RBI seeks to end mis-selling at bank counters, mandates refunds

Mumbai: India’s central bank has moved to redraw the boundaries of how banks sell financial products, unveiling sweeping draft rules that target mis-selling, bundled sales and even “dark patterns” in banking apps.

The proposed framework on responsible business conduct released by the Reserve Bank of India (RBI) on Wednesday mandates explicit, recorded consent for every product, bars coercive cross-selling, and requires full refunds with compensation where mis-selling is proven.

Comments on the draft rules have been invited until 4 March. The new regulations will come into effect from 1 July.

The move follows concerns flagged by the RBI in its monetary policy last week, where it said third-party products sold at bank counters must be suitable to customer needs and aligned with individual risk appetite.

What changes under the draft rules

The draft guidelines introduce a formal definition of ‘mis-selling’, covering the sale of products that are unsuitable for a customer’s profile, providing misleading or incomplete information, selling without ‘explicit consent’, and ‘compulsory bundling’ of products.

The RBI has defined explicit consent as a specific, informed and unambiguous indication of agreement that must be recorded by the bank. Consent for multiple products cannot be clubbed together and must be obtained separately.

The central bank has also taken aim at dark patterns — deceptive digital design practices that nudge or trick users into unintended choices.

Banks have been directed to ensure that their websites and apps do not deploy such tactics and to subject user interfaces to periodic audits. Illustrative practices cited include false urgency, hidden charges, pre-ticked consent boxes and difficult subscription cancellations.

Further, banks have been barred from bundling third-party products with their own offerings and from funding product purchases through loans without explicit consent. Incentive structures that encourage aggressive selling have also been discouraged.

To strengthen accountability, banks must seek customer feedback within 30 days of a sale and prepare half-yearly reports on findings. If mis-selling is established, banks must refund the entire amount paid and compensate customers for any loss.

The draft also requires banks to put in place a comprehensive, board-approved policy covering suitability assessments, customer feedback mechanisms, and compensation mechanisms. Lenders must determine whether a product is appropriate for a customer based on factors such as age, income, financial literacy and risk tolerance.

Strict norms have also been prescribed for direct selling agents (DSAs) and direct marketing agents (DMAs), who are engaged by banks to market their own or third-party products. Banks must maintain and publish updated lists of such agents, ensure they are trained and certified, and make them clearly distinguishable from bank staff when operating within bank premises.

RBI governor Sanjay Malhotra had said on 6 February that customers would be “very happy” with the proposed measures, acknowledging that mis-selling has been a persistent concern despite earlier regulatory steps.

Expert views

Experts said the draft rules strengthen accountability in distribution practices.

“When banks act as intermediaries for third-party products, the obligation to safeguard customer interest becomes even more critical,” said Prakash Agarwal, partner at Geofin Capital. “The Draft Amendment Directions, 2026 rightly recognise this by clearly ring-fencing agency and referral roles, restricting banks to regulated products, mandating fee-based models without risk participation, and strengthening disclosures and grievance redressal,” Agarwal said.

By reducing conflicts of interest and enhancing transparency, the RBI has reinforced accountability in distribution practices and protected the trust underpinning the banking system, Agarwal added.

Wider regulatory and government concerns

The draft directions come amid sustained pressure from the government and regulators over rampant mis-selling, particularly of insurance products through bank channels.

India’s Economic Survey for FY24 cautioned that the banking industry should resist pursuing short-term profits at the expense of customers. “Product mis-selling is too rampant to be dismissed as an aberration of a few overenthusiastic sales personnel,” it said, adding that acknowledgement of mis-selling and compensating for losses is sound business practice across banking, insurance and capital markets.

In November 2024, insurance regulator Irdai’s then chairman Debasis Panda urged bankers to focus on core banking functions rather than aggressively push insurance. A day earlier, news agency PTI reported that Union finance minister Nirmala Sitharaman had made similar observations, noting that mis-selling of insurance policies can indirectly raise borrowing costs for customers.

In August 2025, however, Malhotra ruled out any ban or curbs on bancassurance — the partnership model that allows insurers to sell their products to a bank’s customers. He said the central bank would focus on strengthening safeguards rather than disrupting bancassurance, a key channel for financial inclusion.

The governor's remarks came amid growing pressure on banks to boost fee-based income and recent government directives to delink insurance sales from employee incentives.

The finance ministry’s department of financial services (DFS) has also asked banks and non-banks to review marketing practices and delink insurance sales from employee incentives. Mint reported in June 2025 that the finance ministry has asked banks and non-banks to stop offering incentives on insurance sales to eliminate this malpractice.