In conjunction with ASIC’s report on its surveillance of private credit funds offered to retail and wholesale investors (REP 820), and following the private credit expert insights released in September (REP 814), ASIC has published Advancing Australia’s evolving capital markets: Discussion paper response (REP 823), which examines the role private credit is playing in Australia’s financial system and sets out better practices for private markets for participation by investors and borrowers.

ASIC is enforcing compliance with financial services laws by increasing supervision and surveillance of private markets.

The reports note that Australia has experienced rapid expansion in its private credit market over the past 18 months. The market is estimated at $200 billion in assets under management (AUM) and continues to grow, driven by factors such as the increasing size of Australian superannuation savings focused on seeking investment diversification and yield; moderation in bank lending to higher-risk real estate ventures; and increased retail investor participation through ‘evergreen’ and exchange-traded investment products.

Private credit broadly refers to non-bank lending, where loan assets are not traded on public markets or widely issued publicly.

For private credit, ASIC says it will issue a catalogue that summarises fund managers’ legal obligations and related ASIC regulatory guidance, refresh funds management regulatory guidance on a targeted basis, and engage with industry bodies as they work to enhance industry standards.

The reports are relevant to responsible entities and trustees of managed funds, investment management firms, portfolio managers, investment advisers and consultants, financial advisers, industry bodies, service providers and other regulators. It will also interest those considering investing in private credit markets, including retail, wholesale and institutional investors, and superannuation funds.

ASIC’s roadmap for the next 12–18 months covers private markets, data reporting and transparency, superannuation and public markets.

ASIC has identified that it will need better tools from the government for effective supervision of funds, including notification of wholesale funds in operation, data collection, and independent audited financial reports for wholesale funds.

ASIC says that areas where improvement is needed include:

• Inconsistent and unclear reporting and terms, masking portfolio risks and challenging investor decisions;
• Opaque interest margins and fee structures, obscuring the risk and cost to investors;
• Weak governance and poorly managed conflicts of interest, risking harm to investors and confidence;
• Poor valuation practices, impacting entry and exit prices, performance and fees; and
• Inadequate practices in key risk areas indicating poor preparedness for stress scenarios.

ASIC’s report 820 also identifies better practice examples.

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Author: David Jacobson
Principal, Bright Corporate Law
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The information contained in this article is not legal advice. It is not to be relied upon as a full statement of the law. You should seek professional advice for your specific needs and circumstances before acting or relying on any of the content.