RBI Proposes New Guidelines to Prevent Mis-selling by Banks

The Reserve Bank of India (RBI) has announced a set of draft regulations aimed at curtailing the mis-selling of financial products by banks and non-banking financial companies (NBFCs). This significant proposal was unveiled on January 11 and is set to take effect from 1 July 2026, provided no major objections arise during the consultation period, which ends on March 4.

Under the new guidelines, banks will be required to ensure that all products sold to customers are suitable for their individual circumstances. Specifically, lenders must conduct thorough assessments of the product features, risks, fees, and complexity, aligning these with the customer’s profile, including their financial literacy, income, and risk appetite. This means that even with customer consent, banks cannot sell products deemed unsuitable.

A critical component of the new framework is the necessity for explicit and documented consent from customers for each financial product sold. This measure aims to eliminate aggressive cross-selling tactics, often seen as coercive. The RBI emphasized that unless a customer explicitly agrees, lenders must refrain from initiating any sale of financial products.

In its official statement, the RBI articulated its concern regarding the significant repercussions of mis-selling on both customers and financial institutions. "Mis-selling financial products and services has significant consequences for both customers and institutions alike. There is a felt need to ensure that third-party products and services that are being sold at the bank counters are suitable for customer needs and are commensurate with the risk appetite of individual clients," the RBI remarked.

The guidelines stipulate that banks can only send commercial communications regarding promotional offers when customers have granted their explicit consent. Moreover, customer information must not be shared with third parties unless there is an explicit request or consent from the customer.

To address issues related to user experience, the RBI has mandated that banks assess their user interfaces to eliminate 'dark patterns'. These patterns are manipulative mechanisms used to mislead users into making decisions they would not typically make, such as through tricks in wording or design.

The draft regulations also include provisions to curb harsh practices in loan recovery. Lenders are mandated to provide borrowers with written details regarding any recovery agents assigned to them. They must avoid incentivising agents in ways that could lead to unethical recovery practices, particularly when a grievance is on record against an agent.

These broader regulations, which will affect commercial banks, small finance banks, payments banks, NBFCs, and cooperative banks, seek to construct a more transparent and fair financial landscape for consumers in India.

Any interested parties are encouraged to review the draft rules and submit their feedback to the RBI before the deadline at the beginning of March. Comprehensive details can also be found on the RBI's official website.