent review, which now reads like a demolition job of Boden’s management prowess. It found that “Starling’s senior management as a whole lacked the experience and capability to effectively implement the Vreq”, with “no single person” in charge and “different understandings” of what they were supposed to do.
Meantime, the FCA found that a “system misconfiguration” going back to July 2017 meant that Starling’s “screening” for sanctioned individuals failed to generate appropriate “alerts”. When it fixed the problem and reviewed almost four million historic payments, they generated 795,712 alerts, going on to identify “a number of potential financial sanctions breaches”.
Top stuff all round. Ask if the FCA report was the real reason Boden left the bank’s board this summer, after stepping down as chief executive in 2023, and Starling insists not. Boden, who still holds a 5 per cent stake and, at the latest filing, 18.5 per cent of the bank’s voting rights, declined to comment.
Still, the regulator’s findings do throw fresh light on her row with the former counter-fraud minister Lord Agnew, who accused Starling of acting “against the government and taxpayer’s interests” by allegedly failing to monitor Covid bounce-back loans for fraud. Boden bitterly disputed that. But, if the FCA’s latest effort is anything to go by, Agnew looks bang on.
Starling now has a new boss (former Ovo energy chief Raman Bhatia) and chief risk officer (Cyrille Salle de Chou). But Sproul’s position looks untenable for any floating bank. As for valuations, the £2.5 billion of 2022’s funding round looks plenty high enough for a bank that last year made £301 million in pre-tax profits. Particularly after this fiasco.
Just the thing for sole-searching among investors at JD Sports Fashion: its biggest brand partner, Nike, reporting a 10 per cent drop in quarterly sales and pulling its full-year guidance. What impact would that have on the UK-listed trainers and hoodies retailer? Short answer: less than feared.
True, the market reaction to JD’s half-year figures was still a 6 per cent share price fall to 140¼p. But that was mainly due to analysts cutting forecasts by about 1 per cent due to the stronger pound — not so useful when only about 30 per cent of its earnings come from the UK nowadays. On the back of organic sales growth of 6.4 per cent, underlying profits of £406 million pre-tax marginally beat forecasts, with chief executive Regis Schultz “reiterating” full-year guidance of £955 million to £1.04 billion.
That’s reassuring from a fellow who spooked investors with a Christmas trading blooper after overestimating the demand for “tech fleeces” and underestimating the impact of market discounting. Since then, he’s managed to offset Nike’s woes with more in-demand stuff from the likes of Adidas and New Balance. The integration of his £878 million US buy, Hibbett, looks to have gone smoothly too, even if it’s a long way from proving itself the “cracker” Peel Hunt analysts claimed. In short, a decent half — despite Nike getting a kicking.
Talk about spooky. The budget’s the day before Halloween. And look at this: in the run-up to it, investors last month withdrew a beastly £666 million from UK-focused equity funds. Or so says Calastone, the funds network.
Edward Glyn, its head of global markets, reckons the “government’s rather pessimistic commentary about the UK economy” has blown a “nascent revival” in interest in UK equities after July’s election. True, there have been net outflows in UK funds every month since May 2021. But the relentless gloom from Sir Keir Starmergeddon is hardly helping.