Any regulatory intervention into private markets for retail investors should only aim to protect unadvised retail investors as the current regulatory settings sufficiently cover advisers, the Financial Services Council has warned the corporate regulator.
In a submission to ASIC’s private market discussion paper, the FSC made 71 recommendations and argued the current regulatory regime was fit for APRA-regulated super funds as well.
For advisers, the FSC argued there was already several fiduciary obligations in place as well as laws like the Design and Distribution Obligations, brought in after the Hayne royal commission, to ensure retail products are being distributed to the right clients.
Instead, the FSC suggested ASIC should assess if there are any shortcomings in the existing regulatory obligations, or if there is any non-compliance.
On private credit specifically, the council downplayed any risks to the sector arguing any further imposition on prudential controls was unnecessary. The FSC believed private credit funds have a legitimate role to play in financing activities, particularly when banks are unwilling to do so.
ASIC said in its original discussion paper there are “failures on the horizon” in the private credit sector.
“There will be more failures in private credit investments, and Australian investors will lose money,” the ASIC paper said.
“ASIC is increasing its focus on private credit, not to constrain participation but with a view to being well informed and to test whether investment offers comply with existing laws.”
Scrutiny of private credit access by retail investors ramped up after major licensee Count recommended its advisers sell holdings in at least three funds run by Metrics Credit Partners, leaving the fund on the back foot to defend the credibility of its performance as well as the asset class.
SQM Research placed the private credit sector on “watch”, while Lonsec would be commencing a review of the asset class as part of their regular review cycles.
The scrutiny from the advice and research sector gained praise from ASIC Commissioner Simone Constant, who was “pleased to see” the industry initiate its own re-assessment of the asset class.
The FSC submission conceded there needs to be improved disclosure where a private credit fund has debt obligations above a certain threshold converted into equity as a result of a loan default or related negotiation.
The FSC also suggested ASIC should “evaluate current regulatory obstacles” to help additional credit ratings agencies enter the Australian market, to increase the options available for ratings to be given to loans.
ASIC’s paper sought to identify regulatory gaps between private and public markets, including if the latter was overly regulated and had become unattractive for companies to list on stock exchanges.
But there have also been strong concerns private markets have been insufficiently regulated due to worries over transparency, the accuracy of valuations, and illiquidity.
Despite the regulatory scrutiny, research found 40 per cent of wealth managers believe a lack of private market access was a “threat” to the business due to the need to meet client demands for the asset class.
It comes as retail and wholesale investors have begun to gain better access to private markets, with HUB24 and Netwealth partnering with Reach and iCapital respectively, and BT partnering with alternative education provider Preqin.
The council said some “sensible and targeted regulatory enhancements” can be made which should centre around a focus on improving governance around asset valuations and improved disclosure processes.
“The FSC suggests that these can mostly be accomplished through ASIC regulatory guides and an industry-led process to develop best practice principles for fund governance and disclosure in cooperation with ASIC,” the submission, authored by FSC executive director of policy Chaneg Torres, said.
The higher fees of private market funds were also defended with the council arguing the complex nature of the products and specialised skills, required to executive private asset investments and the lowest fee product, is not always appropriate for retail investors.
