Even though most of the Dixons Advisory complaints are yet to be submitted, the CSLR has already allocated a $24 million bill to the industry. Good financial advisers will be forced to pay for the nefarious and neglectful acts of bad ones for years to come.
After years of regulatory turmoil and a violently shifting business landscape, the advice industry may be on the cusp of a relatively calm period. For advisers, this could be the right time to reflect, revise and even reset their business.
External validation key to credit quality of corporate loans: Epsilon
Private credit fund managers that aren’t big banks and don’t have the oversight of a prudential regulator should have third party validation of their loan books, according to Epsilon Direct Lending, with their usage just one of the things investors should be checking on.
The Australian non-bank corporate lender and private markets investment manager’s founding partner, Joe Millward, says banks operate in a different realm to non-bank private loan managers.
“For the regulated banking giants such as NAB who operate under the watchful eye of the Australian Prudential Regulation Authority (APRA), the use of credit models is highly regulated with meticulous oversight and auditing to ensure accuracy and reliability in assessing credit quality,” Millward (pictured) says. “Thankfully for investors, the results of these credit models is summarised each reporting season in their Pillar 3 reports.”
However, private credit funds operate in a “different realm”, he continues, “unrestricted by the regulatory requirements that govern banks’ use of credit models”.
For investors, that means extra diligence is required.
“In this sector, practices diverge, with some funds crafting their proprietary credit models or even using a simple ‘finger in the air’ approach, while others turn to third-party models from leading rating agencies,” he says.
Due to this diversity in the way that private credit lenders operate, investors can find extra diligence a difficult thing to achieve. Even with the best intentions, knowing how and what to research can be a confounding problem.
Millward says that investors should approach private credit lending operators with a checklist of questions ready to pitch, starting with whether or not they use a third-party ratings tool to assess the quality of loans on the books.
“Have you fully adopted the third-party tool or made changes to the models purchased?” he asks. “If changes have been made, how accurate are the ratings versus public ratings?
“And If third-party tools are used, how many overrides of the ratings outputs have been made when adopting ratings for investor reporting?” he continues. “What is the ratio of downgrades to upgrades for those overrides?”
Not only should there be external ratings, he says, but there should be a level of transparency regarding whether those ratings are qualitative or quantitative. The manager should also provide the investors with adequate portfolio reporting showing underlying credit ratings.
“The message remains clear: credit quality assessment tools empower private credit fund investors, allowing them to draw their own conclusions. While the regulatory landscape for banks and private credit funds differs, the use of credit ratings serves as a bridge to transparency and responsible investing,” he says.
