Starling Bank is pursuing several debtors who had never previously shown signs of active trading, while the fintech company, which relies on government-backed Covid-19 loans, struggles with rising defaults and an investigation into its financial crime controls.
Since May, Starling has filed winding-up petitions against 24 companies that have failed to repay their loans, according to British court records. Most of those companies reported little or no business activity, three have never filed financial statements and another six have been inactive since their inception, according to company records analyzed by the Financial Times.
The London-headquartered fintech company’s action against insolvent debtors came after it noted a rise in defaults and announced last week that it was being investigated by UK regulators in connection with its anti-financial crime controls.
Starling said in its annual report last week that the Financial Conduct Authority launched an investigation in November focusing on “aspects of its systems and control frameworks for combating money laundering and financial crime”. Starling also warned that the impact of the investigation could be significant.
One of the companies Starling has brought suit against, Cambridge Newton Capital, presents itself as an investment firm that also offers “financial planning advice” to clients, but has never been regulated by the FCA. The company, which received a loan from Starling, set up micro-firm accounts during its mostly dormant existence. It deleted its website after being contacted by the FT.
Cambridge Newton Capital did not respond to requests for comment.
Another debtor against whom a winding-up petition has been filed, Bedford-based Boyee Trading Ltd, has filed accounts claiming that in each financial year “the average number of employees during the year was zero”. Boyee could not be reached by email or telephone for comment.
Some others have only published accounts with transactions worth a few hundred pounds.
Eight of the companies were founded in 2019 or later before successfully applying for a loan from Starling.
About 90 percent of Starling’s £830 million in outstanding loans to small and medium-sized enterprises (SMEs) were guaranteed by the UK government at the end of March, the company said last week.
In 2021, the bank owed over £2.1 billion in government-backed debt obtained through one of the UK’s pandemic lending schemes – the Bounce Back Loan Scheme (BBLS), the Coronavirus Business Interruption Loan Scheme (CBILS) and the Recovery Loan Scheme (RLS).
Figures released by the neobank show that the government has repaid around £630 million of its non-performing bounce-back loan debt since 2021.
A Starling Bank spokesman said: “We continually review all our loans and take a proactive approach to recovering non-performing loans.”
The fintech company continues to take steps to “identify and report suspected fraud and misconduct to law enforcement and other authorities and cooperate with them as appropriate,” they added.
Starling said it was cooperating with the FCA’s investigation and had “in some cases proactively identified areas for improvement and reported them to our regulators”.
Starling had previously drawn the ire of politicians after it expanded its loan portfolio largely through government-backed lending schemes with minimal customer checks. Starling differed from most of its larger rivals by lending to new customers rather than existing ones.
The bank made provisions for bad loans of £13.9 million in the year to the end of March, up 40 percent from the previous year, as it saw a rise in default rates on its SME loan book.
Kathryn Westmore, a senior research fellow at the Centre for Finance and Security at the Royal United Services Institute think tank, said the FCA’s concerns about neobanks’ poor financial crime response were gradually leading to potential enforcement action against major players such as Starling and Monzo, which is also currently under a similar investigation.
Monzo said earlier this month that the FCA had informed the company that a criminal investigation into money laundering had been closed, but that civil investigations were still ongoing.
Westmore said: “We could see heavy fines for some of these fintechs in the next few years.”
