Lift standards or face stronger action, ASIC tells private lenders

The report builds on a report commissioned by ASIC on the private credit market in Australia by Richard Timbs and Nigel Williams, which outlined both positive and poorer practices within the sector. For example, it found that found that more needs to be done within the industry to provide greater confidence in the valuation of unlisted fund assets, including by both superannuation trustees and auditors.

Eight core failings

The need for improvement has been driven by compliance issues identified across 28 retail and wholesale funds, underscoring that poor practices, high-risk assets, and opacity are creating fertile ground for market failures.

ASIC's surveillance found failures across the sector are inconsistent with financial services laws and previous guidance.

ASIC's report identified that:

• Real Estate Concentration: Australia’s private credit market is highly concentrated, with 40 to 60 per cent of wholesale and retail funds invested in real estate, particularly higher-risk construction and development.

• Transparency Gaps: Funds show less transparency in disclosures relating to portfolio mix, impaired assets, related-party transactions, and income-producing versus non-income-producing loans.

• Opaque Fees: Complex and opaque fee structures are common, reducing investor returns and hindering the ability to compare costs between funds.

• Governance Lapses: Failings include a lack of independent or active oversight where the RE, trustee, and investment manager are part of the same group, heightening conflict risks.

ASIC’s 10 principles

To assist the industry in complying with its obligations, the regulator has developed 10 principles drawn from existing legal frameworks, which the sector must use to urgently benchmark and lift its current practices. It said this would enhance trust and integrity in the private credit fund sector.

ASIC is now challenging the private lending industry to immediately adopt the 10 principles for "private credit funds done well' as a benchmark, or face heightened regulatory intervention.

The principles demand robust, investor-centric operations, covering the entire lifecycle of fund management:

1. Stewards of other people’s money: Responsible entities (REs) and trustee boards should actively oversee fund operations, including valuations, conflicts, liquidity and impaired assets, to ensure fair and proper conduct.

2. Organisational capability: Maintain adequate staffing, systems, and capital, with regular reviews as funds grow in size and complexity. Ensure appropriate expertise and experience in leadership and staff, including in credit, risk, compliance, systems support, valuation, reporting, liquidity, and conflict management. Undertake appropriate monitoring and supervision, including of corporate authorised representatives.

3. Transparency: Adopt consistent reporting practices and terminology, including timing, form and substance.

4. Design and Distribution: Determine an appropriate target market, taking care that it reflects any high-risk or complex fund structures or features. Strengthen distribution oversight to ensure product suitability (including via platforms). Platforms provide clear and accessible information.

5. Fees and Costs: Disclose all fees and income streams (e.g. management and performance fees, borrower-paid fees, origination margins, default interest). Be clear about the manager’s total remuneration. Avoid complex fee and margin structures that obscure the true cost to investors.

6. Conflicts of Interest: Avoid arrangements (i.e. fees, interest, co-investment, loan structuring) that unduly favour one party. Ensure clear and fair allocation across funds. Disclose related-party transactions and multiple exposures to the same borrower with independent oversight.

7. Governance: Establish well-defined, documented roles, decision-making and escalation processes, with clear accountability. Embed a culture of risk awareness, compliance and transparency. Empower staff to challenge poor practices. Ensure independent oversight, with REs and trustee boards independent of the business. Avoid overly complex structures that heighten the risks of conflicts and unfair treatment of investors and borrowers.

8. Valuations: Implement clear and consistent valuation methodologies, policies and processes that produce fair valuations. Undertake valuations regularly (monthly or quarterly), with appropriate independence. Include periodic external audits.

9. Liquidity: Disclose redemption terms, liquidity gates and stress testing practices to investors. Ensure the source of funds for distributions is sustainable and stems predominantly from cashflows generated by underlying assets. Avoid paying distributions from investor capital or that of new investors.

10. Credit Risk: Apply standardised credit assessment and monitoring frameworks as part of a well governed and documented risk management framework. Document credit decisions and risk ratings, and regularly review borrower performance. Establish escalation protocols for early signs of distress. Use portfolio stress tests. Apply a consistent approach to impairments, and ensure independent oversight of credit, default and impairment processes.

ASIC’s roadmap for the next 18 Months

While backing the growth of private markets, ASIC noted that the current regulatory settings for wholesale funds are inefficient, reactive, and means some risks are going unchecked.

ASIC’s roadmap for private credit in the next 12–18 months focuses on a range of areas, including:

• Enhanced Surveillance: Conducting targeted surveillances of the funds management sector—especially private credit funds with real estate lending strategies—with a specific focus on distribution, fees, margin structures, and conflicts of interest.

• Legislative Reform: Engaging with the Federal Government on potential reforms to legislative settings for managed investment schemes, including the need for mandatory notification of wholesale funds in operation and better data collection tools.

• Industry Engagement: Continuing to work with industry bodies on the review, development, and adoption of enhanced sector standards.

Other areas include:

• enhancing market integrity across private, public, and superannuation markets through enforcement actions and continuous surveillance of financial reports;
• modernising regulatory guidance by updating key documents to address current risks and licensing requirements; promoting data reporting and transparency with a pilot program to inform future law reform; and
• fostering competition and innovation by streamlining the IPO process, reviewing listing requirements, and inquiring into market infrastructure providers.

This builds on work already taken in private credit in the past year, including its action taken such as issuing design and distribution interim stop orders against some retail private credit fund operators and commenced enforcement investigations. This work addresses potential harm when products are marketed and distributed in ways that are unsuitable for retail investors.

'Acting now will help avoid future disruption'

“While Australian investment bodies have established general standards and guidance and, to varying degrees, they apply some international standards, including International Private Equity Valuation standards, gaps remain - especially in private credit,” the report reads.

“Industry standards help promote good practices in how participants across the funds management industry comply with the law and promote consistency…

“We encourage industry to continue improving industry practices through strengthened and expanded standards for private credit and private markets more broadly within the next 18 months.”

ASIC emphasised that improvements should include:

• adopting consistent core standards: including on governance, effective disclosure, valuations and risk management practices, and implementing measures to support compliance and accountability

• defining key loan types in private credit: including investment grade, senior and secured, and other key terms (including self-assessed credit ratings and default and impairment events) to assist understanding of investment performance and risk exposure by investors, and to avoid a mismatch in risk taken on by investors.

• promoting fund comparability: through consistent disclosure and reporting, including consistent reporting formats

• enhancing guidance for the valuation of unlisted assets: including what is meant by valuation, and the role and adoption of different methodologies and data inputs, including public market equivalent valuation methods.

ASIC Commissioner Simone Constant commented: “‘Our roadmap sets out a future where private credit grows from strong foundations to give access to opportunity for investors and to capital for business and growth.

“Acting now to address poorer practices will help avoid future disruption.

“It is clear increased oversight of private markets is essential, and ASIC will continue its surveillance and enforcement work in private credit to ensure compliance with the law. If we do not see material improvements, we are prepared to pursue stronger regulatory action.”

“ASIC’s clear message is we want both options for Australia - settings that promote healthy, vibrant public and private markets - we want to hear your ideas, and we are watching to ensure opportunity and risk are appropriately balanced.”

ASIC chair Joe Longo concluded: “This roadmap lays out the choices and future of Australia’s markets. We want our markets – private and public – to grow. That growth means stronger businesses, more jobs and a boost to our economy..

“We want to lay the foundations for managed investment schemes and private markets to sustainably thrive for the future benefit of business and investors.

“We see enormous opportunity for public and private markets to thrive and grow together especially as they embrace new technology and innovation,” he said.

Longo continued: “At the heart of this roadmap is a clear message, that Australia and ASIC want to be backers, not blockers of investment and capital.

"This roadmap is the launchpad for action, not the finish line. Australia should be bold and seize the opportunities ahead, so that our markets remain strong, dynamic and globally competitive.”

[Related: ‘Enhance standards’: ASIC tells private credit sector]