Australia’s nonbank lending sector is on the verge of major disruption after the Australian Securities and Investments Commission (ASIC) signaled that it might crack down with stricter regulations. Yet, the industry has experienced unprecedented growth. It has issued $200 billion in credit, almost exclusively to riskier players of the real estate game like mortgage REITs and commercial property developers. As the scrutiny continues to grow, industry leaders are calling for a reasonable and fair approach to regulation that will both foster innovation and protect investors.
The private lending sector has surged in the last decade, growing by a mind-boggling 500 percent. Today, private credit is believed to make up 20 to 25 percent of the investment pie. Venture investors are rushing to private credit. This includes people who run self-managed super funds, who are lured in by the prospect of good returns and the chance to diversify their income streams. Private lenders charge double to triple the interest rates of traditional banks. Other private credit funds have required borrowers to accept exorbitant interest rates between 2.5 percent and 44.51 percent.
ASIC’s Surveillance Program
As one to combat the industry’s explosive growth, ASIC has kicked off a national surveillance program. This cooperative effort seeks to find gaps and forestall emerging hazards in the industry. This new effort is a positive sign that more people are recognizing the potential dangers of unregulated expansion in an environment with high-risk loans.
“Our goal here is to ensure private credit has strong foundations to continue growing from, to try and avoid future disruption,” – Simone Constance, ASIC official.
The agency’s new emphasis on oversight is especially timely considering the recent high-profile incidents that have shaken the industry and eroded public confidence. La Trobe Financial, a prominent entity in the private lending market, was recently compelled to temporarily block investments in one of its flagship retail funds due to regulatory concerns. Then, La Trobe Financial undertook to revise its investment documentation to settle the impasse with ASIC.
The risk profile of the private lending industry’s portfolio can change radically depending on timing and economic conditions. Many private credit funds have shifted their lending focus. To increase yields, they’re disproportionately targeting riskier loans with fewer collateral protections. Either way, this paradigm shift presents some serious questions around the sustainability of investors’ returns and the long-term health of the market as a whole.
Implications for Investors
As the private lending sector massively expands, millions of Australians are becoming more and more exposed to private credit through their superannuation funds. The Australian superannuation system has been very important for acceptance of private markets, including private credit. This ubiquitous exposure creates an urgent need for effective regulatory structures. These frameworks should safeguard investor interests, but they should not inhibit innovation on new financial products.
Joe Longo, chair of ASIC, commented on the major changes within the private markets:
“If I was to point to one critical feature of our markets that’s dramatically changed in recent times and is going to make an even bigger impact, is the superannuation money flowing into the system.”
Investor sentiment towards private lending remains mixed. Of course, few investors can resist the lure of promised high returns. Some advocates for equity argue that high-interest loans risk driving borrowers into more expensive default scenarios.
Future Outlook for Private Lending
Looking ahead, the future of Australia’s private lending industry will largely depend on how regulators balance oversight with opportunities for growth. ASIC is currently undertaking its own massive investigation into the sector. All players involved are wishing for realistic regulations to come out, providing the necessary consistency and certainty that both lenders and borrowers need.
With the private lending landscape quickly being transformed with new policy and practice indicative that change is on the way, readiness is key. With increased scrutiny from ASIC and evolving lending practices among private credit funds, participants in this market must remain vigilant and adaptive.
