Being efficient, honest & fair - Private Credit under the ASIC microscope
Introduction
Working in corporate governance in the Australian Financial Services Licensing space I’ve become very familiar with key sections of the Corporations Act 2001 (Cth) (‘Act’).
One of my favourite sections of the Act is s912A(1)(a):
A financial services licensee must do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly.
What I like most about this section of the Act is that it is the Australian Securities and Investments Commission (‘ASIC’) ‘catch all’ for monitoring the behaviour for all companies that have been granted an Australian Financial Services Licence (‘AFSL’) by ASIC.
However, as I explore below, this section of the Act is not a standard of perfection.
ASIC Expectations
An AFSL holder must comply with the General Obligations pursuant to s912A(1) (‘General Obligations’) from the time ASIC grants the AFSL, and then on an ongoing basis per ASIC Regulatory Guide 104.
ASIC can conduct surveillance visits on a business holding an AFSL and may check the licensee’s ongoing compliance with the general obligations, including the measures the licensee has for ensuring ongoing compliance with the General Obligations of s912A(1).
A key component of the General Obligations and listed as ‘item a’ of this section is that a licensee must do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly.
Noting section 912A(1)(a) is not a standard of perfection
Licensees should note that complying with s912A(1)(a) does not mean that ‘the licensee is perfect’. Rather, this section is a forward looking obligation requiring AFSL holders to take ‘reasonable steps’ to maintain compliance with the 'efficiently, honestly and fairly' obligation.
For example, even in circumstances where errors in systems and processes have been identified by a licensee, establishing a breach of the section requires actual identification of what a licensee should have done to prevent areas of non-compliance of s912A(1) occurring. From experience, in the majority of instances, it is likely that any breach of s912A(1) was inadvertent and more likely a mistake rather than nefarious conduct by the licensee, i.e. the licensee is still being efficient, honest and fair.
Working closely with AFSL holders over the past 20 years, I know that errors will occur that impact customers, fees will be miscalculated, and some compliance deadlines will be invariably missed. Key people at an AFSL can change suddenly and sometimes replacements don’t get up to speed quickly enough to maintain a ‘clean sheet’ with compliance matters.
Broadly speaking, as long as the licensee identifies any error, investigates it and, if there is a loss or damage, take reasonable steps to remediate affected clients, the licensee should be in good shape with regards to being ‘efficient, honest and fair’.
If the error is considered a breach and a ‘Reportable Situation’, the licensee is required to report the breach to ASIC via the ASIC Regulatory Portal, including details of the breach, corrective actions, and any client compensation. (Note ASIC has provided AFSL holders additional targeted relief under the reportable situations regime in response to feedback from industry from 27 June 2025).
Timely communication and an honest appraisal of the error or breach by the licensee can go a long way to build trust with ASIC while any errors are being investigated and rectified by the licensee. During this process, the licensee should assess the steps the licensee took against the standard of acting efficiently, honestly and fairly. Usually, the board of the company would be involved in this process of documenting the processes considered in managing this important facet of licensee corporate governance.
Case Law relating to AFSL compliance of s912A(1) - not being a standard of perfection
ASIC v Commonwealth Bank of Australia [2022] FCA 1422 (‘ASIC v CBA’).
In ASIC v CBA, the case involved monthly account fees (‘Fees’). CBA had charged Fees to customers who were entitled to Fee waivers. ASIC commenced proceedings against CBA in March 2021 where ASIC alleged a number of breaches of the law by the CBA.
Justice Downes took the view of what a reasonable customer would expect:
‘They would be aware that CBA’s systems are computerised and that CBA’s processes involve human interaction with those systems. They would understand that customer account statements are generated by CBA’s computerised systems and, having regard to the size of CBA’s operations, are unlikely to have been reviewed by any of CBA’s personnel before being issued. They would also be aware that the systems and processes within large organisations such as banks are not and cannot be expected to be perfect all of the time; that all organisations (even banks), and the people within them, sometimes make mistakes and that, for a variety of reasons, a contractual promise by CBA to waive a fee otherwise payable in relation to their account might not translate into that fee being waived for reasons which may not involve any intentional conduct by CBA. While the customer expects that the bank will adhere to the terms of the contract, the ordinary and reasonable customer (as described above) does not expect perfection from a bank in the performance of its contract’.
ASIC claimed that CBA had breached its general conduct obligations as a licensee and was unsuccessful relating to the claim regarding breaching s912A(1)(a). Justice Downes found that compliance with the General Obligations was not a standard of perfection:
‘the obligation imposed by s 912A(1)(a) must accommodate the possibility of error; were the position otherwise, then s 912A(1)(a) would set a standard that demanded absolute perfection, rather than a reasonable standard of performance’.
It is important to note that the CBA completed its customer remediation program for the affected customers relating to this case which involved refunding approximately $55 million in fees charged between 2010 and 2019, i.e. the licensee identified the error, investigated it, identified the loss or damage and remediated affected clients.
How serious does Licensee conduct need to be to warrant concern with compliance with the General Obligations?
More egregious breaches of s912A(1) may attract the honesty and fairness limbs of this section for example, a bad motivation or purpose (e.g. acting in ‘bad faith’). Examples of bad faith can include breaches of good faith, acting for an improper purpose, and acting unconscionably.
Relevance of s912A(1) on Private Credit
The private credit sector is topical at the moment due to ASIC’s current interest in this asset class. ASIC has published a report providing a high-level review of the private credit market in Australia, “Private credit in Australia”, REP 814 on 9 September 2025.
Per REP 814, examples in the current market relating to risks of potential breaches of s912A(1) in private credit could include:
Remuneration and fees - Weak disclosure and often non-existent quantification of manager fees and other forms of remuneration not directly payable by investors (e.g. managers not disclosing an interest rate differential (net interest margin) between the ultimate lenders (investors) and borrower where this is facilitated by use of an SPV).
Related party transactions and governance - Transferring investments between funds managed by the same manager, potentially creating valuation and governance issues.
Valuations - Frequency, method, beneficiary and independence of valuation.
Liquidity - Facilitation of liquidity and addressing risk of liquidity mismatch between investor liquidity requirement and asset pool or funding source, including portfolio stress testing.
Investment reporting - Mixed investment reporting across the market, leading to lack of visibility of investment exposure, especially for the retail segment of market.
Definitions and use of key terms - Clear and consistent explanation of key terms where some key terms are inconsistently used or vague.
Concentration - Risk of an unknown amount of debt and level of credit risk in any sector, particularly real estate and exposure of retail investment to private credit markets.
Conclusion
It is established that s912A(1) of the Act is a ‘catch all’ that can be used by ASIC to investigate whether an AFSL holder is meeting its requirements under the General Obligations.
Errors will occur when licensees are managing their business activities under their AFSL. How an AFSL board reacts to the errors is important for proving how the business is complying with the Act.
Good practice suggests that AFSL company boards should review often, how their company is complying the efficient honest and fair obligations of the Act, pursuant to s912A(1).
Once may assume that with the current scrutiny of ASIC in the private credit sector of the market that the regulator holds concerns about how the participants of this market are maintaining their compliance with s912A(1) of the Act.
If you are a company board holding an AFSL and would like to discuss how I can assist your company with enhancing your governance so that you can better manage your compliance risks and protect your investors, please contact me for an obligation free discussion. I can assist your company with:
· Responsible manager;
· Compliance committee;
· Company director;
· Compliance review; and
· Governance committee services.
Together we can comply with s912A(1) of the Corporations Act and give your investors the best chance of an ethical and sound investment outcome.
Disclaimer
This content of this blog post is not legal advice. The information provided is opinion and for general purposes only and is not a substitute for personalised legal counsel.