Starling Bank faces fresh scrutiny over covid loans and financial conduct

Starling Bank, the digital-only lender, is under renewed scrutiny for its handling of government-backed Covid-era loans, having disclosed a £28.2 million provision to remove state guarantees from certain bounce back loans. The move follows an internal review that identified loans issued prior to April 2021 which potentially failed to meet the required compliance standards of the scheme.

These loans form just 1.8 per cent of the £1.6 billion Starling lent under the scheme, but the bank’s decision has placed it under the spotlight, notably as other lenders returned guarantees for less than 1 per cent of such loans. Starling attributed this higher proportion to its practice of accepting new business customers rather than limiting lending to existing clients, leading to a significant proportion of younger firms borrowing through its platform.

The bounce back loan initiative was launched to provide financial relief to small businesses amidst the pandemic, offering loans of up to £50,000 per applicant. These loans were 100 per cent government-backed, allowing lenders to distribute funds rapidly. However, a review by the National Audit Office exposed vulnerabilities in the scheme, such as minimal verification processes and the absence of credit checks, which left it exposed to fraud and financial losses.

Starling’s rapid growth in lending to smaller businesses during the pandemic attracted criticism as early as 2021, when Lord Agnew of Oulton, a former counter-fraud minister, described the bank as “one of the worst” in conducting anti-fraud measures for bounce back borrowers. Ann Boden, Starling’s founder and then-chief executive, denied these claims vehemently, defending the bank’s operations.

The current chief executive, Raman Bhatia, stated that the review revealed lapses in the implementation of procedural checks, prompting the decision to voluntarily surrender the government guarantee on questionable loans. While this step demonstrates accountability, it has impacted the bank’s recent financial results. Pre-tax profits for the 12 months ending March fell to £223 million from £301 million the year before. This marks the second significant financial setback for Starling within a year, following a £29 million fine by the Financial Conduct Authority for failing to maintain robust anti-financial crime measures.

The British Business Bank, which oversaw the bounce back loan scheme, acknowledged Starling’s adherence to protocols by proactively identifying and addressing non-compliant loans. It praised the lender for conducting thorough reviews aimed at safeguarding taxpayer funds while adhering to the agency’s recommended standards.

Despite these challenges, Starling continues to discuss the possibility of pursuing an initial public offering. Its leadership remains focused on overcoming regulatory and financial hurdles while maintaining its position in the competitive digital banking landscape.