The regulator has urged industry bodies to lift standard across private credit sector after a major new report found some concerning practices that needed improving and better transparency.
The Australian Securities & Investments Commission (ASIC) has warned that private lenders must lift their standards, after a major review of the $200-billion private lending market revealed troubling practices.
The calls come after ASIC commissioned a review of Australia’s private credit funds sector by infrastructure investment executive Richard Timbs and former banker and chief risk officer Nigel Williams, in order to help it better understand the sector and whether there needs to be any increased regulatory attention.
The report, REP 814, has said that the private lending market has expanded rapidly in recent years, meeting demand from both borrowers and investors, with approximately half estimated to be invested in real estate–related assets.
While still small enough that it doesn't threaten financial stability, the report cautioned that the sector is not homogenous, and that segments of the market are lagging global standards on governance, valuation and transparency.
The authors noted that while the private credit market is "serving its purpose" from a borrower perspective (i.e. enabling borrowers to access finance when they otherwise may not have been able to) and that the institutional end of the private credit market (including large superannuation and insurance companies) are showing "good operating practice", there are areas that warrant improvement.
These issues particularly included:
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Remuneration and fee structures that obscure the true cost of fund management: The report found that many funds retain 50–100 per cent of borrower-paid fees and net interest margins without disclosure, meaning investors may significantly underestimate the total manager remuneration and the actual cost of the fund.
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Related-party lending and intra-fund transfers: Loans to related developers or transfers between funds managed by the same group often occur without independent valuation or robust governance, increasing risks for investors.
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Weak or inconsistent valuation methods: Some funds do not perform quarterly valuations, rely on internal processes without independent review, or have credit staff valuing assets where fees depend on those same valuations, leading to distorted credit risk assessments.
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Liquidity mismatches: Marketing materials often promote consistent monthly distributions, even when underlying real estate construction and development loans lack sufficient cash income, meaning distributions may be funded from new investor capital or existing capital rather than actual loan returns.
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Misleading or inconsistent use of terms such as “investment grade” and “senior debt”: Terms like “investment grade,” “secured,” and “senior debt” are often used without formal ratings or clear definitions, creating confusion and potentially understating investment risk.
The report also warned that growing retail exposure to private credit should be a priority for operational review and improvement. ASIC questioned whether retail investors, particularly SMSFs, can fully understand investment risks compared to prudentially regulated institutions that enjoy greater transparency and bespoke arrangements.
“Whilst the Australian private credit market hasn’t experienced credit cycle and associated downturn, the clear observation is that commercial property construction and development presents the greatest risk of impairment and credit loss based on asset concentration and investment disclosure," it said.
REP 814 estimated that about half of Australia’s private credit exposure is tied to real estate, particularly higher-risk construction and development projects, with a worrying concentration of less experienced investors.
The report included a large chapter on real estate funds - flagging concerns that some real estate private credit funds targeting self-managed superannuation funds (SMSFs) are marketing monthly distributions of around 0.7–1.0 per cent, despite not generating regular interest payments. ASIC said this raised legitimate questions about whether distributions were instead being funded by loan capital drawdowns or inflows from new investors – practices that could leave retail investors exposed to hidden risks.
REP 814 concluded that the issues most warranting regulatory inspection include:
- Management and disclosure of conflicts of interest
- Valuation practices
- Fee arrangements and alignment of interests between managers and investors
- Liquidity facilitation
- Investment reporting and transparency
- Distributions potentially paid from capital without clear disclosure
- Definition and use of key terms
As such, the report writers suggested that improvements could be made through:
- regular reporting of fund composition and independent loan valuations
- disclosure of:
- whether credit ratings are internal or third party (if used)
- the scale of mezzanine debt and equity holdings
- all manager fees and earnings (including any interest earned)
- liquidity risk management and leverage, and
- the fund’s relevant policy
- transparency of related-party or inter-fund transactions, along with independent review
- consistency in the use of investment and real estate terminology.
ASIC chair Joe Longo said that while the report and industry feedback has underscored that private credit can complement the banking system and provide further opportunities for innovation, employment and growth "if done well", the report showed the importance of raising standards to match international best practice.
“Private credit is playing an important role in our capital markets and Australia should implement industry standards that align with international best practice.
"Enhanced standards are needed to lift practices across the sector. They will help promote confidence, improve market integrity and empower investors to make informed decisions.
"When an industry agrees on clear standards, it shows a strong commitment to doing things right and we welcome the industry's commitment to leading this work. They need to act decisively," Longo said.
He continued: "While the report highlights some encouraging practices, it also reveals concerning behaviours that fall short of market expectations and more importantly that are inconsistent with existing financial services law. With the pace of growth in size and reach of the domestic sector, this becomes all the more important.
"Promoting confident and informed market participation is a shared responsibility, including those already demonstrating and upholding high standards."
ASIC noted that these practices could breach requirements that financial services be provided “efficiently, honestly and fairly” and warned that it will continue to issue stop orders and commence enforcement action where misconduct is found.
The outgoing chair said that ASIC "expects meaningful action in response to these findings and will not hesitate to intervene where progress falls short".
"ASIC’s message is that the Australian industry needs to step up to adopt and implement industry wide standards to drive greater global alignment but most of all promote market integrity and transparency.
"ASIC is taking a proactive stance in response to the findings of this report and other surveillance activity, with multiple enforcement investigations underway for egregious conduct.”
The report is part of ASIC’s wider review of both public and private markets, launched earlier this year. More than 90 submissions were received in response to its discussion paper, with many stakeholders flagging transparency as a central issue.
ASIC will release a comprehensive package of findings in November, including its full response to submissions on Australia’s evolving capital markets surveillance results on retail and wholesale private credit. This release will include two additional expert reports, including an international comparison of disclosure standards guiding principles for compliant private credit; and a catalogue of regulatory guidance for funds management.
The regulator said the goal was to provide clear direction for the industry, reinforce investor confidence and strengthen transparency in Australia’s growing private credit market.
ASIC has already begun flexing its powers in the space. Last week, ASIC issued interim stop orders against the RELI Capital Mortgage Fund and La Trobe Australian Credit Fund products, citing deficiencies in their target market determinations (TMDs). The regulator said both funds’ target markets suggested inappropriate portfolio allocations given the risks, and flagged concerns with how the products were described and distributed to retail investors.
These moves form part of ASIC’s broader surveillance of private credit, which has zeroed in on transparency, valuation practices, liquidity management, conflicts of interest and the fair treatment of investors. Since the design and distribution obligations (DDO) regime came into effect, ASIC has made almost 100 interim stop orders, including several in private credit.
The regulator has warned it will continue to act quickly where target markets are poorly defined or disclosure is misleading, saying failures in Australia’s fast-growing private credit sector are “on the horizon” if standards are not lifted.
Its final package of findings, due later this year, is expected to outline both surveillance results and stronger guidance for industry practice.
[Related: ASIC begins cracking down on private credit funds]
