The stink around the mis-selling insurance products of banks has reached the corridors of power finally: The central bank, on February 11, announced the Draft Reserve Bank of India (Commercial Banks — Responsible Business Conduct) Amendment Directions, 2026. The aim is to prevent mis-selling of financial products by banks. This, the Reserve Bank of India (RBI) intends to do through suitability assessments, explicit consent requirements, prohibition of compulsory bundling and dark patterns, customer feedback mechanisms, and compensation frameworks. The expectation is that banks put customer interest over sales targets. This is a good half-step, but unless RBI defines suitability and the robustness of the customer-feedback mechanism, it will remain ineffective to stop the haemorrhage of money.
First, some background. The anecdotal experience of bank customers feeling like chickens in front of hungry wolves has been backed by hard evidence for more than a decade. I had presented a paper published in the Journal of Comparative Economics to the then-RBI governor, based on findings from mystery-shopped banks (in which an evaluator poses as a customer for the bank), using a third-party market research firm. The 2016 paper found that banks were giving wrong information across costs, returns, lock-in periods and exit costs. In life insurance, the “lying” was at 100% on cost disclosures and at 99% on returns disclosures. In fact, after the presentation, two vigilance officers told me that what my co-author and I had documented is just the tip of the iceberg; it was much worse on the ground. RBI knew it. It did nothing for years.
In a half-hearted first step in June 2017, RBI “allowed” customers to complain to the banking ombudsman for sale of unsuitable third-party products. Bear in mind, we were “allowed to complain”. Of course, it had zero impact. Over time, the public outcry got so loud that the Economic Survey has flagged the problem twice in the past few years. A documentary and a research paper from 1 Finance magazine had very hard-hitting stories.
There are three things that need to be fixed, or the 2026 regulation will go the way of the 2017 one — that is, it will be ineffective and perpetuate the status quo.
First, suitability has not been defined. While a lot of ink has been used to describe dark patterns or digital user interfaces that manipulate or deceive users into taking actions they did not intend, what might be a “suitable” product or service is left for the banks to decide. Should the fox decide the thickness of the doors of the chicken coop? Regulation needs to be deeply prescriptive in retail finance; leaving it to each bank to decide what is suitable is not going to be effective.
While the guidelines specify factors to consider such as age, income, risk tolerance and financial literacy, they do not flesh these out. What constitutes “suitable” for a particular customer profile will depend on each bank. Effectively, therefore, every customer will have to search across all the commercial banks to discover the various interpretations of “suitable”.
RBI needs to do the work in defining a suitability framework that all banks will follow. For example, selling a life insurance policy to a 60-year-old is an unsuitable sale, unless he has a loan that he is protecting. Steering a fixed-deposit-seeking investor into an insurance policy is an unsuitable sale. Selling a small cap mutual fund to a low-risk investor is an unsuitable sale. It needs to look at best practices globally and then examine the Indian market. We have a large first-generation-banked population. Expecting them to understand the nuances of costs, exit clauses and market returns and then take a considered decision is simply foolish. The onus must be on the seller to make asuitable sale that does no harm at the base level and then builds financial security.
Second, RBI needs a feedback loop independent of the banks. The interests of banks lie in hiding mis-selling. RBI has a very large investor education and protection budget. It could use a part of that to go beyond comics aimed at improving financial literacy and hiring celebrity endorsers, and instead carry out regular mystery-shopping exercises using third-party institutions that have no skin in the game. Relying on the banking association or their staff may not be able to fully hear the voice of the real banking customers. There is a way to hear what people are saying, provided RBI really wants to hear it.
Third, unless the insurance regulator, Irdai, works to remove the big fat “ladoo” (a phrase used by bankers to describe front commissions; “bakra” or goat is used to describe the customers) embedded in the first-year payments made by an insurance buyer towards a life insurance policy, these regulations will do nothing to move the needle. Banks can harvest up to 100% of the first-year premium as commissions. Irdai needs to link commissions to persistence of the policy rather than put incentives in the wrong place and introduce commission clawbacks for policies that don’t stay the course.
This is not an argument to stop banks from selling insurance. To the contrary, banks are the best placed to be partners in the journey of financialisation of the country. They are still trusted, though that trust is fast eroding, one anecdote at a time. On the ground, the front-line staff too are deeply conflicted; they see the destruction of the finances of individuals as they are forced to sell terrible products to meet targets. A possible solution could be AI-based, full-service financial planning offered by banks, which will give them an annuity income that grows as Indian per capita income rises. Households will become partners, and not victims of finance as they are today.
Monika Halan is the best-selling author of the Let’s Talk series of books on money. The views expressed are personal
