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Starling Bank is pursuing several debtors who never showed signs of active trading, while the fintech that relied on government-backed Covid-19 loans faces rising defaults and an investigation into its financial crime controls.
Since May, Starling has filed winding-up petitions against 24 companies that defaulted on their loans, according to British court documents. Most entities have reported little to no business activity, three have never filed accounts, while another six have been inactive since inception, company documents analyzed by the Financial Times show.
The London-based fintech’s legal action against bad debt comes as it has marked a spike in defaults, and last week it emerged that UK regulators were investigating its financial crime controls.
Starling said in its annual report last week that the Financial Conduct Authority had opened an investigation in November focusing on “aspects of its systems and control framework against money laundering and financial crime”. It also warned that the impact of the probe could be significant.
One of the companies Starling has filed a complaint against, Cambridge Newton Capital, presents itself as an investment firm that also provides ‘financial planning advice’ to clients but has never been FCA regulated. The company, which received a loan from Starling, has filed microbusiness accounts during its largely dormant lifespan. It removed 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 brought, Bedford-based Boyee Trading Ltd, has filed accounts claiming that for each trading year “the average number of employees during the year was NIL”. Boyee could not be reached for comment by email or telephone.
A collection of others have only published accounts with transactions worth a few hundred pounds.
Eight of the entities were newly incorporated in 2019 or after, before successfully applying for a loan from Starling.
About 90 percent of Starling’s outstanding £830 million of loans to small and medium-sized businesses (SMEs) were guaranteed by the UK government at the end of March, it said last week.
In 2021, the bank owed more than £2.1 billion in government-backed debt, which it accessed through one of the UK’s pandemic lending schemes – the Bounce Back Loan Scheme (BBLS), Coronavirus Business Interruption Loan Scheme (CBILS) and the Recovery Loan Scheme (RLS).
Figures published by the neobank show that the government has paid off around £630 million of its problematic rebound loan debt since 2021.
A spokesperson for Starling Bank said: “We have an ongoing process of reviewing all our loans and take a proactive approach to the recovery of defaulted loans.”
The fintech continued to take steps to “identify and report suspected fraud and wrongdoing to law enforcement and other authorities and to cooperate with them as appropriate,” she added.
Starling said it was cooperating with the FCA investigation and that “in some cases we have proactively identified and reported areas for improvement to our regulators”.
Starling has previously drawn the ire of politicians after largely expanding its loan portfolio using government-backed lending programs with minimum customer checks. Starling differed from most larger rivals by lending to new customers rather than existing customers.
The bank set aside £13.9m for bad loans in the year to the end of March, a 40 per cent increase on the previous year, as it flagged a rise in default rates in its SME loan book.
Kathryn Westmore, a senior research fellow at the Royal United Services Institute think tank’s Center for Finance and Security, said the FCA’s concerns about neobanks’ poor management of financial crime were beginning to translate into potential enforcement activity against major players such as Starling and Monzo, which is also under a similar investigation.
Monzo said earlier this month that the FCA had told it it had dropped a criminal investigation into money laundering, although a civil investigation is ongoing.
Westmore said: “We could expect to see some major fines for some of these fintechs in the coming years.”