At the time of taking a home loan, did the bank executive recommend that you take a home loan insurance policy? Legally, it is not mandatory to buy such a policy. However, many bank customers have reported that they were recommended to buy the policy.
On 23 February 2026, Finance Minister Nirmala Sitharaman warned banks against mis-selling insurance and other financial products. She advised banks to focus on their core business rather than spend time selling insurance when it is not required. The RBI has issued draft directions to banks to curb the mis-selling of financial products. In this article, we will understand what these directions are and how they will protect customers.
The RBI issued the draft directions for responsible business conduct for commercial banks on 11 February 2026. The directions will come into effect from 1 July 2026. As the directions pertain to preventing mis-selling, let us start by understanding what mis-selling is.
What is mis-selling of financial products?
As per the RBI directions, mis-selling refers to the sale of a financial product/service by a bank, illustratively, in the following cases:
- Sale of a product/service, which is neither suitable nor appropriate in view of the customer’s profile, even if with their explicit consent;
- Sale of a product/service without providing correct or complete information or by giving misleading information;
- Sale of a product/service without the customer’s explicit consent;
- With the sale of a requested product/service, compulsory bundling of another product/service;
- Sale of a product/service involving any other element defined by the financial sector regulator concerned as mis-selling
Many customers have been victims of mis-selling even though they have given their explicit consent. That happens when they are either not given complete information, or have been given misleading information, or the product is neither suitable nor appropriate in view of their profile.
Now that we understand the meaning of mis-selling, let us examine the RBI directions on the mis-selling of financial products and services.
Comprehensive policy
A bank must put in place a comprehensive policy for advertising, marketing, and sales of its financial products and services. Among other things, the policy must include compensation to customers in cases of mis-selling.
Customer consent
The bank must take explicit consent from a customer for offering or selling its own or third-party products or services. Consent must be obtained for each product or service individually, rather than clubbing together consents for multiple products or services.
The process for obtaining consent must be designed in a way such that the customer goes through the terms and conditions, if any, before giving consent.
Advertisement and marketing
The bank must determine the financial product or service suitability and appropriateness for the customer before it is marketed or sold to them. The bank’s advertising materials must be clear and factual, and disclose all fees/charges associated with the product/service being promoted.
A customer can be sent commercial communication or promotional offers alerts only if they have given explicit consent to receive them. Subscribing and unsubscribing from any services or commercial communication must be equally easy.
Telephonic contacts and/or visits to customers should be between 9:00 AM and 6:00 PM. Bank employees or DSAs must not mislead or coerce the customer into purchasing any product or service.
Sales of financial products or services
The bank must use a separate application form for the sale of a particular product/service and prominently indicate its nature and features. The product/service documents should be available in the region’s language or in a language that the customer understands. On sale completion, a copy of the terms and conditions/agreement, signed by the customer, should be provided to the customer, either physically or by email, as per the customer’s preference.
The bank policies and practices should neither create incentives for mis-selling nor encourage employees/DSAs to push product/service sales. There should be no direct/indirect incentive from a third party for bank employees engaged in marketing/sales of third-party products/services.
There should be no bundling of the sale of any third-party product/service with the bank’s own product/service. The bank should not fund a customer’s purchase of its own/third-party products/services from a loan sanctioned to the customer without their explicit consent.
The bank’s user interfaces must not deploy any dark patterns. The RBI directions include an illustrative list of dark patterns, which may be relevant to banks.
Feedback and compensation
Within 30 days of the sale of a product/service, the bank must seek the customer’s feedback to ensure the customer has understood the features and risks associated with such product/service. The customer can lodge a complaint regarding the mis-selling of a product/service within the specified timeline.
In cases where the product/service mis-selling is established, the bank must cancel the sale and refund the entire amount to the customer. Further, the customer must be compensated for any loss arising due to mis-selling.
Adherence to other regulations
Along with the RBI directions, banks shall also ensure compliance with:
- Guidelines issued by DoT, Government of India, TRAI, and other relevant authorities
- Guidelines issued by SEBI, IRDAI, PFRDA, etc., regarding products/services falling under their respective domains
- Any relevant guidelines issued by the Reserve Bank on related matters, as applicable to the banks
How will RBI directions protect customers?
The finance minister’s warning to banks on mis-selling of financial products/services came in the wake of increasing instances of mis-selling. The RBI directions specify that a product/service sale will be classified as mis-selling even if with the customer’s explicit consent, if it is neither suitable nor appropriate in view of the customer’s profile. Wherever mis-selling has been established, the bank must cancel the sale and provide a full refund to the customer, along with compensation for any loss. Thus, the RBI’s directions are timely to stop mis-selling and protect customers.
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached on LinkedIn.
