The Reserve Bank of India (RBI) has introduced new rules to combat mis-selling of financial products, effective January 1, 2027. According to reports from Mint, these comprehensive regulations will apply to banks and other lenders selling insurance, mutual funds, or loans. The new framework specifically prohibits banks from designing incentive structures that encourage aggressive selling practices by employees, agents, social media influencers, or digital marketing partners. One of the most significant provisions is a crackdown on sales-linked incentives, with banks required to ensure their internal policies and compensation structures do not encourage employees to push unsuitable products. The RBI has also asked banks to bar their employees from receiving any direct or indirect incentive from third-party product providers such as insurers or mutual fund companies for selling their products.
Under the revised rules, banks must obtain explicit consent through signed declarations, OTP-based approval, digitally recorded confirmation or clearly demarcated consent sections in agreements before selling any add-on products. As reported by Mint, the framework prohibits forced bundling, with banks unable to make insurance policy, mutual fund, or third-party product purchases mandatory conditions for sanctioning home loans, personal loans, or credit cards. Banks must assess suitability based on factors such as age, income, financial literacy, risk tolerance, product complexity and associated risks, and if multiple products are offered in the same form, each product must be listed separately with customers able to choose only the products they want. Banks cannot fund the purchase of financial products from loan proceeds without explicit approval, and lenders must disclose key product features, risks, fees, and exit terms upfront.
According to the RBI definition, mis-selling includes practices such as offering unsuitable products, providing incomplete or misleading information, selling products without consent, and forced bundling of products. As reported by Mint, customers can file complaints within 30 days of receiving the signed copy of terms and conditions if they believe a financial product was mis-sold. In cases where mis-selling is established, banks must refund the entire amount paid for the product and compensate the customer for any losses, in accordance with their policy. The framework also targets dark patterns in banking apps and websites, flagging practices such as pre-selected insurance add-ons, fake urgency messages, difficult cancellation processes, hidden charges, confusing wording, persistent notifications and promotional messages disguised as account alerts. Telemarketing rules have been tightened with bank employees and agents contacting customers only between 9 a.m. and 7 p.m., unable to visit homes or offices without explicit consent, and must honour 'Do Not Disturb' requests.
The new regulations address real-world mis-selling cases like that of Ahmedabad-based Ashok Parekh, whose 32-year-old daughter purchased a ₹75,000 insurance policy as a mandatory condition for her ₹32 lakh home loan from a private sector bank. After her death from cardiorespiratory arrest, Parekh discovered the policy was actually a critical illness cover rather than life insurance, with the claim rejected since cardiorespiratory arrest was not covered. Anuj Kesarwani from Zenith Finserve warns that while the RBI move is welcome, banks may still find ways to comply only on paper, noting that mis-selling often occurs through verbal conversations where compliance may be monitored more closely. Shilpa Arora from Insurance Samadhan cautions that obtaining consent itself could become a weak link, particularly with OTP-based consent where elderly customers may not have adequate opportunity to read terms and conditions. Lokanath P. Kar from ElpeeCo emphasizes that the message from RBI is clear: banks should not view insurance primarily as a revenue-generating tool but focus on core banking activities, requiring investments in compliance and monitoring systems that could force banks to reassess the economics of insurance distribution.
