The Reserve Bank of India has said that customers’ consent does not legitimise the sale of an unsuitable financial product, as part of its draft rules to check mis-selling by banks. The new norms will act as a deterrent against this rampant practice which erodes public trust in the banking system, explains Saikat Neogi
l How mis-selling happens in banks
OVER THE YEARS, customers have complained how they were being pushed into buying insurance, mutual funds or other third-party products by banks without fully understanding them. Most often, unit-linked insurance products are sold to senior citizens as fixed deposits and long-term insurance products are sold as limited pay options with high surrender value. Loan products are bundled with insurance products and opening of a locker is linked to higher fixed deposits.
In November last year, Finance Minister Nirmala Sitharaman had asked banks to curb mis-selling and protect public trust in the banking system. At present, banks and insurance companies follow a buyer-beware approach and use a signed form by the customer to defend themselves in case of disputes related to mis-selling. In FY25, the Offices of the Reserve Bank of India (RBI) Ombudsman received 296,000 complaints including those against mis-selling, of which the majority was against banks, followed closely by non-banking financial companies. Acknowledging this growing menace, the RBI has now tightened the definition of mis-selling.
l What do the new RBI rules say?
UNDER THE NEW norms scheduled to take effect from July 1, 2026, the definition of mis-selling includes the sale of a product or a service which is not suitable as per the customer’s profile even if with his explicit consent, or that without providing correct or complete information or forced bundling of unnecessary products. The draft rules have red flagged issues such as hidden clauses, giving incomplete or misleading information and selling a service without clear acceptance from customers.
Banks will have to implement a sales code of conduct with penal actions for violations. The rules prohibit compulsory bundling of products linked to a loan such as purchase of insurance, which raises the cost of borrowing over 15-25 years. The RBI has also tightened the oversight of third-party agents. Banks will have to display the list of direct selling agents on their websites and ensure that these people operating within branches are distinguishable from bank employees.
l Redressal mechanism
IN CASES WHERE the mis-selling of a product is established, banks will have to refund the entire amount paid by the customer to purchase the product. The bank will also compensate the customer for any loss arising due to mis-selling as per its approved policy. Banks will have to design a user interface such that customers cannot grant consent without reading the terms and conditions.
Consent for multiple products cannot be clubbed and must be obtained individually. Banks will have to collect customer feedback within 30 days from the sale of the product to ensure that customers have understood the features of the product. Moreover, banks will have to prepare a half-yearly report on the findings to aid the review of existing policies. In case of mis-selling, customers can lodge a complaint with the bank as per the timeline specified by the respective financial sector regulators or within 30 days of receiving the signed agreement.
l Mis-selling of insurance policies
DATA FROM IRDAI’S annual report shows more than 2.5 lakh insurance grievances were recorded in FY25, an increase of 20% from 2,15,569 cases reported in FY24. A significant share falls under unfair business practices, which include mis-selling and improper disclosure. For example, out of the total 1,20,429 grievances reported in FY25 against life insurance, 26,667 cases, or 22.14%, are related to unfair business practices.
A survey done by ConsumerFirst, a consumer advocacy group, shows that 68% of respondents have lost faith in insurance products, while 42% are hesitant to buy new insurance policies. As a result of the trust deficit, insurance penetration remains abysmally low in the country — 3.7% in FY24— half the global average, resulting in a significant protection gap. The sector is skewed toward life insurance, where the penetration is 2.8% and just 1% for non-life insurance.
l Why banks indulge in this practice
INCENTIVES OF BANK employees are linked to sales targets of third-party products such as insurance and mutual funds. For banks, higher sales of these products increase the fee income. For insurance and mutual fund companies, banks can capture a customer base for distribution of their products. As insur-ance commissions are front-loaded, this results in sales of unsuitable products. Bancassurance is a well-established model for sales of insurance products and accounts for 6.24% of the commission paid in life insurance new business premium in FY24.
For the private sector, it is 21.28%, the second highest after direct business. In the non-life segment, the private sector’s bancassurance accounts for 8% of the commission paid (excluding the standalone health insurers). In fact, private sector banks have a higher share of insurance proceeds in their other income. The Economic Survey 2025-26 highlights that high distribution costs are preventing a ‘widening’ of the risk pool and suggests insurers must prioritise the digitisation of distribution to rationalise acquisition costs and restore ‘value for money’ for the policyholders.