ASIC has called for the private credit sector to lift standards, after a review of the sector found questionable practices
ASIC has called out concerning practices in the $200 billion private credit sector in Australia, after an independent review of the sector.
A report detailing the findings of the review, named REP 814, has called out concerning practices, including opaque remuneration and fee structures, related party transactions and governance arrangements, valuation practices and inconsistent use of terms for effective disclosure. These practices require address, the regulator said.
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
“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,” Joe Longo, Chair of ASIC, said.
Related-party Transactions and Conflicts of Interest
The review was conducted by infrastructure investment executive Richard Timbs and former banker and chief risk officer Nigel Williams. The report provides insights on the size and nature of the sector in Australia and includes examples of better and poorer practices and areas for industry and regulator attention, ASIC said.
For example, the report discussed issues with related party transactions, where loans were being transferred between funds managed by the same head entity. This can create conflict points in relation to asset value in the selling fund and the buying fundm the authors wrote.
“We note that many managers deal with such conflicts by having separate trustees or responsible entities for each fund,” the said.
They also called out situation where a manager may have separate debt and equity exposures to the same entity, in the same or different funds. This could raise a potential conflicts, especially if the underlying entity encounters financial difficulties.
Finally, the report said loans to related party property developers can create conflict points in relation to valuation, fees, loan interest rates and loan terms.
Recently, ASIC issued a number of stop orders against private capital funds over design and distribution issues, including against RELI Capital Mortgage Fund and La Trobe’s US Private Credit Fund and Australian Credit Fund.
The regulator said it would issue guidance on key principles in November, when ASIC will release its response to the discussion paper on Australia’s evolving capital markets, alongside its retail and wholesale surveillance findings.
“The response will include clear guidance on key principles, along with additional research and expert insights to guide our future priorities, work program and regulatory roadmap,” the regulator said.
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