Private Credit & Marketplace Lending: Is Your Fund a Credit Activity?

Introduction

The Australian private credit market is experiencing rapid growth, yet this expansion requires an in-depth understanding of complex regulatory requirements. Many fund managers mistakenly assume that an Australian Financial Services Licence (AFSL) provides a universal shield for all lending, but the National Consumer Credit Protection Act 2009 (Cth) and the Corporations Act 2001 (Cth) draw a sharp line between managing financial products and providing credit. If an entity engages in credit activities involving consumer credit or residential property investment, it will typically require an Australian Credit Licence (ACL)—a process managed through ACL applications to the Australian Securities and Investments Commission (ASIC).

This guide provides a comprehensive overview for any private lender or private credit fund manager to determine if their specific lending model triggers the need to hold an ACL. By examining the business purpose test and the licensing requirements for acting as an intermediary between a credit provider and a consumer, this article clarifies when a licence is required under the current licensing regime. Understanding these triggers is essential for maintaining compliance in the private market and ensuring that your organisation is properly authorised to engage in those activities.

The Business Purpose Test: How Loan Use Determines Your Licence

Defining Regulated Credit Under the National Credit Code

The need for an ACL is primarily determined by the National Credit Code (NCC), which is part of the National Consumer Credit Protection Act 2009 (Cth). A loan is regulated by the NCC if it meets specific criteria related to the borrower and the loan’s purpose.

Your lending activity will likely require an ACL if the following conditions are met:

• The Borrower: The credit is provided to a “natural person” (an individual) or a strata corporation.
• A Charge is Applied: A fee or interest charge is imposed for providing the credit.
• The Purpose: The credit is provided wholly or predominantly for personal, domestic, or household purposes.

A crucial point is that the NCC also explicitly regulates credit provided to an individual to purchase, renovate, or improve a residential property for investment purposes.

Many private lenders mistakenly assume that any loan secured by an investment property is commercial, but if the borrower is a natural person, it is a regulated credit activity.

The test is the “predominant” purpose, meaning more than 50% of the funds are for a regulated use.

The Risk of Sham Business Purpose Declarations

To avoid regulation, some lenders ask borrowers to sign a Business Purpose Declaration, which states the loan is for business use. However, this document is not a foolproof defence.

Under Section 13 of the NCC, a Business Purpose Declaration is ineffective if the lender knew, or reasonably should have known, that the credit was actually for a consumer purpose.

ASIC considers arrangements designed to avoid the National Consumer Credit Protection Act 2009 (Cth) a major enforcement priority.

For instance, a “sham” structure might involve a broker advising a borrower to set up a shell company to obtain a loan that is immediately used for personal debt consolidation.

If a lender or their intermediary was aware of or coached the borrower to use this structure, it is considered a serious avoidance activity.

Consequently, lenders must look beyond the paperwork to the substance of the transaction and have evidence of the genuine business use of funds.

When Your Wholesale Fund Triggers an Australian Credit Licence (ACL)

Source of Funds vs. Use of Funds: A Key Distinction

A common and critical error in funds management is to confuse the regulatory requirements for raising capital with those for lending it. Holding a wholesale AFSL does not create a regulatory shield against credit licensing obligations.

These two licensing regimes govern separate and distinct activities.

The source of your funds relates to your investors. Raising capital from “wholesale investors” under the Corporations Act 2001 (Cth) is a financial service regulated by your AFSL.

This allows you to issue interests in your fund without providing a Product Disclosure Statement (PDS).

However, the use of those funds concerns your borrowers. Consequently, the status of your investors is irrelevant to the lending activity.

If you take capital raised from a wholesale investor and lend it to a “natural person” for a purpose regulated by the National Consumer Credit Protection Act 2009 (Cth), you have engaged in a credit activity.

This triggers the need for an ACL if the funds are used for purposes such as:

• A home renovation.
• The purchase of a residential investment property.

Understanding the NCCP Act Threshold for Lenders

The requirement to hold an ACL is not determined by a percentage of your loan book or the frequency of your consumer lending.

Instead, the threshold is triggered by the activity itself. This means that even a single loan that falls under the NCC can obligate your fund to be licensed.

For instance, if a wholesale fund provides just one bridge loan to a high-net-worth individual for a home renovation, that activity requires an ACL.

Some managers may argue that such lending is merely “incidental” to their primary investment business, but this defence is often rejected by ASIC.

If lending is part of your scheme’s operations, you are considered to be carrying on a credit business.

Engaging in a regulated credit activity without an ACL is considered operating without an Australian Credit Licence, which carries severe consequences.

The loan contract may be declared unenforceable, which could force the fund to:

• Forfeit all interest and fees associated with that loan.
• Face a significant compliance risk.

Navigating Regulatory Triggers for Specific Lending Types

Lending to SMSFs & Retirement-Based Lending Rules

Lending to a Self-Managed Super Fund (SMSF) can inadvertently trigger the need for an ACL due to the structure of the fund’s trustees. The National Consumer Credit Protection Act 2009 (Cth) applies to credit provided to a “natural person,” which creates a critical distinction based on how the SMSF is managed.

A significant regulatory trap arises when an SMSF has individual trustees. Consider a scenario where a fund lends to an SMSF with individual trustees for the purpose of purchasing a residential investment property.

This situation is typically regulated by the National Consumer Credit Protection Act 2009 (Cth) for the following reasons:

• The Borrower: The individual trustees are considered “natural persons” under the law.
• The Purpose: The credit is for purchasing a residential property for investment, which is an explicitly regulated purpose under the NCC.

Consequently, a private lender providing such a loan must hold an ACL. To navigate this, many sophisticated lenders mandate that any SMSF borrower must have a corporate trustee.

Because the National Consumer Credit Protection Act 2009 (Cth) generally does not apply to companies, structuring the loan with a corporate trustee as the borrower can place the activity outside the consumer credit regime.

Marketplace Lending Models & The Dual AFSL & ACL Requirement

Marketplace, or peer-to-peer (P2P), lending platforms operate a unique model that typically requires them to hold two separate licences to remain compliant. These platforms connect investors with borrowers, creating distinct regulatory obligations for each side of the transaction.

This dual licensing structure is necessary because the platform is simultaneously managing an investment product and facilitating a credit activity.

The need for both an AFSL and an ACL can be broken down as follows:

• AFSL for the Investment Activity: Platforms pool funds from multiple investors to lend to borrowers. This structure is generally classified as a Managed Investment Scheme (MIS). Operating an MIS is a financial service that requires an entity to apply for an AFSL under the Corporations Act 2001 (Cth). The “product” being offered to investors is their interest in the scheme.
• ACL for the Credit Activity: The platform also provides services to borrowers. By matching borrowers with lenders or arranging the loan, the platform is engaging in a “credit activity.” If the borrowers are individuals seeking credit for personal, domestic, or household purposes, the platform must hold an ACL and comply with the National Consumer Credit Protection Act 2009 (Cth).

ASIC’s New Surveillance Focus: Private Credit

ASIC’s New Private Credit Unit

In mid-2024, ASIC established a dedicated Private Credit Institutional Loan Market Unit.

This development signals a significant shift from passive observation to active surveillance of the rapidly growing private credit market. Furthermore, the formation of this specialised unit underscores the regulator’s intent to increase its monitoring and enforcement activities within the sector.

ASIC’s Key Surveillance Priorities for 2025 & 2026

ASIC has identified private credit as a key surveillance priority and has outlined several areas of concern that will be the focus of its regulatory attention, often leading to ASIC audits and investigations.

Consequently, fund managers should be aware that ASIC is closely examining a range of practices to ensure compliance and protect investors. The regulator’s key priorities include:

• Valuation Integrity: ASIC is scrutinising how private credit funds value distressed or illiquid loan assets. There is a focus on whether managers are hiding impairments to smooth performance, which can mislead investors about a fund’s true health.
• Opaque Fees and Remuneration: Complex and non-transparent fee structures are under the microscope. This includes origination fees paid directly to the manager instead of the fund, undisclosed interest margins, and other borrower fees that are not clearly quantified for investors.
• Governance and Conflicts of Interest: The regulator is concerned about weak governance frameworks and poorly managed conflicts of interest. This includes related-party transactions, the fair allocation of investment opportunities across different funds, and arrangements that unduly favour the manager over investors.
• Liquidity Mismatches: ASIC is targeting funds that promise regular liquidity to investors while holding long-term, illiquid private debt assets. The regulator is assessing whether funds have adequate liquidity risk management systems and stress-testing practices in place.
• Transparency and Disclosure: A lack of transparency in fund disclosures is a major concern. This covers inconsistent reporting, vague descriptions of portfolio risks, and the inconsistent use of key terms like ‘default’ or ‘investment grade’, which makes it difficult for investors to compare funds.
• Distribution to Retail Clients: The marketing and distribution of private credit products to retail clients and “sophisticated” investors is a priority. ASIC is reviewing whether Target Market Determinations (TMDs) are appropriate and whether funds are being mis-sold to investors who do not understand the associated credit risks.

Conclusion

Fund managers must recognise that their lending activities, particularly loans to individuals for personal use or residential property investment, can trigger the need for an ACL under the National Consumer Credit Protection Act 2009 (Cth), regardless of their AFSL status. This requirement is determined by the loan’s purpose, not the investor’s wholesale status, and applies to specific scenarios like SMSF lending and marketplace platforms, which are now under increased ASIC surveillance.

Navigating these complex regulatory distinctions is crucial for avoiding significant penalties and ensuring the long-term success of your fund. For expert guidance on whether your lending activities trigger the need for an ACL, contact our AFSL compliance lawyers at AFSL House to turn these regulatory challenges into strategic opportunities.

Frequently Asked Questions (FAQ)