RBI Issued Draft Guidelines on Mis-Selling

RBI Issued Draft Guidelines on Mis-Selling

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Recently, the Reserve Bank of India (RBI) issued draft guidelines directing banks to prioritize core activities like deposit mobilization over the aggressive sale of third-party insurance products, aiming to curb unethical sales tactics. 

Highlights of RBI Draft Guidelines on Mis-Selling

The Reserve Bank of India’s (RBI) draft “Responsible Business Conduct Amendment Directions, 2026” mandates a shift from “Buyer Beware” to “Seller Responsible,” targeting unfair sales practices in third-party product sales.

• Scope of Mis-Selling: The draft formally defines mis-selling as selling unsuitable financial products without full disclosure or explicit informed customer consent. This includes pushing investment-linked insurance policies or financial products that do not match the customer’s risk appetite, affordability or financial needs.
• Statutory Offence under BNS: Mis-selling is now classified as an offence under the Bharatiya Nyaya Sanhita (BNS). This legal shift empowers regulators to treat deceptive sales not just as procedural lapses but as criminal misconduct.
• Mandatory Refunds and Compensation: If mis-selling is proven, banks are legally mandated to provide a 100% refund of the amount paid. Furthermore, banks must compensate customers for financial losses, supported by a board-approved policy. 
• Prohibition of Forced Bundling: The RBI draft strictly bans tying loan approvals to the purchase of third-party products like insurance. Customers must retain the freedom to choose providers without coercion from the bank. 
• Ban on “Dark Patterns” and Digital Deception: Deceptive design practices, known as dark patterns, are prohibited. This includes “basket sneaking” (adding items without consent) and creating obstacles to opting out of services. 
• Suitability Assessment and Explicit Consent: Banks are required to perform a suitability assessment considering the customer’s risk appetite and financial profile. Additionally, explicit, separate consent must be obtained for each product, prohibiting “clubbing” of services. 
• Regulation of Selling Agents: Direct Selling Agents (DSAs) are restricted to contact hours between 9:00 AM and 6:00 PM. Agents must be clearly distinguishable from bank staff to prevent confusion regarding who is selling the product. 
• Post-Sale Feedback and Compliance: Banks must seek customer feedback within 30 days of a sale to ensure transparency. A half-yearly report on these interactions is mandated to improve sales practices. 

The draft guidelines are open for public comments until March 4, 2026, with implementation expected from July 1, 2026.

Necessity of Binding Guidelines on Mis-Selling by RBI 

• Surge in Grievance Volumes: Total complaints under the RBI Ombudsman Scheme rose 13.55% in FY25, reaching 13.34 lakh cases. This follows a previous 32.81% surge in FY24, highlighting a persistent trend of customer dissatisfaction that necessitates binding regulatory intervention. 
• Protecting Vulnerable Demographics: Senior citizens have become increasingly vocal, with a 24.09% rise in their complaints. Mandatory suitability checks are now necessary to prevent banks from selling complex products to individuals over 60 or those with limited financial literacy and low-risk appetite. 
• Curbing Coercive Bundling: Guidelines are vital to stop “compulsory bundling,” where loan approvals are conditioned on purchasing third-party insurance. A 2024 study revealed 62% of rural customers felt bullied into buying such add-ons, directly undermining fair credit access. 
• Systemic Incentive Conflicts: Institutionalized mis-selling is fueled by commission-heavy structures, where bank tellers and relationship managers prioritize sales targets over client needs. In a 2025 survey, 57% of managers admitted their superiors instructed them to mis-sell unsuitable products. 
• Digital Deception and Dark Patterns: The rise of digital banking introduced “dark patterns”—manipulative UI designs like false urgency or hidden charges. Binding rules are required to mandate periodic audits of digital interfaces and ensure explicit, recorded consent for every individual product. 
• Insurance Sector Instability: Mis-selling in the insurance sector is a “significant concern,” with unfair business practice complaints rising 14% in FY25. Nearly one in five life insurance grievances now relates to mis-selling, often tied to banks acting as corporate agents. 
• Financial Restitution Gaps: Existing norms often leave consumers without recourse. Binding guidelines now mandate 100% refunds and additional compensation if mis-selling is proven, ensuring banks face direct financial liability for unethical sales practices. 

Comprehensive Regulatory Measures by RBI to Curb Financial Mis-Selling Practices

• Integrated Ombudsman Scheme (RB-IOS): Launched in November 2021, this scheme consolidated three separate ombudsman units into one. It allows customers to file complaints for deficiency in service across all regulated entities. The RBI reported a 15.74% increase in complaints in 2022-23, handling over 4.68 lakh cases. The scheme permits awards up to ₹20 lakh for losses and ₹1 lakh for mental agony. 
• Charter of Customer Rights: Adopted in December 2014, this framework mandates five core rights, most notably the Right to Suitability. It forces banks to sell products aligned with a client’s financial status and risk appetite. Boards must oversee a Customer Service Committee to ensure these rights are not violated by aggressive sales targets or mis-aligned incentives. 
• Internal Ombudsman (IO) Mechanism: RBI mandated that banks with 10 or more service outlets and certain NBFCs must appoint an Internal Ombudsman. The IO acts as an independent authority to review rejected complaints before they reach the RBI. In 2023, the RBI extended this to Credit Information Companies (CICs) to curb errors in credit scoring, a major source of financial distress. 
• Third-Party Product (TPP) Guidelines: To regulate Bancassurance, RBI norms state that banks cannot force customers to buy insurance to get a loan. Under the Master Direction on Insurance, banks must disclose all commission earned from TPPs in their annual reports. Any incentive structure for bank staff must be approved by the board to prevent unethical “push-selling” of high-commission products. 
• Digital Lending Guidelines (DLG): Effective December 2022, the DLG framework targets mis-selling in the fintech space. It mandates a Key Fact Statement (KFS) that clearly lists the Annual Percentage Rate (APR), inclusive of all fees. It prohibits automatic credit limit increases without explicit consent and ensures all data collected is “need-based” to protect against predatory digital tactics. 
• Financial Literacy & Awareness (FLC): Through the National Centre for Financial Education (NCFE), the RBI funds mass awareness campaigns like “RBI Kehta Hai.” By educating the public on Key Fact Statements and cooling-off periods, the regulator aims to empower consumers to identify and report deceptive practices.