Industry Update: ASIC Enforcement Action Against Oak Capital – Implications for Private Lenders

The Australian Securities and Investments Commission (ASIC) has launched a significant enforcement action against Oak Capital that signals a new era of regulatory scrutiny for private lenders. The proceedings against Oak Capital Mortgage Fund Limited and Oak Capital Wholesale Fund Pty Ltd allege unconscionable conduct in circumventing the National Credit Code (NCC), raising important considerations for all private lenders.

The Oak Capital Case

The enforcement action centers on Oak Capital’s lending practices between 2019 and October 2024, during which the company provided approximately 47 loans totaling $37 million. These loans, while structured through corporate borrowers, were secured against residential properties and, according to ASIC, should have been regulated under the National Credit Code.

At the heart of ASIC’s case is the allegation that Oak Capital implemented a systematic business model designed to avoid regulatory oversight – loans structured through corporate borrowers despite being essentially personal loans secured against residential properties.

ASIC alleges that Oak Capital’s practices generated over $5.38 million in fees and interest while depriving borrowers of crucial consumer protections. The regulator is seeking substantial remedies, including declarations of unconscionable conduct, injunctive relief, pecuniary penalties, and orders voiding certain contractual provisions.

Implications for Private Lenders

The Oak Capital case represents a watershed moment for the private lending industry, highlighting ASIC’s increasing focus on substance over form in lending arrangements. Private lenders must now carefully evaluate their practices, particularly in areas where corporate structures intersect with individual borrowing purposes.

The key risk areas emerging from this case deserve careful attention. First and foremost is the use of corporate borrower structures. ASIC’s action makes it clear that the mere existence of a corporate borrower is insufficient to avoid consumer credit regulations. Lenders must look beyond the corporate veil to examine whether the loan’s true purpose and beneficiary would bring it within the scope of the NCC.

Asset-based lending practices are also under scrutiny. While security value remains important, ASIC’s position suggests that lenders cannot rely solely on asset values without considering serviceability. This represents a significant shift for many private lenders who have traditionally focused primarily on security coverage.

Essential Risk Management Strategies

In light of these developments, private lenders should implement comprehensive risk management strategies. This begins with a thorough review of existing loan portfolios to identify any patterns similar to those challenged in the Oak Capital case. Particular attention should be paid to:

• The relationship between corporate borrowers and individual guarantors, especially where the corporate entity appears to serve primarily as a vehicle for obtaining finance.
• Documentation of loan purposes and verification procedures that go beyond mere declarations of business or investment purposes.
• Serviceability assessments that consider income sources beyond asset liquidation.

Lending criteria and policies should be reviewed and updated to ensure they adequately address these risks. This may require developing new procedures for verifying loan purposes and assessing borrower capacity, even in cases where loans are nominally made to corporate entities.

Looking Ahead

The private lending industry stands at a crossroads. ASIC’s enforcement action against Oak Capital suggests a regulatory environment that will increasingly challenge traditional private lending practices. Lenders must adapt their operations while maintaining their ability to serve legitimate business and investment borrowers.

For many lenders, this may mean reconsidering whether obtaining an Australian Credit License would better serve their business model and customer base. While this brings additional regulatory obligations, it also provides clarity and certainty around compliance requirements.

The industry should also expect increased scrutiny of broker arrangements and referral relationships. ASIC’s focus on Oak Capital’s broker-arranged transactions suggests that lenders must have oversight of their distribution channels and ensure aligned compliance standards.

Practical Next Steps

Private lenders should take immediate action to protect their positions. A comprehensive review of lending practices should examine:

• The substance of borrowing arrangements, looking beyond corporate structures to understand the true nature of each transaction
• Documentation and verification procedures for loan purposes
• Assessment criteria for borrower capacity and loan serviceability
• Training programs for staff involved in loan assessment and approval

Beyond immediate compliance concerns, lenders should consider their longer-term strategic positioning. The private lending market remains vital to the Australian financial system, but its practices must evolve to meet regulatory expectations while continuing to serve legitimate business needs.

As this enforcement action proceeds through the courts, it will likely provide further guidance for industry practices. Private lenders should monitor developments closely and be prepared to make additional adjustments to their operations as the regulatory expectations continue to evolve.

Blaine Hattie is Principal of the Commercial Team at SLK Lawyers.

This update is intended for general information purposes only and does not constitute legal advice. The analysis presented reflects our interpretation of publicly available information as of November 2024 and should not be relied upon as a substitute for specific legal or professional advice. The allegations against Oak Capital have not been proven in court, and the views expressed are preliminary observations only. Each lender’s circumstances are different, and appropriate professional advice should be sought before taking or refraining from taking any action in reliance on the information contained in this update.