This article has been updated to include details of the banking Royal Commission report and recommendations

The banking Royal Commission report has dropped but before it landed, fintech small caps were pretty sanguine about its impact on them.

The year-long investigation uncovered shocking tales of bad and at times blatantly illegal behaviour by the largest banking and financial services companies in Australia. As part of his report commissioner Kenneth Hayne referred 24 companies, including the large banks, for possible criminal and civil penalties.

The report by Mr Hayne was handed to the government in an awkward photo op on Friday afternoon:

It was released after the market closed on Monday night.

The government has not committed to implementing all of the commissions, such as those around mortgage broking.

Already the larger banks are trying to appear on side with an angry public: Australian Banking Association chief Anna Bligh admitted on Monday the banks hadn’t lived up to societal expectations of how they should behave, and hoped the report would be “an opportunity to reset the industry and to make things better for our customers”.

They are right to be worried: a wave of class actions are coming their way, the AFR reports.

Smallcap fintechs are sitting tight

Several of the ASX’s smaller fintechs were circumspect ahead of the release.

Arthur Naoumidis, head of property investment platform Domacom (ASX:DCL), says the impact of the Royal Commission has already hit via tighter lending standards.

“Anything that is negative to property or financial planners will have a short-term impact on us, because we’re a property investment platform,” he told Stockhead.

“It’s already had the effect because the Royal Commission has had an impact on lending… and already had the effect on residential property investing.

“I don’t think long term it will change anything… if anything it’ll probably be better because fear is worse than reality.”

In November Mr Naoumidis said it had actually been good for Domacom, as he wanted to muscle in on the property lending market using foreign funding.

In the interim, they’ve secured a trial with one of the big four banks that so far remains unnamed, which given the larger lenders have pulled sharply back from property and business lending may complicate that ambition a little.

Simon Lyons, CEO of reformed digital bank Goldfields Money (ASX:GMY), hopes the smaller size of his bank and their efforts around transparency will allow them to avoid the worst of any blanket changes ahead.

“We’ve rebuilt our business on the basis of transparency, simplicity and honesty in banking so our hope is we stand out as what a bank should be, post Royal Commission,” he told Stockhead.

“We’ve done a lot of work around simplifying our documentation, making it easier for people to understand what we do, how we work, and what we charge them for.”

“We think the smaller lenders like ourselves have been doing a pretty good job over the past few years.

“The real competition for us is taking market share off the top 10 banks in the market, they own about 90 per cent of the market.”

Goldfields’ Achilles heel is Finsure, the mortgage aggregation business they merged with in 2018. Any changes to commissions payments will have an adverse effect on that division.

The recommendations at a glance

The insurance recommendations strongly reflect a number of changes first introduced in the Future of Financial Advice (FOFA) reforms that were passed into law in 2012, such as a ban on trailing commissions and annual renewal of advice fees, but which were vastly watered down.

It may have the biggest impact on smallcap fintechs, with companies like Ensurance (ASX:ENR) operating in the field:

  • a ban on hawking insurance products
  • capping commissions paid to car dealers who sell add-on insurance
  • apply unfair contract terms in ASIC Act to insurance

In banking:

  • mortgage brokers have to act in the interest of their client, not the bank providing the loan
  • expanding the definition of small business in the Banking Code
  • ban mortgage broker commissions over a period of up to three years, with bans on all other kinds of commissions to follow
  • make mortgage brokers subject to the same laws as financial advisers
  • bring retail car dealers into the National Consumer Credit Protection Act 2009
  • eliminating default interest on loans where people have been affected by natural disasters
  • making the appointment of receivers or other forms of outside debt administration the last resort only

In superannuation:

  • banning fees for advice on MySuper accounts
  • ensure people have one default fund only
  • super trustees banned from having obligations other than to the fund they manage and from encouraging employers to use their fund as the default
  • extend the banking executive accountability regime to apply to super trustees
  • a ban on heavy-handed sales of super products

In financial advice:

  • ongoing fee for advice arrangements should be renewed every year
  • financial advisers have to disclose any conflicts of interest to clients
  • repeal grandfathered commissions as soon as possible
  • reduce cap on life insurance commissions to zero
  • create a new, single disciplinary body to cover financial advisers, with compulsory registration by advisers
  • all banking licence holders must refer serious compliance concerns about advisers to ASIC every quarter

In regulation:

  • for large companies ASIC infringement notices should be for administrative failings and not as an enforcement tool
  • ASIC’s starting point should be whether a court should decide the consequences of a breach
  • establish a new government-independent overseer of both ASIC and APRA, the banking regulator
  • the Banking Executive Accountability Regime (BEAR) should cover all APRA entities including super trustees
  • change the BEAR Act forcing banking executives to deal with APRA and ASIC in an “open and constructive” way, and make both regulators jointly in charge of administering it
  • give ASIC the power to enforce all provisions in the Superannuation Industry Act that carry civil penalties
  • maintain the ‘twin peaks’ model of regulation that sees APRA in charge of market stability and ASIC overseeing good market conduct and consumer protection

In culture and governance:

  • banks to review at least once a year remuneration for frontline staff
  • APRA to set limits on how financial metrics are used in setting long-term pay