RBI proposes to ban third-party incentives to bank staff to cut mis-selling | Finance News

In a move to curb mis-selling of financial products, the Reserve Bank of India (RBI) has proposed banning incentives paid to bank staff by third parties such as insurance companies or mutual fund houses for selling their products and services. It has also proposed that a bank should ensure that its user interfaces do not deploy any dark pattern to lure customers.
 

In the Draft Amendment Directions for ‘Advertising, Marketing and Sales of Financial Products and Services by Regulated Entities’, issued on Monday, it was proposed that a bank shall not bundle the sale of any third-party product with any of its own products. In case the sale of the bank’s own product is contingent on the purchase of a third-party product, the customer should be provided the option to purchase the same from any other company.

 
 

Banks have to refund the entire sum in case mis-selling has been established, and the bank shall also compensate the customer for any loss arising due to mis-selling, as per its approved policy.
 

The regulator said a bank shall ensure that its policies and practices, such as organising competitions among business units for sale of products and services, neither create incentives for mis-selling nor encourage employees or direct sales agents to ‘push’ the sale of products or services.
 

“It shall be ensured specifically that no incentive is directly or indirectly received by the employees engaged in marketing or sales of third-party products or services from the third party,” the draft norms said.
 

The proposed norms could be a major blow for both banks and insurance companies or mutual fund houses, as they heavily rely on banks for distribution. Banks earn a fee for distributing such products.
 

In November last year, Finance Minister Nirmala Sitharaman highlighted the need to retain public confidence in the country’s banking system while urging lenders to curb mis-selling. The banking regulator has also highlighted the issue of mis-selling and emphasised that banks should focus on their core activities.
 

RBI also said a bank should not fund the purchase of a product or service by a customer, whether its own or that of a third party, out of any loan facility sanctioned to the customer without explicit consent. Customers can lodge complaints against mis-selling within 30 days of receiving the signed copy of the terms and conditions, in case the sector regulator has not specified any time frame for such a complaint.
 

“A bank shall establish a mechanism to seek feedback from customers, within a period of 30 days from the sale of any product or service to ensure that customers have understood the features of the product or service and also the risks associated with such product or service,” the draft norms said. Banks have been asked to prepare a half-yearly report on the findings of the feedback and utilise it for review of existing policies and features of products or services.
 

The draft also laid down norms regarding the conduct of direct selling agents. It was proposed that telephonic contacts or visits to customers should normally be between 09:00 hours and 18:00 hours, and such contacts can be made beyond the specified period only after customer consent. Furthermore, for the benefit of customers, it was proposed that any agent of the bank or representative of a third party who is present within the bank’s premises for the sale of the bank’s own or third-party product shall be distinguishable from employees of the bank, including clear ‘on-person’ identification.
 

Banks have been asked to determine the suitability and appropriateness of a product for the customer, based on risk-return attributes, time horizon, complexity, fee structure, etc., vis-à-vis the customer’s age, income and financial literacy before a product is marketed or sold.
 

“A bank shall not advertise or market any third-party product or service as its own,” it said.
 

Banks have also been asked to devise a code of conduct for both employees and DSAs and should obtain an undertaking from DSAs or DMAs that they agree to abide by the code of conduct. There should be a penal provision if the code is violated.
 

It is proposed that the bank shall ensure that products or services, whether its own or third-party, are sold to customers only with their explicit consent.
 

Highlighting the need to refrain from using dark patterns, the draft norms cited examples of certain activities such as creating false urgency for a customer, basket sneaking, confirm shaming, subscription traps, etc., and asked banks not to create such scenarios for customers.
 

The regulator has proposed the norms to come into effect from July 1, 2026. Feedback on the draft can be submitted by March 4, 2026.