NEW DELHI: The Reserve Bank of India has proposed a new set of rules that could reshape how banks and financial institutions sell insurance, loans, mutual funds and other financial products to customers.Issued on February 11, 2026, the draft All India Financial Institutions — Responsible Business Conduct Amendment Directions, 2026 seek to address a long-standing concern in retail finance — mis-selling, or the sale of unsuitable, unwanted or poorly explained financial products.The proposed framework applies to All India Financial Institutions (AIFIs), including NABARD, National Housing Bank, EXIM Bank and SIDBI. The draft is open for public comments and is proposed to come into effect from July 1, 2026, if finalised.Here is what the draft proposes and how it could affect customers, banks and insurers if implemented.
What is mis-selling — and why the draft redefines it
For the first time within this framework, the RBI draft sets out a detailed definition of mis-selling under Clause 3A.An institution would be considered to have mis-sold a product if it:
- Sells a product unsuitable for a customer’s profile, even where explicit consent exists;
- Provides incomplete or misleading information;
- Completes a sale without explicit customer consent; or
- Bundles an additional product with one the customer actually requested.
The most consequential element is the first. Under the proposal, customer consent alone would no longer shield an institution if the product itself was inappropriate for the customer’s age, income, financial literacy or risk tolerance.
In effect, responsibility shifts from what customers signed to how products were sold.
How branch interactions and sales calls could change
The draft places suitability assessment at the centre of product sales.Clause 32ZF proposes that institutions determine whether a product is suitable and appropriate before marketing or selling it. The assessment must compare product characteristics – including risk-return profile, complexity, fees and investment horizon – against customer attributes such as income, financial literacy and risk tolerance.If implemented, this could mean more structured conversations before recommendations are made, with profiling becoming part of the sales process rather than an afterthought.Sales outreach is also addressed. Under Clause 32ZL:
- Agents and representatives may normally contact customers only between 9 AM and 6 PM unless expressly authorised otherwise;
- Terms and conditions must be explained before completing a sale; and
- Misleading or coercive conduct is prohibited.
Agents would also need to disclose upfront if purchasing through them involves different fees or charges compared with buying directly from the institution.
However, Rohit Shah, Financial Planner, cautioned against expecting immediate change on the ground. “I’d call most of this unethical selling rather than mere mis-selling. Given the slow nature of such changes actually transpiring on the ground, I suspect customers won’t notice a material difference immediately,” he said. Shah noted that ground-level behaviour typically lags regulation by several quarters, and that real awareness at the customer end would not build unless the RBI mandated sustained awareness campaigns – the way AMFI drove “Mutual Fund Sahi Hai” or IRDAI pushed “Insurance Liya Achha Kiya.” “Without that, these remain gazette notifications, not behavioural shifts,” he said.Shruti Ladwa, Partner and Insurance Sector Leader at EY India, offered a more structural reading of the shift. “The RBI circular represents a shift towards more transparent distribution, with a focus on strengthening customer protection,” she said. Ladwa said the most visible change for customers would be in the nature of the conversation itself. “Branch interactions and sales calls will prioritise the customer’s financial profile and need analysis, supported by suitability assessments and standardised disclosures. The recommendations will also be better explained and documented, moving the conversations towards advisory or need-based dialogue which will enhance transparency and long-term trust,” she said.
Consent rules become more explicit — especially online
The draft introduces detailed requirements around how customer consent must be obtained.Under Clauses 32ZD and 32ZE:
- Consent must be taken separately for each product or service;
- Institutions cannot bundle multiple approvals into a single checkbox; and
- Digital interfaces must ensure customers navigate applicable terms and conditions before granting consent.
Promotional communications may be sent only where explicit permission has been given, and unsubscribing must be as simple as subscribing.
Vivek Iyer, Partner and Financial Services Risk Advisory Leader at Grant Thornton Bharat, said the opt-in requirement addresses a gap that has long worked against customers. “Currently, many customers do not even know that they have opted for being contacted and this guideline will give them the flexibility to decide,” he said. He added that the change would reduce unsolicited outreach to those who do not want it, “which is a positive from a conduct risk point of view, which is how it should have been in the first place.” Iyer also said the framework would push institutions toward more sustainable communication strategies. “Financial literacy campaigns will help financial institutions inform customers about new products and services, instead of reaching out through unsolicited calls,” he said.The draft also proposes a ban on “dark patterns” – interface designs that nudge users into unintended decisions. Annex I lists practices such as false urgency messaging, default add-ons, subscription traps, disguised advertisements and hidden pricing structures as examples relevant to financial services.
What customers may need to do differently
The proposed framework also changes what happens after a sale.Clause 32ZV requires institutions to contact a sample of customers within 30 days to confirm they understood the product’s features and risks. The feedback must be collected by teams not involved in the original sale.Customers who believe a product was mis-sold may lodge complaints within timelines specified by sectoral regulators, or within 30 days of receiving signed agreements where no timeline exists (Clause 32ZW).If mis-selling is established, Clause 32ZX proposes:
- Refund of the entire amount paid; and
- Compensation for losses arising from the mis-sale in accordance with institutional policy.
The emphasis moves toward evaluating conduct and suitability rather than relying solely on signed documentation.Shah said customers should not wait for institutions to act first. “Caveat emptor always applies. Customers should read the product literature carefully, insist on written answers from the bank relationship manager, and do their own due diligence before trusting any recommendation,” he said. He pointed to pressure tactics that remain common: RMs seeking help in meeting sales quotas or offering quid pro quo for routine banking services such as a locker or a loan. “Customers must resist this influence, ask tough questions, and demand that their normal banking services are never held hostage to product purchases,” Shah said. On the new complaint provisions, he described the shift as decisive: “If mis-sold, the draft rules now require banks to refund the full amount paid and compensate for any loss — a decisive shift from ‘buyer beware’ to ‘seller beware’. Customers should document everything and escalate through the RBI Ombudsman if the bank fails to act.”Ladwa said informed decision-making would remain the customer’s best protection even under the new framework. “Before purchasing any financial product, customers should ensure that they clearly understand product features, costs and exclusions, among other things. They should also evaluate how the product aligns with their financial goals and risk profile,” she said. On the complaint process, Ladwa said the revised framework was designed to deliver timely resolution. “If a customer believes a product has been mis-sold, they can lodge a complaint with the bank within the timeline specified by the respective financial sector regulator. The revised emphasis on accountability is intended to ensure timely resolution and fair outcomes while strengthening customer protection,” she said.
Could tighter rules affect bank earnings?
Banks and financial institutions generate fee income by distributing third-party products such as insurance policies, mutual funds and pension schemes.
The draft introduces provisions that could influence how this business operates, including:
- Mandatory suitability assessment before sale (Clause 32ZF);
- Prohibition on incentives encouraging aggressive product pushing (Clause 32ZR); and
- Restrictions on compulsory bundling of third-party products (Clause 32ZS).
According to Vivek Iyer, the intent is tied to broader financial stability goals. “Systemic risk stability is one of the core objectives of the Reserve Bank of India and treating customers fairly is one of the key goals to keep the financial services system stable. Mis-selling guidelines issued by RBI are issued with this intent to protect consumer interests and thereby maintain financial stability, which is a long-term positive impact for the financial services ecosystem.”He added that institutions may need to embed customer protection into business strategy rather than treat the framework purely as compliance. “We expect the approach by the financial institutions to change from sellers of products or services to providers of genuine solutions for customer challenges.”Iyer noted that stronger dispute-resolution mechanisms may also become necessary as complaint processes evolve.Shah said the revenue impact should not be underestimated. “Third-party product distribution is now a critical revenue pillar – fee income constitutes roughly 25–30% of total income for top private banks,” he said.
But he argued that a shift in approach could offset near-term pressures. “Banks that pivot from pushing products to genuinely understanding customer needs may find that right-fit recommendations lead to higher retention, larger ticket sizes, and better margins over time — offsetting the short-term revenue hit.”Ladwa said the income pressure was real but was likely to be transitional. “In the near term, banks could see moderate pressure on fee income, alongside some increase in compliance and process-related costs. However, this impact is likely to be transitional only. As banks recalibrate distribution models and adapt to the requirements, income momentum should stabilise over the medium term,” she said. She added that larger institutions were better placed to absorb the shift. “Large private banks, in particular, are well positioned to adapt quickly given their strong digital infrastructure, integrated platforms and established capability in managing process transitions,” Ladwa said.
Implications for bancassurance and insurance distribution
Insurance distribution through bank branches – commonly known as bancassurance – is directly affected by several draft provisions.The proposals state that:
- Customers cannot be compelled to purchase third-party products alongside another service (Clause 32ZS);
- Institutions cannot market third-party products as their own (Clause 32ZG); and
- Agents operating inside branches must be clearly identifiable (Clause 32ZB).
These measures could alter how insurance products are presented within banking relationships, particularly where policies have historically been linked to loans or relationship-based selling.
Ladwa said leading insurers had already built resilience into their distribution models. “Bancassurance has evolved over the past decade, and most bank-promoted insurers have built strong distribution, product and servicing capabilities,” she said. She acknowledged a likely near-term slowdown but said adaptation would follow quickly, driven by three levers: distribution evolution toward advisory and digitally enabled models, technology-led sales enablement including AI-driven personalised product recommendations, and product innovation with greater emphasis on need-based solutions and simpler structures. Ladwa added that diversification would cushion the impact. “Most leading bank-promoted insurers have diversified distribution, with roughly 50% of premium coming from non-bancassurance channels. This should help cushion the impact and enable faster adjustment,” she said, noting that recent GST regulatory changes could also strengthen underlying insurance demand.Iyer said stronger consumer confidence could support long-term engagement. “When customers feel protected, they are more likely to engage and buy products or services.”Shah said tighter rules would create friction in the short term but should not be read as a structural setback. “Bancassurance is now a Rs 55,800 crore market and a critical growth engine for insurers, especially in Tier 2–4 cities. Tighter norms will certainly create short-term friction,” he said. “But India’s insurance penetration remains just 3.7% of GDP – half the global average of 7.3%. The problem was never demand; it was trust.” He said insurers should use the moment to strengthen alternate channels – traditional agents and digital platforms – and shift toward products such as pure term plans, where penetration is low and genuine need is high. “Better selling practices may ultimately expand the market, not shrink it,” Shah said.
A broader conduct shift under consultation
Taken together, the draft directions introduce a conduct-focused framework covering advertising practices, consent collection, agent behaviour, digital interface design and post-sale verification.The proposals remain under consultation and may evolve following stakeholder feedback before finalisation.If implemented substantially in their current form, they would mark a shift in regulatory focus – from merely ensuring financial soundness to closely examining how financial products are presented, explained and sold to customers.
