Starling Bank has stepped up legal action against borrowers who have defaulted on loans, many of which were backed by UK government pandemic lending schemes, as the digital bank grapples with rising loan losses and a regulatory investigation into its financial crime controls.

Starling Bank Cracks Down on Defaulted Debtors as Loan Losses Mount

Court filings show that since May, Starling has filed winding-up petitions against 24 companies over unpaid debts. An analysis of corporate records indicates most of these entities have reported minimal business activity, with three having never filed accounts and six being dormant since incorporation. Eight were newly formed in 2019 or later before successfully obtaining loans from Starling Bank.

The legal moves come as Starling flagged increasing defaults in its £830 million small business loan portfolio, about 90% of which is guaranteed by the government under Covid-19 relief programs.

The bank also disclosed last week that the Financial Conduct Authority (FCA Financial Conduct Authority (FCA) The Financial Conduct Authority (FCA) is the largest financial regulator for all financial markets in the United Kingdom (UK).The UK regulator is responsible for the conduct of firms authorized under the Financial Services and Markets Act 2000. Moreover, the FCA is also responsible for the regulation of behavior in retail and wholesale financial markets, supervision of the trading infrastructure that supports those markets, and the prudential regulation of firms not regulated by the PRA. Its rol The Financial Conduct Authority (FCA) is the largest financial regulator for all financial markets in the United Kingdom (UK).The UK regulator is responsible for the conduct of firms authorized under the Financial Services and Markets Act 2000. Moreover, the FCA is also responsible for the regulation of behavior in retail and wholesale financial markets, supervision of the trading infrastructure that supports those markets, and the prudential regulation of firms not regulated by the PRA. Its rol Read this Term) opened a probe last November into "aspects of its anti-money laundering Money Laundering Money laundering is a blanket term to describe the process by which criminals disguise the original ownership and proceeds of criminal conduct by making such proceeds appear to be derived from a legitimate source.Money laundering is an issue that traverses countless industries and sectors, which includes the financial services space. Though criminal money may be successfully laundered without the assistance of the financial sector, billions of dollars’ worth of criminally derived money are laund Money laundering is a blanket term to describe the process by which criminals disguise the original ownership and proceeds of criminal conduct by making such proceeds appear to be derived from a legitimate source.Money laundering is an issue that traverses countless industries and sectors, which includes the financial services space. Though criminal money may be successfully laundered without the assistance of the financial sector, billions of dollars’ worth of criminally derived money are laund Read this Term and financial crime systems and control framework." Starling warned the investigation's impact could be material.

"Starling Bank intensifies legal action against debtors as 90% of its SME loans are UK government guaranteed. A move amid defaults and FCA probe. #StarlingBank #SMEloans #FCAprobe #UKgovernment"https://t.co/Yxv0vEZRyd

— Benjamin Schott (@SchottBenni) June 19, 2024

This information was included in the company's latest FY24 report, which indicated that it generated £593 million from net interest income while the number of customer accounts increased to 4.2 million from 3.6 million.

"We have an ongoing process of review of all our lending and take a proactive stance on recovery of defaulted loans," a Starling spokesperson commented for Financial Times, adding that the bank is cooperating with the FCA probe and has "proactively identified and reported areas for improvement to our regulators" in some cases.

Lending Spree Haunts Starling

Among the companies Starling is pursuing is Cambridge Newton Capital, which presents itself as an investment firm offering financial advice but has never been FCA-regulated.

The company, which received a Starling loan, has filed bare-bones accounts during a mostly dormant existence and recently deleted its website. Another debtor, Boyee Trading Ltd, has consistently reported having no employees in its annual filings. Neither firm responded to requests for comment.

Starling has faced criticism for its aggressive expansion of lending under government schemes with minimal vetting of new customers. The bank set aside £13.9 million for bad loans in the latest fiscal year, up 40%, as SME defaults rose.

Figures show the government has already paid off about £630 million of Starling's impaired bounce-back loans since 2021.

At the end of last year, the company was considering going public and was preparing for an IPO. However, the question now is whether current issues might delay this decision.