Understanding the structural divide in private credit regulation

Australia’s private credit market has accelerated rapidly, drawing in both retail and wholesale capital, evolving far beyond its once‑niche status.  What was once a specialist segment is now a mainstream component of portfolios across superannuation, private wealth and institutional mandates.

This growth has coincided with a markedly sharper regulatory posture from the Australian Securities and Investment Commission (“ASIC”).  In the period from October 2024 to August 2025, ASIC conducted a thematic surveillance review of 28 private credit funds (“PCFs”), listed and unlisted, and both retail and wholesale, publishing its findings in Report 820 (“REP 820”).

REP 820, read alongside the 2025 private credit in Australia report (“REP 814”) prepared by Richard Timbs and Nigel Williams, paints a clear picture that while private credit “done well” plays a valuable role in the Australian economy, current market practices are “inconsistent and not always executed well”.

Structure matters

While definitions of what a PCF is may differ, it broadly refers to non-bank lending that is not traded, or widely issued, publicly.  In Australia, PCFs are generally established under one of two structures:

• unregistered managed investment schemes, typically used where the fund has fewer than 20 members or is offered exclusively to wholesale investors via a trustee; or
• registered managed investment schemes, most commonly offered to retail investors (albeit they may also include wholesale investors) operated by a responsible entity (“RE”).

How a PCF is structured determines which statutory obligations apply, which regulatory guides are engaged and, ultimately, how ASIC assesses compliance.  While there is overlap between the two, the regulatory burden diverges materially:

• registered managed investment schemes are subject to statutory duties and product design and distribution obligations (“DDOs”) from Chapter 5C and Part 7.8A in the Corporations Act 2001 (Cth) (the “Corporations Act”), respectively, as well as requirements to issue a product disclosure statement (“PDS”); whilst
• unregistered managed investment schemes are not subject to the above legislative obligations, but Australian financial services licence (“AFSL”) obligations and ASIC’s expectations on governance, valuations and conflicts still apply.

This structural divergence provides the foundation for understanding the different compliance expectations ASIC is now enforcing across the private credit sector.

ASIC’s enforcement stance for 2026

ASIC’s 2026 priorities explicitly “call out poor private credit practices” as an area of heightened enforcement attention.  ASIC documented in REP 820, page 7, that the operational focus of the priority will include:

• “fees, margin structures and conflict-of-interest management in wholesale [PCFs], including those with a focus on real estate lending, and
• distribution of [PCFs] to retail clients through direct and advised channels.”

Considering ASIC’s specificity, the article’s structure will mirror the way the regulatory body has framed its supervisory concerns.

The “Commandments” for AFS licensees

It goes without saying that, irrespective of a PCF’s structure or investor class, several foundational obligations apply universally to all AFS licensees.  Collectively, these form the “Commandments” of regulatory expectations that underpin the operators of PCFs.

Under section 912A(1) of the Corporations Act, every AFS licensee must comply with 13 general obligations.  While all relevant, several take on particular significance in the private credit context, of which are outlined below.

Financial requirements

All AFS licensees must comply with base-level financial requirements under ASIC’s RG 166, including the solvency and net assets, cash and needs, and audit requirements.  However, PCFs often trigger additional requirements, including the:

• net tangible assets requirement, depending on the nature of the financial service provided;
• surplus liquid fund (“SLF”) requirement, particularly because PCFs generally hold client money or property in the value of $100,000 or more; and
• adjusted SLF requirement, as many PCFs transact with clients as principals rather than as pure intermediaries.

These requirements exist to ensure that PCFs have sufficient financial buffers to absorb stress, valuation volatility or liquidity mismatches inherent to private credit strategies.

Risk management

At a whole level, PCF operators must ensure their risk management systems reflect the nature, scale and complexity of their activities.  Practically, this requires that:

• all material risks are identified and assessed, supported by one or more risk registers documenting their risk identification and assessment process;
• appropriate strategies are implemented, including retaining adequately experienced staff, establishing reporting and escalation measures, undertaking regular stress testing and scenario analysis, and maintain a written risk treatment plan; and
• a comprehensive risk management system to encompass all the above, including functional segregation to ensure independent checks and balances and, at a minimum, an independent review every three years.

(For more information, see ASIC’s RG 259).

Compliance management systems

In this context, ASIC’s RG 132 is useful in guiding AFS licensees on developing effective compliance management systems.  Unregistered managed investment schemes must maintain such a system (Australian Standard ISO 37301:2023 is a helpful benchmark); by contrast, registered managed investment schemes must also have:

• a compliance plan;
• annual compliance plan audits; and
• if fewer than half the RE’s directors are external, a compliance committee responsible for monitoring adherence and reporting breaches to the RE and, where appropriate, ASIC.

Retail PCFs

Since the introduction of DDOs in October 2021, ASIC has observed that many retail PCFs continue to take an inconsistent and, at times, insufficiently considered approach to preparing and implementing their target market determinations (“TMDs”).  In particular, ASIC’s surveillance indicates that the central challenge for retail PCF distribution practices remains the ability to accurately define their target market and to screen prospective investors against that target market.

Retail PCFs are commonly distributed through two channels:

• direct-to-investor distribution, involving active, multi-channel campaigns such as direct email, websites and social-media promotion; or
• indirect distribution, where PCFs rely on financial advisers and investment platforms to introduce and filter prospective investors.

While retail PCFs retain greater autonomy over their marketing through direct-to-investor channels, they must exercise prudence when distributing via financial advisers.  REP 820 confirms that financial advisers are a key distribution channel for many retail PCFs, making it essential for them to take “reasonable steps” to ensure adviser-led distribution remains consistent with the fund’s defined target market.

For more information on where firms are getting TMDs wrong, and what better prepared firms are doing differently, see our other article.

Wholesale PCFs

Many wholesale PCFs operate as unregistered managed investment schemes under the exemption in section 601ED(2) of the Corporations Act.  However, trustees and managers, subject to their activities in relation to the financial products provided, may still require an AFSL.

Unregistered status does not equate to lighter scrutiny.  In fact, REP 814 notes that wholesale PCFs targeting higher-risk real estate construction and development finance should provide greater transparency regarding portfolio risks, loan characteristics and valuation practices.  These strategies often involve fund of fund structures which heighten the potential for conflicts of interests, particularly where related parties are involved in origination or servicing activities.

It is worthy to note that while some wholesale PCFs rely on exemptions under section 911A of the Corporations Act to avoid holding an AFSL, ASIC noted in REP 820 that it intends to update Information Sheet 251 (AFS licensing requirement for trustees of unregistered managed investment schemes) in early 2026. This update is expected to reflect the implications of the Full Federal Court decision in Australian Securities and Investments Commission v BPS Financial Pty Ltd [2025] FCA 74, and will likely narrow the circumstances in which product providers rely on the intermediary authorisation exemption.

Fee, income transparency and margin structures

One of ASIC’s strongest critiques for wholesale PCFs relates to fees and income transparency.  Fee structures across wholesale funds vary significantly, and many involve non-disclosure of additional fees or income streams retained by fund managers.  REP 814 observed that fee arrangements in the private credit sector often do not present a quantifiable and readily observable true cost of managing the PCF, making it difficult for investors to identify a clear view of total costs.

Consistent with these findings, REP 820 identifies several fee-related practices that raise material concerns:

• Retention of loan origination fees: three wholesale managers retained up to 100% of the origination fees paid by borrowers without disclosing the quantum, rate or range of the fees retained.
• Failure to pass on default fees: in multiple cases, managers retained all, or part of, default fees and default-interest income, even though investors bear the credit risk of non-payment.
• Omission of key income sources: REP 820 provided a case study where a fund disclosed generally that income above the target distribution was paid to the fund manager, but failed to disclose origination (line) fees; default fees; default interest; interest rate margins; capitalised interest; and the extent to which distributions were funded from borrowings, not cash income.

Further, wholesale PCFs often retain a net interest margin (“NIM”), being the difference between the interest rate charged to the borrower and the rate passed through to the fund.  REP 820 notes that ASIC observed limited transparency across wholesale funds in relation to interest rates charged to borrowers, making it difficult for investors to identify the true NIM retained by fund managers.

REP 814 similarly reports widespread margin opacity, highlighting that non‑disclosed remuneration can be a multiple of up to three to five times the fund’s publicly disclosed management fees.  These issues are particularly pronounced in construction and development finance, where interest rates charged to borrowers can range from 8% to more than 41.66%.

To address these concerns, ASIC expects wholesale PCFs using a securitisation warehouse, special purpose vehicles (“SPVs”) or other interposed vehicles, to provide explicit disclosure of:

• the interest rate charged to borrowers;
• the interest rate or yield passed through to investors; and
• the NIM retained by the manager or related entities.

Taken together, opaque or incomplete fee disclosure may be viewed as inconsistent with the obligation to act efficiently, honestly and fairly, conflicting with ASIC’s conduct expectations in RG 234 (Prospective financial information), and may may give rise to misleading or deceptive conduct concerns.  ASIC emphasises that all fees and incomes streams, including interest rates charged to borrowers, must be fully and transparently disclosed.

Managing conflicts of interest

In December 2025, ASIC released its updated RG 181 (Licensing: Managing conflicts of interest), incorporating industry feedback from 26 submissions.  Of significance is the inclusion of a non-exhaustive catalogue of obligations and examples to help licensees identify and manage conflicts more effectively.

Conflicts of interests, whether direct or indirect, or actual or potential, may arise from competing:

• financial interests, including preferential fee arrangements, NIM capture or economic incentives that may conflict with investors’ interests;
• personal interests, including remuneration arrangements, bonuses or personal relationships that may influence judgment; or
• business or related party interests, including competing duties owed by representatives (e.g. employees, directors or agents) across related entities, and lending, arranging or servicing activities undertaken by related parties.

In the present context, ASIC highlighted an example where a PCF may be motivated to retain fees and interest margins on loans under management, prioritising its own revenue over members’ interests.  This illustrates why disclosure alone is insufficient and why, for example, information barriers, approval requirements, documented decision-making and investment restrictions are essential.

Bottom Line

When all has been put into perspective, it’s clear from several of ASIC’s private credit reports that the sector’s maturation will depend on a meaningful uplift in transparency, governance and structural discipline.

TIP 1: Map and monitor all revenue streams – just as reviewing distribution data is essential for TMDs, reviewing all economic flows within a PCF is essential for meeting ASIC’s expectations on transparency. This means systematically identifying, recording and monitoring every fee, NIM and other income streams generated by the fund.  Regular internal reviews will help detect patterns, and this structured approach assists in demonstrating that the fund is acting efficiently, honestly and fairly.

TIP 2: Uplift staff capability on fee and margin governance – ongoing training should ensure staff understand how fees, NIM and valuation practices interact, and how these elements feed into regulatory risk.  Training should not be limited to onboarding, updates should be delivered whenever fee arrangements change, SPV structures are introduced, new strategies are added, or ASIC publishes updated regulatory guidance.

TIP 3: Strengthen engagement with related entities and service providers – where wholesale PCFs rely on related‑party originators, SPVs, warehouse facilities, arrangers or servicers, these parties become critical sources of information.  Routine engagements should be established to ensure full transparency regarding rates, fee arrangements, credit risk and any economic benefits captured outside the fund.  This promotes early identification of conflicts, supports proper documentation for conflict-of-interest registers and demonstrates that the trustee or RE is taking active steps to ensure fair, arm’s‑length outcomes.  Keeping these related parties and service providers closely aligned with your governance standards reduces the risk of undisclosed NIMs or conflicted arrangements.

If you would like guidance on reviewing your fee and margin disclosures, enhancing your conflict of interest’s management controls or assessing whether your PCF structure remains fit for purpose, our team can assist.  We regularly support AFSL holders operating retail and wholesale PCFs, and can help you identify and address any gaps in your obligations.

Authors: Luka Razlog (Law Graduate) and David Court (Partner).

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