Anti mis-selling norms may affect BFSI firms’ revenue

The Reserve Bank of India (RBI) has proposed stringent draft guidelines to curb mis-selling and coercive practices in the sale of third-party financial products, such as insurance, mutual funds, pensions, and other regulated offerings, by banks and other regulated entities. Issued on February 11, 2026, as amendments to the Responsible Business Conduct Directions (including specific versions for commercial banks), the rules aim to place customer protection at the forefront by banning forced bundling, "dark patterns" in marketing, and unsuitable sales, while mandating explicit consent, suitability assessments and full refunds plus compensation in proven cases of mis-selling. 

The draft directions explicitly prohibit compulsory bundling, where access to a bank's core product—like a loan, savings account, or locker—is conditioned on purchasing a third-party item. Banks cannot tie insurance to loans or deposits, force customers to buy from specific providers, or present third-party products as their own. Sales must follow a rigorous suitability check, evaluating the product's fit based on the customer's age, income, financial literacy, risk tolerance and needs—for instance, avoiding life insurance sales to those over 60 or without earnings. 

Mis-selling is clearly defined to include unsuitable products, misleading information, lack of explicit consent, bundling, or abusive practices. If established, banks must refund the full amount (including premiums) within 30 days and compensate for losses, with potential penalties or license impacts. A former State Bank of India Chairman noted that cross-selling (or fee income from third-party products like insurance) typically accounts for 20-30% of a bank's non-interest income, depending on the institution. 

While the rules do not outright ban such sales, they eliminate bundled or coercive revenue streams, potentially reducing some fee income. However, larger banks have already shifted toward ethical practices, including customer profiling and transparent showcasing. He emphasized that genuine, right-selling remains permitted, and the guidelines strengthen enforcement through mandatory refunds, compensation, and internal governance, encouraging voluntary compliance even with limited supervisory bandwidth. 

From the insurance perspective, former IRDA official described the move as a "welcome step" and long-overdue, as it formally defines mis-selling, dark patterns, and duties of banks/distributors (including advertising and marketing norms). Bancassurance remains a major channel for insurers, and initial sales volumes could dip—particularly for companies heavily reliant on bank partnerships—if processes become more friction-heavy. 

However, with a four-month window (public comments due by March 4, 2026, and final rules effective July 1, 2026), banks and insurers have time to adapt through proper risk assessments, offering multiple options, direct premium payments to insurers, and recorded proof of suitability. 

He highlighted clarifications needed on free-look period refunds (e.g., who bears medical/stamp duty costs) and mutual fund scenarios where NAV declines post-sale. 

Both experts agreed the guidelines extend beyond insurance to mutual funds, NPS, and all third-party products, promoting trust, transparency, and long-term benefits for customers, banks, and insurers. While short-term adjustments may hit volumes and fee income, they view the framework as essential to curb predatory practices—like forcing insurance on locker or loan customers—and foster sustainable distribution. 

The ex-SBI Chairman stressed that bancassurance has boosted insurance penetration (still low at around 4%), and ethical channels add value if malpractices are controlled. The proposals signal RBI's intensified focus on customer-centric banking, following recent recovery agent rules and broader regulatory tightening.