ASIC’s 2026 Private Credit Reforms: Mortgage Funds on REP 820 & REP 823 Compliance21 min read

Introduction

The Australian Securities and Investments Commission (ASIC) is intensifying its focus on the private credit sector, signalling a significant shift from surveillance to active enforcement in 2026. This heightened scrutiny follows the rapid expansion of the market and the identification of systemic weaknesses in governance, transparency, and conflicts management within both retail and wholesale funds.

For mortgage funds and other private credit fund operators, these private credit reforms are part of broader regulatory changes affecting non-bank lenders and demand a proactive approach to compliance, as ASIC’s recent reports, particularly REP 820 and REP 823, have established a new benchmark for industry practice. This guide provides a practical framework for responsible entities, trustees, and fund managers to assess their operations against ASIC’s expectations and implement the necessary changes to prepare for this new regulatory environment.

Interactive Tool: See If Your Fund Meets ASIC REP 820 & 823 Standards

The Driving Forces Behind MIS Governance Reform

Learning from the Collapse of Shield & First Guardian Master Funds

The recent collapses of the Shield Master Fund and the First Guardian Master Fund served as a significant catalyst for the proposed reforms. These events exposed critical weaknesses in the governance and oversight of managed investment schemes (MISs), placing more than A$1 billion of superannuation savings at risk.

Investigations into these collapses revealed issues that went beyond poor investment choices. Specifically, the failures were characterised by several alarming factors:

• Instances of financial misconduct and substantial governance shortcomings.
• Poorly managed conflicts of interest across operations.
• Transactions, particularly loans to and investments in related parties, that were not genuine, arm’s-length commercial dealings, as indicated by liquidator reports.

Ultimately, this highlighted how the existing framework was not adequately mitigating risks, prompting the Australian Government to review the structural settings of the entire MIS regime.

ASIC’s Surveillance Findings in the Private Credit Sector

Alongside high-profile collapses, ASIC’s own surveillance activities have uncovered systemic issues within the private credit sector, further driving the need for reform. Through comprehensive reviews detailed in reports like REP 814 and REP 820, ASIC identified widespread poorer practices across both retail and wholesale funds—a distinction that often aligns with the difference between registered vs unregistered managed investment schemes—signalling that a structural recalibration of governance was necessary.

These surveillance reports highlighted several key areas of concern that pointed to deep-rooted problems in the sector:

• Opaque fee structures: Many fund managers were found to have unclear fee and remuneration arrangements. Poorer practices included retaining up to 100% of borrower-paid fees, such as origination or default fees, without quantifying this income for investors, and using Special Purpose Vehicles (SPVs) to capture a “net interest margin” that was not passed on to those bearing the underlying credit risk.
• Poorly managed conflicts of interest: Conflicts were identified as being prevalent across the industry, particularly concerning related-party transactions. For example, ASIC’s review found instances of funds lending to related developers or transferring assets between funds managed by the same group without robust, independent oversight.
• Inconsistent valuation practices: The reports noted that valuation practices were inconsistent and often lacked independence. Many funds did not conduct quarterly independent valuations, and some relied on internal processes where the investment team had a vested interest in the outcome, creating a clear conflict.
• Weak governance frameworks: A significant number of funds lacked detailed written policies for crucial functions. This included half of the wholesale funds reviewed in REP 820 missing guidelines for credit management, impairment, and the fair allocation of investment opportunities across different funds.

Key Treasury Proposals & Their Operational Impact

Reshaping Your Board & Governance Structure

The Treasury has proposed a significant change to the governance structure of responsible entities (REs) for MISs. Specifically, this proposal would mandate that a majority of directors on an RE’s board must be external directors.

This reform would eliminate the current flexibility that allows an RE to establish a compliance committee as an alternative to having a board with a majority of external members. Consequently, the operational impact of this change is direct and substantial, as it forces a shift towards embedding independence at the highest level of decision-making—the board itself.

For many operators in the private credit sector, this will require a material restructuring of their existing governance arrangements. Ultimately, this transition may involve significant costs and transitional complexity.

To navigate these changes, fund managers will need to:

• Actively recruit and appoint new external directors to meet the majority threshold.
• Re-evaluate their board composition to ensure it aligns with the new requirements.
• Address potential market capacity constraints in sourcing suitably qualified external directors, particularly for smaller REs.

Overhauling Related Party Transaction Protocols

In response to governance failures observed in the collapses of the Shield and First Guardian Master Funds, Treasury is proposing to prohibit most related-party transactions, with only limited and clearly defined exceptions. This moves beyond the current framework, which permits such transactions if they are on arm’s-length terms or approved by members.

This proposal directly addresses a key concern raised in ASIC’s REP 820, which found instances of related-party lending and weak oversight that could harm investor interests. As a result, the operational change for a private credit fund will be profound, effectively requiring them to cease most lending or investment activities involving related parties.

To comply, REs and fund managers must:

• Conduct a thorough review of all existing lending and investment arrangements to identify any related-party transactions.
• Develop and implement strict new protocols to prohibit conflicted transactions from occurring.
• Ensure any transactions that may fall under a legitimate exception, such as a retail scheme investing into a wholesale fund run by the same RE, are rigorously assessed and documented.

Strengthening Your Fund’s Compliance Plans & Financial Requirements

The Treasury proposals also aim to enhance the regulatory framework for compliance plans and the financial stability of REs. Citing widespread poor practices identified by ASIC, the reforms would require these plans to be more prescriptive and specific to each scheme.

As a direct consequence, generic, high-level plans will no longer be sufficient.

Operationally, REs will need to redraft their compliance plans to include detailed descriptions of the scheme’s investment strategy and specific processes for managing significant risks. Furthermore, the annual audits of these plans will be held to mandatory auditing and assurance standards, significantly increasing the level of scrutiny.

Alongside these changes, Treasury is considering more specific financial resource requirements for REs, which could lead to more explicit capital requirements. This shift is separate from, but related to, ASIC’s ongoing review of net tangible asset (NTA) requirements, resulting in several operational impacts:

• REs may need to hold more capital to meet the new regulatory thresholds.
• Firms will need to reassess their financial models and adjust operational budgets accordingly.

A Practical Gap Assessment for Your Fund Using ASIC’s REP 820 Framework

Assessing Your Fee & Income Transparency

ASIC’s surveillance findings in REP 820 place a significant emphasis on the transparency of fees and all income streams derived from a private credit fund.

Opaque fee structures and the retention of borrower-paid fees or net interest margins by fund managers are key areas of concern.

To ensure your alignment with ASIC’s expectations, consider the following questions:

• Are all sources of remuneration disclosed? Review your disclosure documents to ensure they clearly identify every income stream received by the RE, trustee, or investment manager. This includes management fees and every borrower-paid fee—origination, establishment, default, and extension.
• Is the quantum of fees clear? It is not enough to simply state that borrower-paid fees may be retained; good practice involves quantifying these amounts so investors can compare funds effectively.
• How are net interest margins treated? If SPVs or other structures create a margin between the borrower rate and the return paid to investors, disclose the arrangement fully—ASIC views retention without clear disclosure as poorer practice.
• Can investors grasp the total cost? The ultimate test is whether an investor can easily calculate the manager’s total remuneration; complex structures that obscure costs are viewed unfavourably.

Evaluating Your Valuation & Liquidity Management Practices

The valuation of illiquid assets and the management of liquidity are fundamental to fair and orderly fund operation.

ASIC’s REP 820 highlighted significant inconsistencies in these areas across the sector.

A review should confirm that your practices meet the regulator’s standard.

For your valuation framework, ask the following:

• Is your valuation policy robust and documented? A clear, written policy must spell out methodology, frequency, and governance for valuing loan assets.
• Are valuations frequent and independent? Best practice is at least quarterly valuation with independent review, and clear separation between the loan-approval and valuation functions.
• How are impairments recognised? Ensure impairments are booked promptly and consistently so unit pricing remains accurate.

For your liquidity management, consider these points:

• Do you conduct liquidity stress testing? Regular testing against varied scenarios is essential; ASIC found many wholesale funds skipped this step.
• Are redemption terms aligned with asset illiquidity? Terms must be clearly disclosed and realistically reflect the illiquid nature of loan portfolios.
• Is there equal treatment of investors? Side letters giving preferential redemption terms are a poorer practice—liquidity arrangements should treat all investors fairly.

Reviewing Your Credit Risk & Conflict Management Policies

Effective credit risk management, which includes diligent loan management and monitoring, and the handling of conflicts of interest are pillars of a well-run fund.

ASIC’s surveillance revealed underdeveloped policies in many funds.

Benchmark your fund against the heightened expectations in REP 820 and RG 181.

To evaluate your credit risk management, ask:

• Is the credit assessment process systematic? Replace ad-hoc “common sense” approaches with documented frameworks, detailed credit memos, and standardised assessments.
• How do you monitor borrower performance? Implement a formal process with internal credit ratings that are regularly reviewed and updated.
• Is your default management process formalised? Define ‘default’ clearly and outline triggers and procedures for workout or impairment recognition.

To assess your conflict management policies, particularly under updated RG 181, consider:

• Is there independent oversight? RE and trustee boards must be independent and actively oversee operations, especially for related-party transactions.
• Are related-party transactions managed effectively? They must be on arm’s-length terms, subject to independent review, and fully disclosed to investors.
• How are investment opportunities allocated? If multiple funds have overlapping strategies, establish and follow a clear, fair allocation policy to avoid conflicts.

Implications for Wholesale Funds vs Retail Funds

Heightened Scrutiny for Retail-Facing Funds

Retail-facing funds are currently under specific scrutiny from ASIC, particularly concerning their compliance with the design and distribution obligations (DDO). This scrutiny involves:

• A close examination of marketing materials to ensure they are balanced and do not mislead potential investors by downplaying risks.
• Taking decisive action, such as issuing interim stop orders against funds for deficiencies in their target market determinations (TMDs).

Furthermore, ASIC’s surveillance, detailed in REP 820, has identified several poorer practices in this area:

• Inaccurate Risk Characterisation: Some retail funds described themselves in TMDs as suitable for investors with a “low risk tolerance” or those seeking capital preservation, which ASIC considered an inaccurate reflection of the fund’s actual risk profile.
• Inappropriate Portfolio Allocation: TMDs for certain funds suggested suitability for a “core” or “major” allocation within an investor’s portfolio, a level that ASIC deemed potentially inappropriate given the higher-risk strategies involved.
• Unbalanced Marketing: Some funds were found to use aggressive marketing tactics or exaggerate benefits, such as stable returns, without giving equal prominence to the associated risks of capital loss.
• Insufficient Distribution Conditions: A key concern for ASIC was the lack of appropriate distribution conditions in some TMDs to ensure the product reached its intended target market.

Why Wholesale Fund Operators Cannot Ignore These Changes

While wholesale funds are not subject to the same DDO and product disclosure statement (PDS) requirements as retail funds, operators cannot afford to disregard the recent private credit reforms.

This is because ASIC’s surveillance in REP 820 explicitly included a review of both retail and wholesale funds, uncovering significant poorer practices across the entire private credit sector.

The principles for good practice outlined by ASIC apply broadly, and the regulator has highlighted specific failings within wholesale operations.

Specifically, key areas of concern for wholesale fund managers include:

• Conflicts and Governance: ASIC found that oversight was often weak in wholesale funds where the trustee was part of the same corporate group as the investment manager, with half of the reviewed funds lacking a policy for the fair allocation of investment opportunities.
• Fee and Income Transparency: Most wholesale funds reviewed retained all or a portion of borrower-paid fees, and some failed to disclose this to investors, while the use of SPVs to capture a “net interest margin” without full transparency is also a major focus for ASIC.
• Liquidity Management: A significant number of wholesale funds did not perform liquidity stress testing, a practice ASIC considers essential for managing the risks associated with illiquid assets.
• General Licensee Obligations: All Australian Financial Services (AFS) licensees, including those operating wholesale funds, must act efficiently, honestly, and fairly, manage conflicts of interest, and have adequate risk management systems, yet ASIC’s findings suggest that some wholesale operators may be falling short of these fundamental regulatory compliance obligations.

Preparing for Increased ASIC Enforcement & Surveillance

Understanding ASIC’s Enforcement Priorities for 2026

ASIC has clearly signalled a shift from surveillance to active enforcement within the private credit sector. This predictable transition follows a sequence of consultation and reporting throughout 2025, with recent actions suggesting that surveillance has progressed into formal investigations into potential legal contraventions.

These escalating regulatory activities include:

• Conducting on-site visits to assess fund operations.
• Issuing compulsory notices for documents.

Notably, “poor private credit practices” has been designated as a specific enforcement priority for ASIC in 2026. The regulator has explicitly stated its readiness to take enforcement action to “stamp out misconduct” in the private credit sector.

Consequently, the seven focus areas outlined in REP 820 now serve as the primary test against which ASIC will measure the conduct of funds during these investigations.

The Importance of Proactive Remediation & Engagement

The window for private credit funds to undertake voluntary remediation is narrowing rapidly. ASIC has indicated that it will treat funds more favourably if they demonstrate a proactive uplift in their governance and compliance frameworks, rather than waiting for enforcement to compel change.

Furthermore, funds must be cautious, as any information provided to ASIC could potentially be used in subsequent civil penalty proceedings, particularly when sourced from:

• Regulatory on-site visits.
• Responses to compulsory notices.

Currently, there is a brief period for fund managers and REs to engage with ASIC about its concerns before a final decision on enforcement action is made. Funds face the greatest regulatory exposure if they have not yet benchmarked their practices against the “better practice” examples in REP 820.

Therefore, taking immediate steps to address deficiencies is critical for mitigating this risk.

Conclusion

ASIC’s intensified focus on the private credit sector, prompted by MIS collapses and detailed surveillance findings in REP 820, is driving significant private credit reforms that will reshape governance, related-party transactions, and compliance protocols for all fund managers. With ASIC shifting from surveillance to active enforcement in 2026, both retail and wholesale funds must now urgently conduct a gap assessment of their fee structures, valuation practices, and credit risk management to align with these new benchmarks.

To meet these new regulatory demands and ensure your operations are fully compliant, it is crucial to seek expert guidance. You should contact GRM Law’s specialised private lender and non-bank finance lawyers today for trusted legal advice tailored to help your private credit fund successfully adapt to ASIC’s heightened compliance standards.

Frequently Asked Questions