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The Australian Securities and Investments Commission (ASIC) has published its findings after a review into private credit, which warned the sector to lift standards or face stronger regulations.
The regulator found positive and negative behaviours within the sector and warned that poor practices, high-risk assets, and opacity are creating fertile ground for market failures, as reported by Broker Daily sister brand The Adviser.
Speaking at the National Press Club in Canberra on Wednesday (5 November), ASIC chairman Joe Longo said even though the growth in private markets was a good thing, there were still challenges to tackle.
“Compare this sector to the public market where people trade from a position of knowledge because of continuous disclosure obligations. This isn’t the case for transfers of value in a controlled private market, and that brings risk,” Longo said.
“In a private market there’s also a lack of clarity around funds’ fee structures. Add to this the fact that the Australian private credit sector at its current levels is untested under market stress scenarios.
“We have already seen missteps and failures in the private credit industry as a result of the wide variance in practices across the sector.”
Speaking to Broker Daily, James Huntley, founder and MD of commercial finance brokerage Flash Capital, said he would like to see a type of best interests duty introduced to private lending.
“Some form of best interest duty, not quite at the level of home loans, but there needs to be something,” he said.
“There’s a lot of cowboy brokers out there that are charging 10 per cent commission on low loans because the clients are not in a very good position. Moving forward, they’re trying to refinance but commercial lending people just take advantage of that.”
Speaking about the impact of more regulation on borrowers, Huntley said: “I think pricing and turnaround times would stay the same.
“I think the lenders would probably look at it a bit deeper, so it would maybe add a day or so.”
BF Money founder and mortgage broker, George Karam, suggested that while stronger regulation might not be necessary for private credit, better standards were needed.
“I think there needs to be better standards. And I don’t know if regulation is the right approach, but there needs to be clearer disclosures when raising funds,” Karam said.
“So maybe just the policing of it, but I don’t think there needs to be regulation in how they’re [private lenders] giving out money.
“I’m all for full disclosure and correct disclosure. Better standards in how they’re raising funds so people understand the risks that they are exposed to.”
John Alvarez, managing director of Finselect Group, told Broker Daily that he believed more regulation and training for brokers were needed in private lending.
“It gives brokers a bit of certainty that someone may be buying to a higher standard with regulatory oversight. So yes, maybe regulation has a role to play but also understanding what is good value is important. Now, regulation can never basically educate a broker on what is good value,” he said.
“I think part of the problem with private lending is a lack of training and support for brokers to get their head around it and to understand what the private lending marketplace looks like and what is a good lender versus what would you regard as the most recent lender,” he said.
Alvarez added that stronger oversight would give brokers more confidence in the industry.
He said even small regulatory adjustments could have a major impact on lifting standards across the private credit sector.
“I don’t think you need to sacrifice a lot to get to a point where you’re playing on a strong playing field: fair to the customer, fair to the lender. I don’t think that’s a problem,” he said.
“I think it’s more of an internal compliance issue, good systems, good processes, good products.”
[Related: Lift standards or face stronger action, ASIC tells private lenders]
