Source: BS
Why in News?
The Reserve Bank of India (RBI) has issued draft amendment directions to curb mis-selling of financial products by banks. The proposals include banning third-party sales incentives and introducing stricter consumer protection norms. Public comments have been invited until March 4, 2026. The norms are proposed to come into effect from July 1, 2026.
Background
- Banks earn fee income by distributing insurance, mutual funds, and other third-party financial products.
- Concerns over aggressive cross-selling and mis-selling have been raised repeatedly.
- In November 2025, the Union Finance Minister emphasised the need to protect public confidence in the banking system.
- RBI has consistently advised banks to focus on core banking activities.
What are Third-Party Sales Incentives?
Third-party sales incentives are rewards or payments given to bank employees (or agents) by external financial companies—such as insurance companies, mutual fund houses, or NBFCs—for selling their products through the bank.
Key Proposals
Ban on Third-Party Incentives
- No direct or indirect incentives to bank employees from third parties for selling products.
- Sales competitions must not encourage mis-selling.
No Bundling or Forced Sales
- Banks cannot bundle third-party products with their own products.
- Sale of a bank product cannot be made contingent on purchase of a third-party product.
- Customers must have the option to choose any provider.
Explicit Customer Consent
- Products (bank’s own or third-party) can be sold only with explicit consent.
- Loan facilities cannot be used to fund product purchases without explicit approval.
Refund and Compensation
- Full refund required where mis-selling is established.
- Compensation for customer losses as per approved policies.
Customer Protection Measures
Feedback Mechanism
- Banks must seek customer feedback within 30 days of sale.
- Customers may lodge complaints within 30 days of receiving signed terms and conditions (if sector regulator has not specified otherwise).
- Half-yearly reports to review findings and update policies.
Suitability Assessment
- Banks must assess product suitability based on:
- Risk-return profile
- Time horizon
- Complexity
- Fee structure
- Customer age, income, and financial literacy
Conduct Norms for Agents
- Tele-calling and visits allowed only between 9 a.m. and 6 p.m. (beyond with consent).
- Third-party agents must be clearly distinguishable from bank staff.
- Code of conduct mandatory for employees, DSAs, and DMAs.
- Penal provisions for violations.
