ASIC focus will mean greater scrutiny for Australian non-bank lenders

In recent years, private credit funds and non-bank lenders have emerged as significant players in the financial landscape, providing essential capital to businesses and individuals alike. However, the industry has often operated in the shadows, resulting in concern over limited oversight and transparency.

The regulator’s focus will undoubtedly herald a new era of regulation and accountability, meaning non-bank lending may no longer be an opaque industry.

Concerns over the lack of transparency in the market particularly relate to disclosure of fees and expense allocation practices as well as other conflicts of interest. ASIC is also closing in on the industry’s marketing of funds, including the use of hypothetical performance valuation methodologies – in particular for property funding – and adherence to fund documents.

Private credit is a fast-growing asset class in the industry through which investors can lend to companies that are unable to secure traditional bank lending or are seeking something different. Often, this is done through private credit funds, which raise money from investors seeking higher interest rates before lending that money directly to businesses – including property developers.

These funds may offer more flexible lending terms and can cater to borrowers who may not meet stringent criteria of conventional financial institutions. This flexibility has made them an attractive option for small to medium-sized enterprises, and other others with unique financial needs.

An investigation by the Australian Financial Review recently found evidence that private credit funds have been reluctant to write off badly performing loans, with some instead lending to companies that quickly go broke and paying themselves more money in fees than they hand over to their investors.

As part of the increased focus, ASIC has put together a dedicated team for the first time to investigate the need for regulations in the sector.

It comes as figures show a growth in private debt funds in Australia, now 10% of total funds in the Asia-Pacific region in the year to date compared to less than 5% two years earlier. There is also an increase in overdue loans facing non-bank lenders.

While the specifics of potential regulatory changes remain to be seen, there are several areas where ASIC’s focus could lead to new requirements for non-bank lenders. These may include enhanced reporting requirements obliging lenders to provide more detailed and frequent reports on their lending activities, risk exposure, and financial performance. The changes may also include stricter governance standards to ensure that private credit funds operate with integrity and accountability. Non-bank lenders may also need to disclose more information about their lending practices, including the criteria they use to assess borrowers, the terms of their loans, and the performance of their loan portfolio. Greater emphases on risk management practices is also likely within the sector.

For non-bank lenders, ASIC’s heightened scrutiny presents both challenges and opportunities. On one hand, increased regulation could lead to higher compliance costs and operational burdens. Non-bank lenders may therefore need to invest further in robust governance frameworks, enhance their reporting mechanisms, and ensure that they are managing conflicts of interest effectively.

On the other hand, greater transparency and accountability could enhance the credibility of the private credit sector. By adhering to higher standards of governance and reporting, non-bank lenders can build trust with investors and borrowers, potentially attracting more capital and expanding their market reach.

For now, non-bank lenders across Australia should also ensure they are fully aware of their fund documents and are complying with these given additional attention from ASIC. Robust procedures and marketing plan reviews are important. Private credit funds should also review their existing fee expense procedures, carefully identifying any conflicts of interest.

Non-bank lenders should engage with ASIC and other stakeholders to stay informed about emerging regulatory developments and provide input on proposed changes.

Co-written by Jesse McNaughton of Pinsent Masons.