FSC sets standards for private markets

The Financial Services Council (FSC) has released an industry standard for private markets and private credit, designed to lift industry practices. The standard will apply to all of the FSC’s fund management and superannuation fund members from 1 July 2027.

Addressing Inconsistent Practices

It acknowledged that private markets could provide attractive investment returns, yet noted there are inconsistent practices creating risks for investors. The FSC highlighted that ASIC had previously pointed out these issues. Consequently, the FSC released two papers – one on best practice principals and one supporting paper providing practical examples of how managers can meet these expectations.

These examples include valuing private market assets at least quarterly, using defined triggers to reassess valuations and providing transparent reporting of manager remuneration. The Standard sets expectations across governance and accountability, valuations, liquidity and leverage, conflicts of interest, fee and income transparency and investor disclosure, with additional credit risk management requirements for private credit managers.

This new framework arrives as the private credit sector expands, a trend that mirrors the rapid growth of infrastructure and hedge fund assets over the past decade. In that time, the gap between the sophisticated risk models used by managers and the clarity provided to end investors has occasionally widened, leading to periods of market tension when disclosures lag behind performance. The FSC’s move aims to close that gap before the market matures further.

Operational Requirements

The organisation said the exercise is not a ‘set and forget’ instance and the standards will be reviewed periodically as the sector evolves. The Standard requires documented and consistently applied valuation policies that include independence and effective challenge, and clear triggers for re-valuation when material market events occur.

Complex fund structures, interposed vehicles, confidentiality constraints or differences in terminology are not be used to obscure material risks, exposures, fees, conflicts or economic benefits to the investor. This includes the material fees, costs and economic benefits accruing to the investor and to the fund manager.

Redemption arrangements must reflect the liquidity profile of the fund. There must be a clear liquidity risk management policy including liquidity stress testing and monitoring, and investors clearly understand their liquidity position.

Perceived and material conflict of interests must be identified, managed and disclosed, including related-party transactions, with consideration of independent review for transactions with an raised conflict risk. The Standard also requires using clear consistent terminology for key indicators such as arrears, defaults, impairments, watchlist exposures and loan -to-value ratios, and clearly explaining the basis of those measures to investors where different approaches are used.

Good governance of credit risks is also required, such as identifying, disclosing to investors, and escalation governance around deteriorating credit exposures, including impairments or negative revaluations, on a timely basis.

Industry Response

FSC chief executive Blake Briggs said: “The FSC’s industry standard will be mandatory for funds management and superannuation members, but will also be a publicly available resource for all market participations. We encourage all fund managers and superannuation funds to apply the Standard and related Guidance Note in their businesses, and for ratings agencies to consider the principles when they are rating investment and private credit products.

“The FSC acknowledges ASIC’s ongoing supervisory work and its collaborative approach to uplifting private credit sector practices. The FSC and our members have responded in good faith to ASIC’s call for enhanced industry standards, to help address the legitimate concerns ASIC and the Reserve Bank of Australia have towards the private credit market.”

Commenting, Victor Rodriguez, executive general manager at Challenger, said: “As private markets continue to grow, industry practices need to keep pace. We’ve worked closely with the FSC on the development of its Private Markets Standard and Guidance Note and believe greater consistency around governance, valuation and disclosure will strengthen confidence in the sector.

“Clear standards provide investors with greater transparency and confidence in how their capital is managed, while supporting the sustainable development of private markets over the long term.”