As households seek out higher return options beyond bank deposits, cases of distributors mis-selling investment products have assumed alarming proportions. Typically, they hype up returns and underplay risks. The Securities and Exchange Board of India (SEBI) has taken on this problem by barring upfront incentives, capping commissions and strictly regulating financial advisors. However, relationship managers and selling agents at banks and NBFCs (non-bank finance companies) are out of the loop.
Therefore, there was a crying need for Reserve Bank of India (RBI) to establish strong deterrents against mis-selling. It has attempted this through new draft directions on advertising, marketing and sales of financial products which cover not just commercial banks, but also small finance banks, co-operative banks and NBFCs. While the proposed rules are good, their efficacy in curbing mis-selling will depend on the ease with which customers can raise complaints and prompt enforcement actions from RBI. After clearly defining terms such as mis-selling, explicit consent and dark patterns, the draft proposes four sets of safeguards. One, it proposes that lenders seek the explicit consent of customers even to solicit business. As explicit consent is defined as the customer agreeing to a solicitation in writing, this can go a long way in curbing the everyday nuisance of unsolicited calls and mailers from financial entities. Two, no product can be pitched to a customer without a suitability assessment first. Here, what is suitable or not has been left undefined. Most financial products already have suitability assessments in place as a regulatory requirement, but this is treated as a post-sale formality. The challenge is in ensuring that this exercise is taken more seriously.
Three, lenders need to ensure that their employees don’t receive any direct/indirect incentives for selling third-party products or bundle them with loans or other services. Often, bank staff push third party products far more than the bank’s own loans or deposits. However, whether lenders will voluntarily restructure pay packages of their employees to comply with these directions is moot. Four, lenders need to establish a feedback mechanism whereby customers are contacted within 30 days. Where customers lodge complaints for mis-selling, the lender must repay the entire amount received and compensate losses. Banks have also been directed to follow the regulations issued by SEBI, the telecom regulator, insurance and pension regulators with respect to selling practices.
While these proposals are fairly comprehensive, they fall short in detailing what happens when lenders don’t follow them. Presently, the only recourse customers have in cases of mis-selling complaints, is to approach the ombudsman. The ombudsman system is not effective in providing prompt remediation. To deter mis-selling, RBI needs to impose hefty penalties on lenders, besides ensuring proper compensation to customers.
Published on February 17, 2026