Some Action, Finally, RBI’s Tough Proposals to Curb Mis-Selling
The Reserve Bank of India’s 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 in India’s financial landscape. For decades, customers have been sold products they did not need, could not afford, or did not understand. The damage extends far beyond individual losses; it erodes trust in the entire financial system.
The Scale of the Problem
Consider the numbers. According to the Insurance Regulatory and Development Authority of India’s 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.
These 30,000 complaints represent only the tip of the iceberg. Many customers never complain—they may not know they have been mis-sold, may not know how to register a grievance, or may simply give up in frustration. The true scale of mis-selling is almost certainly much larger.
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 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
What makes the RBI’s intervention noteworthy is its breadth. It addresses many of the core pressure points in bancassurance—the practice of banks selling insurance products.
Compulsory bundling—such as linking a home loan to the purchase of an insurance policy—will no longer be permissible. This practice has been rampant for years. A customer seeking a home loan would be told that approval required buying insurance from the bank’s partner. The customer had no choice but to accept, often paying inflated premiums for products they did not need.
Nor can banks make the purchase of an investment product a condition for sanctioning a loan. This is another form of tying that distorts both the lending and investment markets. The customer’s creditworthiness should determine loan approval, not their willingness to buy mutual funds or insurance.
Banks will also be barred from funding the purchase of their own or third-party products out of sanctioned loans without explicit consent. This practice—loading a loan with additional products and rolling the cost into the principal—has left many customers paying interest on products they did not realise they had bought.
If a bank distributes a third-party product, customers must be free to source it from any provider. This restores choice and competition. A customer should be able to compare the product offered by their bank with alternatives available elsewhere.
Scrutinising Internal Sales Practices
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. When branches compete to see who can sell the most policies, the pressure to cut corners becomes intense.
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. The agent who sells the most policies gets a trip to a luxury resort. The pressure to win that trip inevitably influences behaviour.
Telemarketing calls will be restricted to office hours, and field visits must respect reasonable timing norms. This addresses the harassment that many customers have experienced from persistent sales calls at all hours.
Addressing Modern Forms of Manipulation
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.
In the digital age, mis-selling need not involve a human salesperson. A website can be designed to steer customers toward unsuitable products. A checkbox can be pre-ticked to include expensive insurance. A timer can create false urgency. These tactics are just as manipulative as any high-pressure sales pitch, and they operate at scale.
For consumers, especially senior citizens, this could offer meaningful relief. Relationship managers, armed with granular financial data, have often pushed unsuitable products for years. A senior citizen with a large fixed deposit might be persuaded to put that money into a high-commission insurance policy they do not need. The new rules should make such practices harder.
The Political Context
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.
This alignment between the finance ministry and the central bank is significant. It signals that the concern is taken seriously at the highest levels, and that regulatory action has political support.
The Test: Enforcement
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. This means several things.
First, supervision must be robust. Regulators need to actively monitor compliance, not just wait for complaints. Mystery shopping, data analytics, and targeted inspections can identify problems before they become scandals.
Second, penalties must be meaningful. A fine that is less than the profit earned from mis-selling is not a deterrent; it is a cost of doing business. Penalties must be large enough to change behaviour.
Third, individuals must be held accountable. When a relationship manager mis-sells a product, the bank should not simply pay a fine and move on. The individuals responsible should face consequences, including potential bans from the industry.
Fourth, compensation must reach victims. Full refunds and compensation are proposed, but they must actually be paid. Too often, customers are forced through lengthy grievance processes and still do not get their money back.
Conclusion: A Necessary Step
The RBI’s proposals are a necessary step toward cleaning up India’s financial sector. They address longstanding abuses, protect consumers, and restore trust. But they are only a step. The real work begins now—in implementation, enforcement, and cultural change.
The line has been drawn. It must not be blurred.
Q&A: Unpacking the RBI’s Mis-Selling Proposals
Q1: What is the scale of mis-selling in India’s financial sector?
According to IRDAI’s FY25 annual report, over 120,000 grievances were registered against life insurers, with almost a quarter (30,000) relating to unfair business practices including mis-selling. This represents only the tip of the iceberg, as many customers never complain. Insurance penetration has stagnated at 3.7% of GDP, partly because customers who feel misled retreat from formal financial products, eroding long-term trust essential for financial deepening.
Q2: What specific practices will the RBI’s proposals ban?
Key banned practices include: compulsory bundling (linking loans to insurance purchases), making investment product purchase a condition for loan sanction, funding product purchases from sanctioned loans without explicit consent, and restricting customer choice in sourcing third-party products. The proposals also target internal sales competitions that encourage aggressive cross-selling and incentives from third-party providers that fuel lavish rewards for top agents.
Q3: How do the proposals address modern digital manipulation?
The RBI has explicitly identified “dark patterns”—misleading digital design tactics such as pre-ticked boxes, forced add-ons, subscription traps, and artificial scarcity cues. These tactics manipulate consumers at scale without human involvement. For senior citizens especially, this offers meaningful relief from relationship managers who, armed with granular financial data, have historically pushed unsuitable products.
Q4: Why have previous efforts to curb mis-selling been insufficient?
While measures like removing entry loads for mutual funds have helped, the underlying conflict of incentives never fully disappeared. Enforcement has been uneven, penalties insufficient, and compensation for victims often delayed or denied. The new proposals are broader in scope but will succeed only if supervision is robust, penalties are meaningful, individuals are held accountable, and compensation actually reaches victims.
Q5: What will determine whether these proposals succeed?
Success hinges on enforcement. Regulators must actively monitor compliance through mystery shopping, data analytics, and targeted inspections. Penalties must exceed profits from mis-selling to deter misconduct. Individual accountability—including potential industry bans—is essential. Compensation must actually reach victims without lengthy grievance processes. The RBI has drawn a clear line; now banks and regulators like IRDAI must ensure it is not blurred in practice.
