ASIC will review the retail distribution of private credit funds through advised channels next year as it releases a new surveillance report showing mixed practices from fund managers.
The surveillance covered 20 retail funds and eight wholesale funds including products managed by Metrics, La Trobe, Challenger, Qualitas and Ares.
ASIC said some of the poorer practices identified in the review were inconsistent with the regulator’s guidance and may even contravene financial services law, including AFSL obligations to provide financial services efficiently, honestly and fairly, as well as prohibitions against misleading or deceptive conduct.
Looking forward, ASIC said the focus of its private credit surveillance in 2026 will include fees, margin structures and conflict of interest management in wholesale private credit funds with a focus on real estate lending.
Next year’s work will also include distribution of private credit funds to retail clients through direct and advised channels.
“In due course, we will also seek to address areas of identified poorer practices within wholesale private credit funds by updating our regulatory guidance to make it more clearly applicable to wholesale funds,” ASIC’s report said.
“We will also continue using our surveillance work to highlight the need for key legislative reforms for managed investment schemes – to strengthen investor protection, address data gaps, promote transparency and competition in the sector, and better align with international standards.”
Furthermore, ASIC highlighted the role played by researchers and how funds rely on fund ratings from external research houses to support marketing efforts.
“Given the considerable influence a rating can have on a fund’s distribution and an investor’s decision, research houses hold a unique position within the market,” the report said.
“This role enables them to potentially drive improvements across critical areas such as fund governance, valuation practices, risk management practices and disclosure standards. It is therefore important for research houses to ensure the robustness of their ratings processes in the private credit market, to help influence industry practices and support trust and confidence in this market.”
The role of researchers in the distribution of retail and wholesale public markets will be a core topic at the Professional Planner Researcher Forum next month.
The surveillance report was released in conjunction with a response report to its February discussion paper about the regulation of public and private markets.
ASIC had called for industry to develop private credit best practice principles, although the regulator will still have its own guidance.
“What we’re saying to that sector is here’s what we need to develop standards or principles that reflect and deal with these poorer practices that we’ve identified,” ASIC chair Joe Longo said in a media briefing on Tuesday ahead of the release of the report.
“We don’t think at this point law reform or additional regulation is required to deal with that, provided the sector builds on and develops and acts on the principles and standards that we’re calling for.”
Poor practice
The report highlighted several issues of poor practice from the funds where improvement is greatly needed, following on from its interim report released in September.
This lack of standardised practices includes governance and transparency, fees, treatment of net interest margins, valuation methodologies, conflicts of interest, liquidity and credit management.
Longo said during the briefing said there are some significant players in the private credit sector where they haven’t been “entirely happy” with their practices and enforcement action might be required.
“We will be focusing very much on them in the next six months or so to see whether the issues we’ve raised coming out of the surveillance with them are being addressed.
“If they’re not being addressed, they can frankly assume that we’ll be taking more targeted enforcement action.”
ASIC said the funds in the review reported low levels of default – ranging from 0 per cent to 6 per cent of the loan book – but that funds defined the term differently and described “loan security” inconsistently, and that funds may not be reporting to investors a true reflection of non-performing and distressed assets.
Only four of the 28 funds published information about the interest rates or ranges charged to borrowers, while only two retail funds quantified the interest earned from their assets and borrower fees and disclosed the retained amounts as part of their wider management fee in the product disclosure statement (PDS).
The report said only one wholesale fund passed on the full economic benefits of interest earned from its assets and other borrower fees, while in another fund the manager took a “substantial” interest margin of 7.5 per cent.
Only seven retail and five wholesale funds had detailed, written credit impairment and default management policies in place and the regulator was concerned that credit risk was not properly managed across the market.
Half of the wholesale funds did not have a policy governing the fair allocation of investment opportunities across multiple funds and co-investment vehicles managed by an investment manager with overlapping investment strategies.
Most funds in the review did not have effective separation between the investment committee approving loans and the representatives responsible for monitoring loan assets’ performance and value after allocation into a fund, or for overseeing independent third-party valuation of loans.
Of the wholesale funds, only two performed stress testing as part of their liquidity risk management.
The surveillance report found that while private credit is going quickly it is still immature and untested in a system stress scenario and there is a lack of consistent, well-established practices.
However, the report laid out 10 key principles for best practice in private credit for fund managers, responsible entities (REs) and trustees.
| Principles for private credit done well | ||
| Principles | Why it matters | Considerations for private credit participants |
| 1. Stewards of other people’s money
REs and trustees act as stewards of investor capital, ensuring that their decisions are fair and in investors’ best interests |
Safeguards assets, promotes fairness, and maintains trust in the system. | RE and trustee boards should actively oversee fund operations, including valuations, conflicts, liquidity and impaired assets, to ensure fair and proper conduct. |
| 2. Organisational capability
Human, financial and technological resources are adequate. REs and trustees operate efficiently, honestly and fairly |
Supports operational resilience, investor protection and regulatory compliance. | Maintain adequate staffing, systems and capital, with regular reviews as fund size and complexity grow. Ensure appropriate expertise and experience, including in credit, risk, compliance, systems support, valuation, reporting, liquidity and conflict management. Undertake appropriate monitoring and supervision, including of corporate authorised representatives. |
| 3. Transparency
Investors have access to timely, transparent information on investment strategy, exposures, valuations, risks and fees |
Supports comparability and informed decision making by investors. | Adopt consistent reporting practices and terminology, including timing, form and substance. |
| 4. Design and distribution
Design and distribution practices are fair, transparent and appropriately targeted for investors |
Ensures investors receive clear, accurate information to make informed decisions, and mitigates against mis-selling of unsuitable products. | Determine an appropriate target market, taking care that it reflects any high-risk or complex fund structures or features. . Strengthen distribution oversight to ensure product suitability (including via platforms). Platforms provide clear and accessible information. |
| 5. Fees and costs
Fees and costs are fair and transparent, giving investors and borrowers a clear view of total costs |
Enables informed decision making and promotes trust. | Disclose all fees and income streams (e.g. management and performance fees, borrower-paid fees, origination margins, default interest). Be clear about the manager’s total remuneration. Avoid complex fee and margin structures that obscure true cost to investors. |
| 6. Conflicts of interest
Conflicts of interest are identified, disclosed, and effectively managed or avoided |
Promotes trust and fair treatment of investors, borrowers and other parties. | Avoid arrangements (e.g. fees, interest, co-investment, loan structuring) that unduly favour one party. Ensure clear and fair allocation across funds. Disclose related party transactions and multiple exposures to the same borrower with independent oversight. |
| 7. Governance
Structures, processes and people promote sound decision-making, compliance and accountability |
Drives responsible decisions, supports ethical conduct, and fosters a risk aware and compliant culture. | Establish well-defined, documented roles, decision-making and escalation processes, with clear accountability. Embed a culture of risk-awareness, compliance and transparency. Empower staff to challenge poor practices. Ensure independent oversight, with REs and trustee boards independent of the business. Avoid overly complex structures that heighten the risks of conflicts and unfair treatment of investors and borrowers. |
| 8. Valuations
Valuations are fair, timely and transparent, with robust governance |
Determines transaction, entry and exit prices, and can influence management and performance fees. | Implement clear and consistent valuation methodologies, policies and processes that produce fair valuations. Undertake valuations regularly (monthly or quarterly), with appropriate independence. Include periodic external audits. |
| 9. Liquidity
Liquidity risk is effectively disclosed and managed, avoiding structural mismatches, with fair redemption terms aligned to portfolio liquidity |
Minimises disruption during stress, and ensures fair treatment of exiting and remaining investors. | Disclose redemption terms, liquidity gates and stress-testing practices to investors. Ensure the source of funds for distributions is sustainable and stems predominantly from cashflows generated by underlying assets. Avoid paying distributions from investor capital or that of new investors. |
| 10. Credit risk
Credit risk is effectively managed across loan origination, portfolio construction, monitoring, impairment, default and repayment |
Ensures disciplined lending, aims to preserve investor capital, supports long-term portfolio performance, and enables effective impairment and default management. | Apply standardised credit assessment and monitoring frameworks as part of a well governed and documented risk management framework. Document credit decisions and risk ratings, and regularly review borrower performance. Establish escalation protocols for early signs of distress. Use portfolio stress tests. Apply a consistent approach to impairments, and ensure independent oversight of credit and default and impairment processes. |
Source: ASIC
