ASIC's Longo warns of ‘Minsky moment' unless private credit standards lifted
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The news: The Australian Securities and Investments Commission (ASIC) has put private credit funds on notice to lift standards and announced the review and re-launch of its innovation hub.
The context: Addressing the National Press Club on Wednesday, ASIC’s outgoing chair Joe Longo said the regulator wanted a “significant uplift in practices” and warned that if the sector could not get this right then “law reform may be required”.
Longo said that while more rules is not his first choice, if poor practices undermined the integrity of the sector the regulator might not have another option.
ASIC also released its roadmap for the next 12 to 18 months for public and private markets to improve transparency and governance.
“If we fail to address the risks building in this sector, we could very well see our own ‘Minsky moment’ in Australia with a market collapse. In times of prosperity when money flows freely, no one worries about liquidity,” Longo said.
“However it’s the first thing everyone will miss in a crisis. So while the sector is still small, we have time to act. And that requires us to make conscious choices.”
Longo said that growth in private markets was a fundamental good but Australia had lower levels of transparency compared to international standards.
He pointed to Canva and asked why private companies were subject to more limited disclosure obligations than for smaller public companies.
“In a private market there’s also a lack of clarity around funds’ fee structures. Add to this the fact that the Australian private credit sector at its current levels is untested under market stress scenarios,” he said.
“With a large proportion of illiquid investments in high-risk real-estate developments, we have good reason to be thinking critically about this.
“That risk is amplified when we remember that private equity and credit are now firmly established asset classes in superannuation, and will continue to grow along with the rest of the superannuation pie.”
The chair also announced that ASIC would review and re-launch the ASIC Innovation Hub to support financial market innovation.
“Alongside supporting the Government’s review of the Enhanced Regulatory Sandbox to better encourage Australia’s fintech capability, the first priority of the revitalised Hub will be to assess its effectiveness and to do a scan of innovation in financial markets here and abroad to identify regulatory issues and opportunities, so that ASIC can be proactive and help Australia seize opportunities,” he said.
Longo noted that the watchdog had commenced preliminary discussions with Pawsey Supercomputing Research Centre in Perth and the University of Technology Sydney to explore opportunities to further operationalise the large volumes of data and information ASIC receives.
The source: ASIC
