The Reserve Bank of India’s stricter framework on mis-selling of financial products, effective January 1, 2027, is a timely and necessary intervention in a market where banking, lending, insurance and investment products are increasingly sold together. The rules seek to curb unsuitable sales, misleading information, sale without explicit consent, compulsory bundling, and deceptive digital practices known as dark patterns. For the insurance industry, particularly bancassurance, this development deserves close attention.
A sale may be treated as mis-selling when a product is recommended without assessing the customer’s need, risk profile, financial capacity, age, objective, or existing protection. If a borrower is pushed to buy an insurance policy only because a loan is being sanctioned, without proper explanation of cover, exclusions, alternatives, or suitability, the transaction may not be genuine advice. It becomes target-driven selling.
Compulsory bundling is another serious concern. It refers to making one product conditional upon the purchase of another. In loan-linked insurance, customers often feel compelled to buy policies from the bank’s preferred insurer. RBI’s approach rightly questions such practices. Insurance may be necessary to protect a loan asset, but the customer must have freedom to choose the insurer, coverage amount, and product type. Protection should not become coercion.
The new consent requirements are equally important. Consent must be explicit, informed, recorded, and based on clear affirmative action. Pre-ticked boxes, vague declarations, rushed signatures, or verbal pressure cannot be considered valid consent. Customers must know what they are buying and why.
Disclosure must also improve. Banks must clearly explain premium, tenure, commission, exclusions, surrender terms, cancellation rights, claim process, and whether the product is optional. In insurance, incomplete disclosure at the time of sale often becomes a dispute at the time of claim.
Dark patterns—such as misleading buttons, hidden charges, confusing opt-outs, false urgency, or digital nudges—must be prohibited because they manipulate customer behaviour. In financial products, such practices can cause long-term harm.
The larger issue is underinsurance. Banks often insure only the loan value, not the full property value or real family protection need. In a major loss, claim settlement may fall short due to underinsurance or average clause, leaving both borrower and lender exposed.
Another weakness is the poor insurance knowledge of many bank staff selling these products. Insurance is not a routine add-on; it is a contract of protection requiring proper explanation. Bancassurance must move from product pushing to genuine advisory.
The proposed framework should also encourage banks to move away from a volume-based sales culture towards an advice-based distribution model. Performance evaluation of relationship managers should not depend solely on the number of insurance policies sold, but also on persistency, customer satisfaction, suitability of products sold, and complaint ratios. Incentive structures that reward only sales volumes often become the root cause of aggressive selling and unsuitable recommendations.
“The RBI has shown the way by placing customer interest at the heart of financial product distribution. It is now time for IRDAI to complement these reforms with a comprehensive suitability framework for insurance sales across all channels—not just banks, but agents, brokers, corporate agents, web aggregators and digital platforms. Only then can the insurance industry truly move from a sales culture to an advice culture.”
Authored by:
Dr. Rakesh Agarwal
Editor, The Insurance Times
