The corporate regulator is threatening Australia’s nascent private lending industry with tighter regulation if it does not see a significant lift in standards.
The rapidly growing lending sector, known as private credit, has extended around $200 billion worth of loans, much of it to higher-risk real estate players and property developers at interest rates well above those offered by banks.
It raises most of its money from private investors via both wholesale and retail funds.
The Australian Securities and Investments Commission (ASIC) has released a lengthy paper outlining ways to bring the sector into line with practices in the banking sector.
ASIC chairman Joe Longo stressed that the aim of the exercise was to encourage investment by ensuring confidence in both public and private markets.
“We want to encourage the market as a whole,” he told a media briefing on Tuesday.
A little over a year ago, ASIC launched a surveillance program that covered a wide range of industry participants to identify shortcomings and front-run potential threats.
What it uncovered was inconsistent and unclear reporting, risks that had been downplayed, opaque fee structures, conflicts of interest and poor valuation practices.
It also resulted in action against one of the biggest players, La Trobe Financial, owned by Canadian asset manager Brookfield, which was forced to temporarily block investments in one of its flagship retail funds.
The stand-off was resolved a little over a month ago when La Trobe agreed to make alterations to its investment documentation.
ASIC has outlined ways to bring the private lending industry into line with practices in the banking sector. (Supplied: asic.gov.au)
Despite the revelations, ASIC commissioner Simone Constance reiterated that private credit, when done well, was good for the economy and for the country.
“The problem is that it is not consistently done well,” she told the briefing.
How you became a banker to high-risk borrowers
The deep dive into private and public credit markets is the latest step in an 18-month exploration into the workings of our equity markets, including the ASX Ltd.
“Markets aren’t some abstract construct,”
Mr Longo said.
“They represent the money and investment flowing through our economy. They are literally the lifeblood that lets businesses grow and employ people.
“To that end, we want to ensure that we’re making active choices about how these markets develop so we get the markets we want.”
The alternative, he said, was that Australia could end up a passive recipient of changes from outside, which may not be for the better.
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When it comes to private markets, Mr Longo noted that their acceptance has been driven by the incredible rise of the Australian superannuation system, which has become one of the biggest savings pools on the planet, and which has consistently sought out higher yields.
Most Australians now are exposed to private markets through their super funds, but an increasing number of local investors…
Read More: ASIC shone a light on private lending and did not like what it saw
