The Reserve Bank of India (RBI) is moving to curb the mis-selling of financial products by proposing a ban on incentives paid to bank staff by third-party companies, such as insurance firms and mutual fund houses. The proposed regulations, outlined in draft guidelines issued on Monday , also address concerns around manipulative marketing tactics – known as “dark patterns” – and aim to improve customer protection.
The draft amendment directions, concerning the “Advertising, Marketing and Sales of Financial Products and Services by Regulated Entities,” seek to fundamentally alter how banks distribute financial products. A key provision prohibits banks from bundling the sale of third-party products with their own offerings. If a bank’s product sale is contingent on purchasing a third-party product, customers must be given the option to acquire that third-party product from any provider they choose.
The proposed rules represent a significant escalation in the RBI’s efforts to address long-standing concerns about aggressive sales practices within the banking sector. Finance Minister Nirmala Sitharaman previously highlighted the need to maintain public trust in the banking system and curb mis-selling in November of last year, signaling the government’s support for stricter oversight.
Refunds and Compensation for Mis-selling
Under the proposed framework, banks will be legally obligated to refund the full amount paid by customers in cases where mis-selling is proven. Banks must compensate customers for any financial losses resulting from the mis-selling, adhering to their established internal policies. The RBI has defined mis-selling as the sale of products or services that are unsuitable or inappropriate for a customer’s financial profile, even if explicit consent was obtained. It also includes sales made without complete or accurate information, misleading statements, or without the customer’s clear agreement, as well as the practice of bundling products.
The move is expected to have a substantial impact on banks, insurance companies and mutual fund houses, all of which rely heavily on banks for product distribution. Banks currently generate revenue through fees earned by distributing these third-party products, a revenue stream that could be significantly reduced by the proposed ban on incentives.
Addressing “Dark Patterns” and Sales Practices
The RBI is also taking aim at manipulative marketing techniques, commonly referred to as “dark patterns.” These tactics, designed to subtly coerce customers into making purchases they might not otherwise make, are to be prohibited. Examples cited in the draft guidelines include creating a false sense of urgency, “basket sneaking” (adding unexpected items to a customer’s purchase), “confirm shaming” (guilting customers into opting in), and subscription traps.
The regulations extend to the conduct of direct selling agents (DSAs) working with banks. The RBI stipulates that telephonic contact and in-person visits should generally occur between 9:00 AM and 6:00 PM, with any contact outside those hours requiring explicit customer consent. Agents representing third parties on bank premises must be clearly distinguishable from bank employees through visible identification.
Enhanced Customer Due Diligence and Transparency
Banks are also being directed to enhance their customer due diligence processes. They must assess the suitability and appropriateness of products based on factors such as risk-return profiles, investment time horizons, complexity, and fee structures, alongside the customer’s age, income, and financial literacy. The RBI explicitly prohibits banks from marketing third-party products as their own.
To ensure transparency and accountability, banks are required to establish a mechanism for collecting customer feedback within 30 days of a product or service sale. This feedback will be used to assess customer understanding of the product’s features and associated risks, and to inform ongoing reviews of existing policies and product offerings. Banks will be required to submit half-yearly reports detailing the findings of this feedback process.
Loan Facility Restrictions and Implementation Timeline
The draft guidelines also address concerns about banks using loan facilities to finance the purchase of products or services – whether their own or those of third parties – without explicit customer consent. This practice is to be prohibited. Customers will have 30 days from receiving the terms and conditions to lodge complaints regarding mis-selling, unless a specific timeframe is stipulated by the relevant sector regulator.
The RBI has proposed that these new norms come into effect on . The regulator is currently soliciting feedback on the draft guidelines, with a deadline for submissions set at .
The proposed changes signal a determined effort by the RBI to prioritize customer protection and promote ethical sales practices within the Indian banking sector. The impact of these regulations will be closely watched by both financial institutions and consumers alike.
