All you need to know about RBI's new draft norms to curb misselling

Customers must stay vigilant and avoid falling prey as mis-selling is not easy to prove

For a long time, customers who have walked into bank branches for routine banking needs have been mis-sold third-party products, especially insurance. The Reserve Bank of India (RBI) recently issued draft proposals to tighten the way banks advertise, market and sell third-party products.

 

Types of mis-selling 

Bank staff often sell insurance to customers who want to open a fixed deposit, promising higher guaranteed returns. They often do not explain the product’s complexity, the terms and conditions for early withdrawal and other key aspects.

 

“Mis-selling also takes the form of bundling policies with loans or deposits,” says Shilpa Arora, co-founder and COO, Insurance Samadhan. A bank may, for instance, refuse a home loan unless the customer buys a policy from the bank to cover that loan. 

In the past, bank staff have sold regular-premium products, with high annual premiums, as single-premium products. Customers realise the truth only later — that they have to pay the same high premium for several years. Many default on further payments, incurring steep losses. Banks may also hide key exclusions and charges.

 

The RBI draft proposes a number of steps to reduce such mis-selling.

 

Suitability and appropriateness checks 

According to the draft guidelines, banks must assess a product’s suitability and appropriateness before they sell it to a customer. They must document customer needs and be able to demonstrate that assessment later.

 

Earlier, sellers would take customers’ signatures on application documents. When customers later alleged mis-selling, they cited the signatures as evidence of consent. The draft says consent will not suffice if the product does not match the customer’s profile.

 

“Customer needs must be assessed using age at entry, existing liabilities, risk tolerance and paying capacity. For instance, retired senior citizens with no active financial liabilities may not need complex insurance products. Insurance should also be sold primarily as a protection tool rather than as an investment product,” says Arora.

 

Forced or conditional bundling 

Banks have often told customers that loan approval depends on their buying an insurance or investment product. They have also linked better loan terms to such purchases.

 

Earlier anti-bundling norms existed, but enforcement was weak. “The proposals treat conditional selling as a clear supervisory violation. They require banks to demonstrate product independence and document that customers were offered a choice. This shifts the burden of proof from the customer to the bank,” says Arora.

 

Sales incentives for staff to be curbed 

Bank staff mis-sell because their incentive structure rewards the sale of third-party products. The draft proposals aim to curb this driver.

 

Bank management often sets targets for the sale of these products. While incentives may not be removed entirely, targets and payouts are likely to be moderated. They may also get linked to suitability, persistency and customer outcomes. “Reducing the pressure of targets could shift staff focus from pushing products to serving customer needs, provided enforcement is strict,” says Arora.

 

Customer remediation 

Customer remediation aims to restore the customer to the position they would have been in if mis-selling had not occurred. “It can include refund of premiums or charges, payment of interest or compensation and penalty-free cancellation,” says Arun Ramamurthy, co-founder, Staywell.Health.

 

Sudhish Ramteke, associate director, Anand Rathi Insurance Brokers, points out that this provision raises the financial and reputational cost of mis-selling for banks.

 

Will the new norms curb mis-selling? 

Experts say the draft rules are well-designed and focus strongly on customer protection. “They address issues like commission- or incentive-driven targets, poor suitability checks, forced bundling and weak disclosure. They are also supported by refunds and corrections. They thus make it riskier for banks to sell unsuitable products,” says Ramteke.

 

One key shift is that the norms treat mis-selling as systemic, not incidental. “They tighten disclosure standards and impose clearer accountability on banks,” says Raheel Patel, partner, Gandhi Law Associates.

 

However, execution risks remain. “Success will depend on stricter enforcement and quick resolution of complaints,” says Ramteke.

 

These provisions will be effective only if mis-selling is proven. “Most customers will find it difficult to prove mis-selling,” says Ramamurthy. He adds that customer awareness also needs to improve.

 

Lacunae and concerns 

Experts say while the proposed rules are stronger than the earlier norms, a few lacunae remain that banks may exploit. “Key terms such as suitability, mis-selling and loss are loosely defined. Such loose definitions may allow banks to defend poor or forced sales using paperwork,” says Ramteke. Sales staff and agents may use subtle pressure tactics that are hard to prove.

 

“Without mandatory audio-visual recording of sales conversations for high-risk products, disputes will remain in evidentiary grey zones,” says Patel.

 

The writer is a Mumbai-based independent journalist

 

Precautions to avoid mis-selling

 

Get policy wordings, key features and illustrations in writing

 

Don’t buy long-term, complex products for short-term needs

 

Resist forced sales by demanding such requests in writing

 

Never sign blank proposal forms or papers

 

Record sales calls where possible

 

Use free-look period for review; cancel if product is unsuitable