On February 4 last year, former Chief Justice Kenneth Hayne handed down his findings from the Royal Commission into Financial Services.

Justice Hayne did not hold back in calling for change in the financial sector. “The arrangements of the past have allowed conduct of the kinds and extent described here…the damage done by that conduct to individuals and to the overall health and reputation of the financial services industry has been large,” he said.

“Saying sorry and promising not to do it again has not prevented recurrence. The time has come to decide what is to be done in response to what has happened. The financial services industry is too important to the health of the economy of the nation to allow what has happened in the past to continue or to happen again.”

Justice Hayne made 76 recommendations. The most controversial recommendation was overhauling the business model of mortgage brokers in Australia. He recommended switching to a user-pays model from the existing model where the banks pay commissions.

At the time mortgage broking stocks on the ASX tumbled and there was an uproar across the broader industry. Within weeks, the Morrison government pledged it would not change the model and the noise died down.

Meanwhile, fintechs sought to capitalise on people disillusioned with the major banks. For instance neo-lender Wisr (ASX:WZR) launched this campaign only hours after the royal commission.

 

 

The financial sector is thriving

A year on it seems much of the sector is thriving. For many months prior to November 2017, the Turnbull government and the Australian Banking Association resisted a royal commission. Both argued it would hurt not only the banks’ reputation but Australia’s.

On February 4, 2019, the day the findings were released, the Big 4 banks all saw a spike in share prices, but only the Commonwealth Bank sustained it — gaining 20 per cent in a year.

On the other hand, the two ASX small caps in mortgage broking were decimated as their business model was threatened. One was Mortgage Choice (ASX:MOC), which fell over 30 per cent in February last year but is now 24 per cent higher than a year ago.

The other, Yellow Brick Road (ASX:YBR), suffered too, plunging 38 per cent throughout the month of February 2019. It too has staged a recovery, but sits slightly lower than when the bombshell was dropped.

In August, a third company joined the ASX ranks — Australian Financial Group (ASX:AFG), which merged with Connective Group. Since mid-August the debutante has joined these other small caps in advancing and is now up over 20 per cent.

As for the broader financial small cap sector on the ASX, it is up 25 per cent overall from a year ago but there is a wide range in performance.

Code Name Price (I) 1 Year % Return Market Cap
8IH 8I HOLDINGS LTD-CDI 0.14 75 $50.7M
MPR MPOWER GROUP LTD 0.024 -49 $4.0M
MAM MICROEQUITIES ASSET MANAGEME 0.57 37 $75.8M
MAI MAINSTREAM GROUP HOLDINGS LT 0.63 19 $83.7M
WZR WISR LTD 0.26 441 $247.7M
DCL DOMACOM LTD 0.06 -27 $15.2M
GDG GENERATION DEVELOPMENT GROUP 0.85 18 $107.9M
CIW CLIME INVESTMENT MANAGEMENT 0.675 51 $38.1M
RZI RAIZ INVEST LTD 0.85 89 $65.2M
AFG AUSTRALIAN FINANCE GROUP LTD 2.79 134 $614.4M
SOR STRATEGIC ELEMENTS LTD 0.082 118 $23.8M
ABA AUSWIDE BANK LTD 6.14 17 $259.4M
MNY MONEY3 CORP LTD 2.38 40 $453.1M
PVL POWERHOUSE VENTURES LTD 0.089 -26 $2.9M
PAC PACIFIC CURRENT GROUP LTD 6.37 17 $316.6M
EZL EUROZ LTD 1.065 -4 $173.6M
MOC MORTGAGE CHOICE LTD 1.3 36 $165.0M
MCX MARINER CORP LTD 0.066 187 $3.2M
CGA CONTANGO ASSET MANAGEMENT LT 0.44 91 $20.8M
EAS EASTON INVESTMENTS LTD 0.9 3 $31.1M
KAM K2 ASSET MANAGEMENT HOLDINGS 0.043 -52 $10.4M
AFA ASF GROUP LTD 0.093 19 $73.7M
EDC EILDON CAPITAL LTD 1.1 24 $51.9M
MEC MORPHIC ETHICAL EQUITIES FUN 0.96 9 $50.7M
FID FIDUCIAN GROUP LTD 5.56 51 $179.5M
PNC PIONEER CREDIT LTD 1.765 -41 $112.2M
SNC SANDON CAPITAL INVESTMENTS L 0.82 10 $87.5M
INV INVESTSMART GROUP LTD 0.09 -31 $12.3M
PFG PRIME FINANCIAL GROUP LTD 0.076 -6 $14.7M
APD APN PROPERTY GROUP LTD 0.635 75 $198.8M
CLH COLLECTION HOUSE LTD 1.065 -18 $151.2M
GOW GOWING BROS LIMITED 2.3 -4 $126.5M
FSA FSA GROUP LTD 1.36 25 $172.0M
BBC BNK BANKING CORP LTD 0.6 -22 $49.9M
SZL SEZZLE INC-CDI 1.9 $389.6M
MME MONEYME LTD 1.45 $255.9M
BTI BAILADOR TECHNOLOGY INVESTME 1.08 38 $129.6M
OVH ONEVUE HOLDINGS LTD 0.335 -39 $96.5M
MJC MEJORITY CAPITAL LTD 0.035 40 $4.9M
CAF CENTREPOINT ALLIANCE LTD 0.125 14 $18.6M
LAW LAWFINANCE LTD 0.07 17 $42.7M
KSL KINA SECURITIES LTD 1.395 54 $249.9M
ENA ENSURANCE LTD 0.021 -36 $11.9M
SWF SELFWEALTH LTD 0.14 142 $25.8M
BFG BELL FINANCIAL GROUP LTD 1.35 77 $441.0M
PCG PENGANA CAPITAL GROUP LTD 1.55 -24 $165.0M
YBR YELLOW BRICK ROAD HOLDINGS L 0.085 -3 $27.6M
CVC CVC LTD 2.06 -16 $240.8M
AEF AUSTRALIAN ETHICAL INVT LTD 4.34 187 $540.3M
ASW ADVANCED SHARE REGISTRY LTD 0.73 11 $29.6M
SPT SPLITIT PAYMENTS LTD 0.58 14 $191.6M
ED1 EVANS DIXON LTD 1 -36 $233.0M
SEQ SEQUOIA FINANCIAL GROUP LTD 0.2 -31 $24.2M
BWF BLACKWALL LTD 0.59 -25 $37.9M
RMC RESIMAC GROUP LTD 1.3 166 $546.9M
OPY OPENPAY GROUP LTD 1.19 $113.9M
XPL XPLORE WEALTH LTD 0.07 -48 $20.2M
AVC AUCTUS ALTERNATIVE INVESTMEN 0.185 -54 $7.3M
EVE EVE INVESTMENTS LTD 0.006 9 $18.2M
IQ3 IQ3CORP LTD 0.2 -27 $20.8M
BIR BIR FINANCIAL LTD 0.08 -56 $6.5M
NSX NSX LTD 0.12 -48 $23.4M
FFG FATFISH BLOCKCHAIN LTD 0.009 -40 $7.3M

Many of the top performers are fintechs. Wisr tops the list, having surged over 400 per cent in 12 months.

However there is no enough evidence to suggest customers have shifted away from the big banks en-masse as inevitably fintechs have been hoping for.

 

Have the banks learned anything? Maybe…

While small caps were hit harder than the big banks, misconduct in the latter was why the royal commission was called.

Some of these, particularly AMP (ASX:AMP), have not recovered from the share price decimation suffered during the commission. AMP shed two thirds of its value in two years and 28 per cent in the last 12 months.

On one hand it seems some change has happened. Institutions have taken action such as tightening credit standards for borrowers and undertaking fire sales on financial planners. They also adopted the new Banking Code of Practice and abolished sales-based incentives for front-line staff.

“One year on from the delivery of his [Justice Hayne’s] final report, a great deal of work has been completed to fulfil to this commitment,” Australian Banking Association CEO Anna Bligh said last week.

 

Or maybe not?

However, there is just as much evidence to suggest not enough change has happened and Bligh admitted,”the industry knows there is still much work to be done to earn back the trust of the Australian people”.

The government admitted it has only implemented 16 of the 76 recommendations. Although Treasurer Josh Frydenberg promised all recommendations requiring legislation will have at least been introduced into parliament in 2020.

In 2019, a fresh wave of scandals emerged, particularly AUSTRAC’s allegations against Westpac on breaches of anti-money laundering laws.

Many individual victims of banking misconduct claim they are still yet to receive recourse and banks are bracing themselves for lawsuits.

Yesterday, small business and family enterprise ombudsman Kate Carnell accused the banks of “passing on their punishment to small businesses”.

She was particularly critical of the fact that the code only protected small business borrowing up to $3m, which excludes many capital intensive businesses.

“Banks and financial institutions still have a long way to go if they are serious about repairing their relationship with small businesses,” Carnell said.

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