Regulators should eye greater scrutiny over private credit providers

Semper has been a private lender in Australia for 20 years and over that period, have witnessed unimaginable growth in the private credit sector. This was driven by two factors:

1. increased restrictions on banks following the GFC which led to an increasing reluctance, or inability, to lend to indebted companies and
2. investors seeking yield and diversification amidst low interest rates^*1.

However, this expansion will inevitably bring increased regulatory scrutiny due to the closed nature of these funds.

The Australian government’s 2020 review of the Financial Sector (Shareholder Owned Enterprises) Act 2016 acknowledges the need for regulatory adjustment. As private credit continues to grow, inevitable changes will prioritise investor protection and stability^*2.

By learning from past experience and embracing reform, Australia can foster and retain a robust and sustainable private credit market, balancing innovation with prudent regulation.

The debenture sector’s tumultuous past serves as a cautionary tale. Post-GFC, collapses of Australian Capital Reserve, Fincorp, and Bridgcorp resulted in significant retail investor losses. In response, ASIC introduced Regulatory Guide 69 (RG 69)^*3, enhancing disclosure requirements for debenture issuers. We participated in this process and agree that ASIC’s changes led to a more transparent and robust non-bank lending environment.

As private credit funds grow in markets that operate lending businesses with similarities to the debenture lending sector and with traditional banking operations, heightened oversight seems prudent. The lack of transparency and inconsistent reporting standards increases risks, particularly for lesser-informed retail investors.

If we learn anything from the past, as demonstrated by ASIC’s successful introduction of RG 69 for debentures (which meant adopting bank-like reporting conditions for private credit funds and which has been hugely successful in preventing failures) this too will significantly enhance protections in the Unitised funds and MIS space.

Key reforms could include:

• Licensing and registration making registration with ASIC a must to ensuring lenders meet minimum standards.
• Standardised disclosures that include benchmark reporting (see RG 69) that report liquidity, LVR exposures, capital adequacy, concentration risk, aged receivables, related party loans and provisioning for non-performing or under-performing loans.
• Independent oversight for Trustees and / or Custodians to engaging with external auditors to monitor benchmark reporting.
  
  

By introducing these measures, regulators can:

1. Boost transparency and accountability
2. Reduce investor risk
3. Promote market stability
   
   

There will be pushback from the sectors, and they will use the same excuses heard when RG 69 was introduced. Lenders, Trustees, Custodians and Auditors will cry that these greatly increase their risks and raise costs. But in reality, these costs will be inconsequential when compared to the benefits they will bring to a more transparent non-bank lending market and a robust financial sector.

References:
^*1 Australian Financial Review, “Private credit market grows as banks retreat” (2022)
^*2 Australian Government, Financial Sector (Shareholder Owned Enterprises) Act 2016 Review (2020)
^*3 ASIC Regulatory Guide 69 (RG 69)