The Reserve Bank of India’s (RBI) tough proposals to curb mis-selling are long overdue. Its clear warning—that customer suitability matters more than commissions earned from subsidiaries or third-party tie-ups—strikes at the heart of a deeply entrenched problem. Even more significant is the proposal for full refunds and compensation in cases of proven mis-selling, along with tighter oversight of advertising and sales practices across banks and non-banking financial companies. Mis-selling of financial products, particularly insurance and mutual funds, has been a persistent menace.
No More Forced Bundling
Consider the numbers: According to the Insurance Regulatory and Development Authority of India’s (Irdai) annual report for FY25, over 120,000 grievances were registered against life insurers. Of these, almost a quarter related to unfair business practices, including mis-selling. That is not a marginal aberration; it is systemic. The damage goes beyond individual losses. Insurance penetration in India continues to stagnate at 3.7% of GDP. When customers feel misled, they retreat from formal financial products altogether. Mis-selling may boost short-term commissions for insurers, banks, and agents, but it erodes long-term trust—the very foundation of financial deepening.
The mutual fund industry has had its own excesses. Distributors once aggressively pushed new fund offers (NFOs) by marketing them as “cheaper” than existing schemes because of lower net asset values, leaving some investors holding dozens of overlapping funds. The removal of entry loads and stronger oversight have curbed some of these practices, and mutual fund penetration has risen. But the underlying conflict of incentives has never fully disappeared.
What makes the RBI’s intervention noteworthy is its breadth. It addresses many of the core pressure points in bancassurance. Compulsory bundling—such as linking a home loan to the purchase of an insurance policy—will no longer be permissible. Nor can banks make the purchase of an investment product a condition for sanctioning a loan. Banks will also be barred from funding the purchase of their own or third-party products out of sanctioned loans without explicit consent. If a bank distributes a third-party product, customers must be free to source it from any provider.
Crucially, the RBI has gone further by scrutinising internal sales practices. Competitions among business units that encourage aggressive cross-selling have been flagged as potential breeding grounds for mis-selling. Direct or indirect incentives from third-party providers will be disallowed—which could effectively end the culture of lavish off-site rewards for top agents and distributors.
Ending Aggressive Cultures
Telemarketing calls will be restricted to office hours, and field visits must respect reasonable timing norms. Importantly, the regulator has also recognised modern forms of manipulation. “Dark patterns”—misleading digital design tactics such as pre-ticked boxes, forced add-ons, subscription traps, and artificial scarcity cues—have been explicitly identified. For consumers, especially senior citizens, this could offer meaningful relief. Relationship managers, armed with granular financial data, have often pushed unsuitable products for years.
In December, Finance Minister Nirmala Sitharaman publicly flagged the problem and urged banks to focus on core banking—deposits and lending—rather than aggressive cross-selling. The RBI has now backed that sentiment with strong proposals. The intent is welcome. But the ultimate test will lie in enforcement. Unless incentive structures change and penalties are visible and swift, mis-selling will simply mutate into subtler forms. The RBI has drawn a clear line. It is now incumbent upon banks—and regulators such as Irdai—to ensure it is not blurred in practice.