Most of us have likely experienced a bank relationship manager encouraging us to buy insurance policies, mutual funds, and other products that we did not need, and definitely did not understand. The RBI has finally issued draft directions to curb the mis-selling of financial products. This is a welcome step, which was long over-due. The process of reform tells us two things — first that reform takes a long time, and is shaped by research, advocacy, and engaging with the government. Second, the process has just begun, draft directions have to become final, provide more clarity on enforcement, and then have to actually get implemented.
Until recently, while the RBI acknowledged mis-selling by bank staff, it considered it to be someone else’s problem. This has fundamentally changed. The draft directions under the Responsible Business Conduct framework, applicable to commercial banks, NBFCs, regional rural banks, cooperative banks, and all-India financial institutions, define mis-selling as follows, “…if it sells something unsuitable for the customer’s profile, provides misleading or incomplete information, completes a sale without explicit consent, or bundles additional products with a requested service.” This brings about some notable changes.
First, there is now a definition of what constitutes mis-selling. Products have to be “suitable” for the customer’s profile. For example, banks should now have to think twice before selling a life insurance policy to an 80–year–old person. Second, compulsory bundling — the purchase of one product made conditional on the purchase of another — is now prohibited. For example, several banks were making a loan conditional on buying an insurance policy. This will now not be allowed. Third, misleading practices such as “dark patterns”, “trick wording”, and “subscription traps” are also prohibited. Banks must now carry out suitability assessments before selling a product and must seek customer feedback within 30 days of a sale. Finally, the framework introduces post–sale safeguards. Besides seeking feedback, banks must also put in place structured monitoring and reporting systems. If mis-selling is established, the bank must refund the full amount and compensate the customer.
Importantly, the draft places primary responsibility for designing, approving, and overseeing compliance with these requirements squarely on the boards of regulated entities. Policies on suitability, sales practices, incentives, grievance redress, and monitoring must be board-approved, and boards are expected to exercise ongoing oversight.
The theory of change: data, research, and advocacy
How did we get here? This journey has involved three elements: data and research to establish the scale of the problem, advocacy to build a narrative for reform, and government engagement to translate evidence into policy.
The research trail goes back over a decade. In 2014, a research paper estimated that Indian policyholders lost approximately $28 billion between 2004 and 2011 on account of mis-sold life insurance products. The number put a rupee value on a problem that most people experienced anecdotally. A mystery shopping study of bank branches in Delhi, where auditors posed as customers seeking tax-saving instruments, found that private sector banks overwhelmingly recommended the high–commission product, typically an insurance policy, while public sector banks pushed fixed deposits to meet their own mobilisation targets. Banks rarely made voluntary disclosures on product features, costs, or risks. In 30 per cent of the cases, market-linked insurance products were falsely presented as carrying guaranteed returns. Research has also shown that agents systematically recommended products that earned them the highest commissions rather than those that best served the customer. Running alongside the research was sustained advocacy by journalists and commentators.
This body of evidence fed into government engagement. In November 2014, the Ministry of Finance constituted the Sumit Bose Committee to recommend measures for curbing mis-selling and rationalising distribution incentives in financial products. The Committee’s report, released in September 2015, identified the core problem: financial products were regulated by multiple regulators who did not coordinate strategies, the sales channel faced different incentive structures for identical products, disclosures were opaque, returns were not comparable, and costs were hidden. The Committee recommended, among other things, ending the practice of front-loaded commissions that created perverse incentives to push high–cost products. Finally, the RBI’s Report on Trend and Progress of Banking in India 2024-25 stated that mis-selling has significant consequences for customers and the financial sector, and that it would issue comprehensive instructions to curb such mis-selling.
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Why this is not enough, and what must happen next
It is unquestionably a positive development that the ultimate responsibility for preventing mis-selling has been placed on bank boards. For too long, sales misconduct has been treated as an operational issue created by overzealous relationship managers, or poorly trained agents. The elevation of the issue to the board level signifies that mis-selling is a governance failure.
Placing the entire responsibility on boards has trade-offs. On the one hand, as Monika Halan has observed, this might mean that suitability and other requirements remain as boxes to be checked. Along similar lines, others have argued that the effectiveness of these reforms depends on defining key concepts such as “suitability” and creating robust consumer-feedback mechanisms.
On the other hand, if the RBI were to turn every aspect of customer protection into law with exacting standards, there would be little room for banks to interpret requirements differently. A highly prescriptive legislation can constrain flexibility. The next piece of the puzzle, therefore, is the question of incentives and enforcement. Unless bad behaviour is costly, firms will not redesign their incentive structures, and this may leave us exactly where we were before the directions.
This is where the role of data and research becomes even more important going forward. We need continuous and rigorous monitoring of whether the new rules are actually changing behaviour on the ground. We also need data on outcomes: are customers being sold more suitable products? Have refunds and compensation claims risen? Are banks restructuring their internal incentive frameworks? Without this evidence, we will not know whether the directions are working.
The journey from research to regulation is long and uncertain. We are at a point where the central bank has acknowledged the problem and proposed a framework. The next step is to ensure that the framework is robust, that it is enforced, and that we continue to generate the data and research that will keep the pressure for reform alive.
Renuka Sane is managing director at TrustBridge, which works on improving the rule of law for better economic outcomes for India. She tweets @resanering. Views are personal.
(Edited by Aamaan Alam Khan)