The Reserve Bank of India (RBI) has tightened its framework to curb the mis-selling of financial products by banks, non-banking financial companies (NBFCs) and other regulated entities.
The regulator has underlined that sales incentives cannot take precedence over customer interest. Financial products must be appropriate for the buyer, their risks and benefits must be communicated clearly, and they should only be sold after obtaining explicit consent.
Effective Jan. 1, 2027, the RBI's updated rules will prohibit financial institutions from introducing compensation models that encourage staff or intermediaries to prioritise sales over customer interests. The requirements will also cover influencers and digital marketing partners working on behalf of banks and financial institutions.
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Four Major Changes Customers Should Know
The RBI's latest directions introduce several safeguards aimed at making the sale of financial products more transparent and customer-centric. Here are the key changes.
1. Explicit Customer Approval Required
Banks and NBFCs will have to obtain clear and informed consent before selling any financial product or service. Where a single application or consent form covers multiple offerings, each one must be listed separately, allowing customers to select only those they genuinely wish to purchase.
The RBI has also mandated that digital platforms must set the default consent option to "No" or "I do not agree", preventing websites and mobile apps from nudging users towards acceptance by default.
2. End To Mandatory Product Tie-Ins
Banks will not be allowed to compel customers to buy third-party products as part of another financial transaction.
For example, borrowers requiring insurance for a loan must be given the freedom to purchase cover from any eligible insurer instead of being directed towards the lender's preferred partner.
The change is expected to improve competition while reducing the scope for unnecessary add-on sales.
3. Customer Profile Must Guide Product Recommendations
Financial institutions will need to evaluate whether a financial product is suitable before recommending it.
The assessment should consider factors including age, income, financial capability, investment goals, risk tolerance and the complexity of the product. Even a valid sale may be questioned if the product is clearly unsuitable for the customer.
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4. Crackdown On Manipulative Online Practices
The RBI has also taken aim at dark patterns: digital design techniques that influence users into making choices they may not otherwise have made.
These include pre-ticked consent boxes, misleading button designs, hidden charges, repeated prompts, artificial time pressure, cumbersome cancellation processes or interfaces that make accepting an offer easier than declining it.
Banks Face Refund Obligation For Mis-Sold Products
The central bank has directed that customers must not bear the financial cost of proven mis-selling. According to the RBI, banks will be required to refund the full amount collected for a mis-sold product or service and inform customers that the sale has been reversed.
“In cases where mis-selling of a financial product / service is established, the bank shall refund the entire amount paid by the customer for purchase of the financial product / service and also intimate the customer about cancellation of the sale, wherever applicable. Further, the bank shall also compensate the customer, for any loss arising due to misselling, as per its approved policy,” the RBI said.
The rules establish a formal grievance mechanism, enabling customers to raise complaints with their bank if they believe a financial product has been sold inappropriately, subject to the applicable timelines.
“A customer can lodge a complaint regarding mis-selling of a financial product / service with the bank within the timeline specified by the respective 10 financial sector regulators. In cases where no such timeline has been specified, customers can lodge complaints within 30 days of receiving the signed copy of the terms and conditions / agreement,” the notification read.
If a lender determines that a customer was mis-sold a financial product or service, it will have to reimburse the entire purchase amount and confirm that the sale has been reversed. The bank may also be required to compensate the customer for any additional financial loss resulting from the mis-selling, subject to its internal policy.
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