Wildfires in forested ecosystems are increasing in severity and extent. The adaptations many plants have acquired in response to their natural fire regime may not be sufficient to allow some species to persist. This could impact the forest understorey and its seed bank, which are vital reservoirs of biodiversity, and forest resilience in the face of global change. We present a case study of the montane forests of south-eastern Australia, an area subjected to an increase in frequency and severity of fires. We utilise field surveys and a soil seed bank germination study to investigate if short-interval, high-severity wildfires affect the understorey diversity in montane forests, and if the extant vegetation and the soil seed bank exhibit contrasting responses. We consider species diversity and plant functional traits to explore plant diversity in long unburned sites, and sites with one, two or three short-interval, high-severity fires in the past 25 years. With increasing fire frequency, we found a decrease in total species richness, Shannon’s diversity, and the richness of resprouters in the soil seed bank, contrasting a lack of response in the extant vegetation. Increased fire frequency shifted the species composition and the frequency of plant functional groups of both extant vegetation and soil seed bank towards a decrease in clonal resprouters and increase in grasses and other upright herbs. The frequency of wind-dispersed perennials and short-lived seeders and exotics increased sharply following single high severity burn, particularly in the soil seed bank, and remained elevated relative to long unburnt with subsequent fire. The combined species (extant vegetation plus soil seed bank) pool mirrored shifts in the frequency of functional groups in extant vegetation and soil seed bank. These findings highlight the importance of considering the soil seed bank when examining the effects of fire on fire-prone forests. Although a lack of response in the extant vegetation may be a buffering effect of the soil seed bank, the shift in the frequency of plant functional groups in the combined species pool suggests this cannot be maintained indefinitely. The increase in frequency and abundance of species characteristic of early successional states has implications for increased flammability and potential positive feedbacks between past fire and future fire, especially in a warming and drying climate. These shifts were independent of the fire response strategy of eucalypt canopy species raising significant questions of whether artificial re-seeding programs should extend beyond the current focus on obligate seeding forests and an obligate seeding tree.