Starling steps up legal action against debtors amid defaults and FCA probe

Starling Bank is pursuing several debtors that have never shown signs of active trading, as the fintech that relied on government-backed Covid-19 loans battles rising defaults and a probe into its financial-crime controls.

Since May, Starling has filed winding-up petitions against 24 companies that have defaulted on loans, UK court filings show. Most of the entities have reported little-to-no business activity, three have never filed accounts, while a further six have been dormant since incorporation, according to company filings analysed by the Financial Times.

The London-headquartered fintech’s legal action against bad debtors comes as it is has flagged a spike in defaults, and last week revealed that it was under investigation over its financial crime controls by UK regulators.

Starling said in its annual report last week that the Financial Conduct Authority had opened an investigation in November focused on “aspects of its anti-money laundering and financial crime systems and control framework”. It also warned that the impact of the probe could be material.

One of the companies that Starling has filed against, Cambridge Newton Capital, presents itself as an investment firm that also provides “financial planning advice” to customers but has never been FCA-regulated. The company, which received a loan from Starling, has filed micro company accounts during its mostly dormant lifespan. It deleted its website after being contacted by the FT.

Cambridge Newton Capital did not respond to requests seeking comment.

Another debtor against which a winding-up petition has been lodged, Bedford-based Boyee Trading Ltd, has filed accounts claiming that for every year of trading “the average number of employees during the year was NIL”. Boyee could not be reached for comment via email or phone.

A collection of others have only ever published accounts with a few hundred pounds worth of transactions.

Eight of the entities were newly incorporated in 2019 or afterwards, before successfully applying for a loan from Starling.

About 90 per cent of Starling’s outstanding £830mn in loans to small and medium-sized enterprises, or SMEs, was guaranteed by the UK government as of the end of March, it reported last week.

In 2021 the bank was owed more than £2.1bn in government-backed debt, which it had 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 had paid off about £630mn of its impaired bounce back loan debt since 2021.

A spokesperson for Starling Bank said: “We have an ongoing process of review of all our lending and take a proactive stance on recovery of defaulted loans.”

The fintech was continuing to take steps to “identify and report suspected fraud and wrongdoing to law enforcement and other agencies and to work with them as appropriate”, they added.

Starling said it was co-operating with the FCA probe and that “in some cases, have proactively identified and reported areas for improvement to our regulators”.

Starling has previously attracted ire from politicians after it expanded its loan book largely using government-backed lending schemes with minimal customer checks. Starling differed from most bigger rivals by lending to new customers rather than existing ones.

The bank set aside £13.9mn for bad loans in the year to the end of March, up 40 per cent on the previous year as it flagged a rise in default rates in its SME loanbook.

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 control were starting to translate into potential enforcement activity against big players such as Starling and Monzo, which is also under a similar probe.

Monzo said earlier this month that the FCA had told it that it had dropped a criminal money-laundering investigation, though a civil probe is ongoing.

Westmore said: “We could start seeing some big fines for some of these fintechs in the next couple of years”.