A $200 billion industry is under scrutiny: Australia's private credit sector faces regulatory warnings and calls for reform
The Australian Securities and Investments Commission (ASIC) has issued a stark warning to the country's booming private credit sector, highlighting a range of issues that could harm investors and erode trust in the industry. The sector, which has surged since the global financial crisis, is now facing intense scrutiny from regulators due to concerns over opaque fee structures, poorly managed conflicts of interest, and unclear communication about risks to investors.
Private credit, where fund managers raise money from investors and lend directly to borrowers, is a rapidly growing and unregulated part of global finance. It has filled the gap left by banks as they retreated from riskier lending, such as to property developers. In Australia, the sector's growth has been fueled by a wave of investment from superannuation funds.
ASIC acknowledges the potential benefits of private credit for the economy, citing figures from EY that show the domestic market has ballooned by over 500% since 2015 to exceed $200 billion. However, the regulator emphasizes the need for significant improvement in industry practices.
In a report to be published on Wednesday, ASIC reveals that its surveillance uncovered a range of failings that could harm investors, erode trust, and hinder the industry's development. The watchdog's chair, Joe Longo, warns that unless better practices are adopted, the sector may face regulation.
Longo states, 'ASIC will continue to closely monitor this sector and expects to see improved practices. If not, we will advocate for additional regulation.' The regulator's concerns are not limited to private credit; they also unveiled a broader 'roadmap' to encourage the growth of both private and public capital markets, including measures to boost sharemarket listings.
Despite the ASX's market capitalization nearly doubling in the past decade, the number of listed companies has fallen, and the value of equity raised in initial public offerings (IPOs) has plummeted. ASIC aims to reinvigorate the IPO market and suggests that regulation may be a perceived barrier to listings. It encourages the ASX to simplify its corporate governance principles to attract more businesses to the sharemarket.
Longo highlights the importance of growing both public and private markets for economic growth and job creation. He emphasizes that markets are not abstract but represent the flow of money and investment through the economy, serving as the lifeblood for business expansion and employment.
ASIC's findings on private credit are based on surveillance of 28 funds, revealing various 'poorer practices.' These include lack of transparency about interest rates, weak governance, poorly managed conflicts of interest, and poor valuation practices. The regulator also raised concerns about inconsistent communication regarding non-performing loans and the definition of terms like 'default' and 'loan security'.
Some bank bosses have previously called for stronger regulation of private credit, and the Australian Banking Association's chief executive, Simon Birmingham, welcomes ASIC's focus on the industry, viewing it as a step towards ensuring high standards in investor protection and market integrity while increasing transparency.
