Private credit obligations – ASIC guidance

ASIC has released a catalogue of key obligations for private credit funds, following its report on Australia's capital markets, Report 823: Advancing Australia's evolving capital markets - discussion paper.

The catalogue of key obligations enables private fund operators to more easily identify the key pieces of legislation and ASIC guidance that apply to them and aims to help fund operators comply with existing obligations by uplifting their policies and procedures. The catalogue lists the following obligations for:

All licensees (wholesale & retail)

• managing conflicts of interest
• having adequate financial, human and technological resources
• maintaining organisational competence
• risk management
• providing services efficiently, honestly and fairly
• various provisions of the ASIC Act in relation to misleading and deceptive conduct and unconscionable conduct

Wholesale private credit fund operators

• transparency in relation to fees
• valuation practices - these are affected by the general obligations applying to all licensees
• governance, specifically the obligations outlined in RG259: Risk Management systems of Fund Operators (RG259) to manage and mitigate governance risk
• risk management, specifically the obligations in Section B of RG132: Funds Management - Compliance and Oversight (RG132) which relates to unregistered funds and outlines obligations in relation to a compliance management framework for fund operators

Retail private credit fund operators

• design and distribution obligations (DDO)
• specific obligations applying to Responsible Entities under Chapter 5C of the Corporations Act:
  • acting honestly
  • exercising care and diligence
  • acting in the best interests of fund members and prioritising the interests of fund members
  • complying with the fund's compliance plan
  • ensuring fund property is valued at regular intervals
• transparency in relation to fees, specifically the obligations outlined in RG 45 Mortgage schemes: Improving disclosure for retail investors, RG 97 Disclosing fees and costs in PDSs and periodic statements, andRG 168 Product Disclosure Statements
• governance, specifically the obligations outlined in RG132 which outline the requirements for a retail fund's Compliance Plan and in RG259 to manage and mitigate governance risk
• risk management, specifically the obligations RG132 which outlines the obligations in relation to a compliance management framework for fund operators and for mortgage funds, RG45: Mortgage Schemes - Improving Disclosure for Retail Investors

Fund operators should expect further guidance from ASIC over the coming years, shaped by ASIC's surveillance of the industry. Report 823 indicates ASIC will conduct surveillance work in relation to the distribution, fees, valuation policies, margin structures and conflicts of interest impacting private credit funds. Increased surveillance of financial reports and audit files of private companies is also planned for the next 12-18 months.

Fund operators should take steps now to familiarise themselves with ASIC guidance and their key obligations, review policies and procedures in light of the shortfalls ASIC has identified in the private credit sector and take action to ensure compliance with these key obligations.

Background

ASIC's recent Reports 814, 820 and 823 have highlighted the need for stronger governance and more robust compliance controls across both retail and wholesale private credit fund sectors. ASIC's reports indicate widespread issues, including breaches of the law and compliance failures and inconsistencies in relation to fee structures, valuation practices and conflict management.

Report 823 outlines ASIC's roadmap to address emerging risks in Australia's public and private markets. Report 814 provides an overview of the private credit fund sector in Australia, including identifying both positive and concerning practices by fund operators.

Further Reading

ASIC Report 823

ASIC Report 820

ASIC Report 814

Catalogue of key obligations for private credit fund operators

ASIC Media Release: ASIC issues catalogue of key legal obligations for private credit funds

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.