Regulation of debt funds
The ever-increasing capital requirements imposed on traditional banks have been a key driver for the growth of the non-bank lending industry. However, that does not mean non-bank lenders, particularly those structured as a debt fund, are free from regulation.
Whether provided only to wholesale clients or to retail clients, there are several regulatory touch points for fund managers to be aware of when establishing and operating a debt fund. This article provides a high-level summary of the two key regulatory touch points for debt funds – ASIC and APRA.
ASIC
Since the issue of Regulatory Guide 144: Mortgage investment schemes in 2000, ASIC has made it clear that a person (whether individual or corporation) managing the pooling of money from people to make loans secured by a real property mortgage will likely be operating a managed investment scheme. To operate a managed investment scheme the person generally requires an AFS licence and may need to register the scheme with ASIC.
There are numerous obligations and conditions imposed on the holder of an AFS licence, including financial requirements, auditing requirements, and general standards of behaviour.
APRA
APRA can determine at any time that non-bank lenders, including debt funds, are materially contributing to financial stability and has the power to regulate those lenders.
One of the key factors APRA says will influence its decision to regulate non-bank lenders is the market share and overall size of the non-bank lending market. The collection of this data was limited until 2018 when the thresholds to provide statistical data under the Financial Sector (Collection of Data) Act were altered. The alteration means generally all lenders (whether an authorised deposit-taking institution, debt fund, or other non-bank lender) must report data if they have at least $50 million in loans outstanding at any one time or in the previous financial year made loans of a value exceeding $50 million.
Currently, other than this requirement to provide statistical data, APRA has not imposed any regulation on this sector.
Next steps
If you are setting up a debt fund or currently operating a debt fund, you should be aware of the possibility APRA may impose regulations on this sector, particularly if the sector continues to grow its market share. You also need to be aware of the AFS licensing and general managed investment scheme obligations that apply.