Private credit sector must lift standards or face intervention, warns ASIC

The Australia Securities and Investments Commission (ASIC) has called on the Australian private credit sector to lift its standards or face possible intervention.

In an update to its review of Australia’s private credit funds sector launched in February, ASIC voiced concerns over opaque remuneration and fee structures; related-party transactions and governance arrangements; valuation practices; and inconsistent use of terms for effective disclosure.

ASIC chair Joe Longo said the report showed the importance of adhering to existing regulation and highly regarded global standards to ensure confidence in Australia’s rapidly expanding $200 billion private credit sector.

“Private credit is playing an important role in our capital markets and Australia should implement industry standards that align with international best practice,” said Longo.

“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.

“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 expects meaningful action in response to these findings and will not hesitate to intervene where progress falls short.”

ASIC is calling for the consistent adoption of good practices to promote the investor confidence and integrity necessary to sustain a well-functioning private credit market. 

Proper practices should include:

• 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 has shown it means business after slapping alternative asset management giant La Trobe Financial with two interim stop orders last week.