Key Takeaways
- • ASIC's second major private credit review (Report 846) found 88 per cent of advice files recommending more than 20 per cent of a client's portfolio into private credit failed to demonstrate the advice was in the client's best interests.
- • The fail rate rose with allocation size, from 13 per cent at 5-10 per cent allocations to 87 per cent at 20-50 per cent allocations.
- • The review covered advice to 46 clients from 19 advisers at nine licensees across six private credit funds, plus a review of 24 funds managing a combined $18 billion.
- • ASIC identified two arrangements where licensees and their associates appeared to have received payments from a private credit fund manager, and warned it will scrutinise such incentives.
- • ASIC commissioner Simone Constant said private credit is no longer confined to institutional investors or high-net-worth individuals and called for urgent action across the private credit system.
Summary
Australia's securities regulator, ASIC, has found that most financial advice recommending large private credit allocations failed to meet best-interests standards. In its second major review of private credit, detailed in Report 846, ASIC found that 88 per cent of advice files recommending more than 20 per cent of a client's portfolio into private credit did not show the advice was in the client's best interests. The review follows the regulator's first report last year, which flagged plans to examine how private credit was distributed to retail clients through advisers.
The review covered advice given to 46 clients by 19 advisers at nine licensees, across six private credit funds, alongside a review of 24 funds managing a combined $18 billion. Overall, 57 per cent of advice files passed, with some failing on procedural, disclosure or record-keeping grounds. ASIC noted that the files were selected partly at random and partly because of specific risk flags, so the results are not representative of the wider profession.
The fail rate climbed with allocation size: 13 per cent where advice placed 5-10 per cent of a portfolio in private credit, rising to 87 per cent where the allocation was 20-50 per cent. The largest allocation ASIC observed was 87 per cent of a client's money in a single fund. Most concerns traced to five advisers at two licensees who consistently recommended large allocations to a single fund without explaining why such concentration was appropriate, a particular concern for clients with conservative risk profiles or liquidity needs. In one case, a client was advised to place 30 per cent of their money in a single fund mainly to obtain higher returns, although their financial situation and objectives did not warrant the additional income.
ASIC also identified two arrangements in which some licensees and their associates appeared to have received payments from a private credit fund manager. Citing the law, the report states that it is unlawful for AFSL holders or their representatives to give or receive any benefit that could reasonably be expected to influence product recommendations or advice, and that ASIC will closely scrutinise such arrangements.
By contrast, advice from three other licensees kept private credit to a small part of a diversified fixed-interest mix, with no more than 7 per cent in any one fund and an average of 4 per cent. ASIC considered 16 of those 17 files suitable. Licensee research supported 80 per cent of the advice reviewed, while the remainder relied solely on material from the fund issuer. ASIC expects advisers to conduct their own research where private credit forms a large part of a client's portfolio.
Simone Constant, ASIC commissioner, said: "Private credit is no longer an asset class confined to institutional investors or high-net-worth individuals. As more Australians are exposed through retail channels and superannuation, strong gatekeepers matter more than ever." ASIC plans to update its managed funds guidance to cover private credit and will continue working with industry bodies on stronger sector standards, including for advisers.
The review covered advice given to 46 clients by 19 advisers at nine licensees, across six private credit funds, alongside a review of 24 funds managing a combined $18 billion. Overall, 57 per cent of advice files passed, with some failing on procedural, disclosure or record-keeping grounds. ASIC noted that the files were selected partly at random and partly because of specific risk flags, so the results are not representative of the wider profession.
The fail rate climbed with allocation size: 13 per cent where advice placed 5-10 per cent of a portfolio in private credit, rising to 87 per cent where the allocation was 20-50 per cent. The largest allocation ASIC observed was 87 per cent of a client's money in a single fund. Most concerns traced to five advisers at two licensees who consistently recommended large allocations to a single fund without explaining why such concentration was appropriate, a particular concern for clients with conservative risk profiles or liquidity needs. In one case, a client was advised to place 30 per cent of their money in a single fund mainly to obtain higher returns, although their financial situation and objectives did not warrant the additional income.
ASIC also identified two arrangements in which some licensees and their associates appeared to have received payments from a private credit fund manager. Citing the law, the report states that it is unlawful for AFSL holders or their representatives to give or receive any benefit that could reasonably be expected to influence product recommendations or advice, and that ASIC will closely scrutinise such arrangements.
By contrast, advice from three other licensees kept private credit to a small part of a diversified fixed-interest mix, with no more than 7 per cent in any one fund and an average of 4 per cent. ASIC considered 16 of those 17 files suitable. Licensee research supported 80 per cent of the advice reviewed, while the remainder relied solely on material from the fund issuer. ASIC expects advisers to conduct their own research where private credit forms a large part of a client's portfolio.
Simone Constant, ASIC commissioner, said: "Private credit is no longer an asset class confined to institutional investors or high-net-worth individuals. As more Australians are exposed through retail channels and superannuation, strong gatekeepers matter more than ever." ASIC plans to update its managed funds guidance to cover private credit and will continue working with industry bodies on stronger sector standards, including for advisers.
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