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RBI Tightens Rules to Curb Bank Mis-Selling, Bans Dark Patterns and Forced Bundling
The Reserve Bank of India’s latest directives, announced in February 2026 and set to take effect on 1 January 2027, overhaul how banks and other regulated entities market financial products. The new framework defines mis‑selling, bans dark‑pattern digital practices, prohibits forced bundling of third‑party products, requires explicit product‑by‑product consent, and mandates compensation when mis‑selling is proven.
The move comes on the heels of a steady rise in consumer complaints about unsuitable insurance and investment products sold through banks. IRDAI data show that life insurers received 120,726 complaints in FY 2024 and 120,429 in FY 2025. While overall complaints remained roughly flat, grievances linked to unfair business practices and mis‑selling grew, with 26,667 unfair‑practice complaints reported in FY 2025 – a 14 % year‑on‑year increase. IRDAI has called the surge a “significant concern” and a symptom of systemic mis‑selling.
Banks have evolved from deposit‑taking institutions to “financial supermarkets” over the past two decades, driven largely by fee‑based income. According to Dr Arunava Bandyopadhyay, assistant professor of finance at IMI Kolkata, banks now account for more than 49 % of the premium written by private life insurers in FY 2025, and corporate agents, including bancassurance partners, contributed nearly 53 % of new business premium. In FY 2024, banks earned over Rs 1,700 crore in commissions from selling insurance and mutual funds.
A 2024 survey by 1 Finance found that more than half of relationship managers admitted to mis‑selling products to meet sales targets. About 51 % feared job loss if they missed targets, and 84 % reported intense pressure to sell. Bandyopadhyay noted that the incentive structure “is essentially set up to mis‑sell by default.”
The digital transformation of banking has amplified the scale of mis‑selling. Manoranjan Sharma, chief economist at Infometric Ratings, explained that the RBI’s intervention reflects the convergence of rising complaints, surging digital distribution and adverse supervisory findings. He highlighted that pre‑ticked consent boxes, default add‑ons, algorithm‑driven sales journeys and cumbersome cancellation processes can steer customers toward products they never intended to buy. Sharma said, “Mis‑selling has evolved from isolated sales misconduct into a systemic issue, where small interface biases can affect millions of customers.”
Under the new framework, accountability shifts from customers to institutions. Shilpa Arora, co‑founder of Insurance Samadhan, said the rules mean “a bank cannot simply say you signed the form.” She added that mis‑selling now includes selling products unsuitable for a customer’s age, income, financial literacy, risk profile or needs, even if the customer signed the documents. The RBI has also clarified that a customer signature alone is not enough; institutions must demonstrate that the product was genuinely appropriate.
The regulatory change is expected to strengthen consumer protection. The RBI has introduced refund and compensation provisions for confirmed mis‑selling cases and requires documented suitability checks. However, experts caution that regulation alone will not eliminate the problem. Abhishek Kumar, a registered investment adviser, advises customers to demand a written explanation of why a product is suitable, verify charges and lock‑in periods independently, and use the regulatory free‑look period to review policy documents carefully.
As the new rules take effect on 1 January 2027, banks will need to overhaul their product‑sales processes, redesign digital interfaces to eliminate dark patterns, and establish robust suitability‑assessment procedures. The RBI will likely monitor compliance through audits and may impose penalties for non‑compliance. The regulatory shift reflects a broader move toward a suitability‑based approach in India’s financial services sector.
In the coming months, banks will be under scrutiny as they adjust to the new framework. Investors will watch for any impact on fee‑based income, while regulators will monitor whether the changes curb the rising trend of mis‑selling complaints. The ultimate test will be whether the new rules reduce the number of complaints and restore consumer confidence in the banking‑insurance ecosystem.
The move comes on the heels of a steady rise in consumer complaints about unsuitable insurance and investment products sold through banks. IRDAI data show that life insurers received 120,726 complaints in FY 2024 and 120,429 in FY 2025. While overall complaints remained roughly flat, grievances linked to unfair business practices and mis‑selling grew, with 26,667 unfair‑practice complaints reported in FY 2025 – a 14 % year‑on‑year increase. IRDAI has called the surge a “significant concern” and a symptom of systemic mis‑selling.
Banks have evolved from deposit‑taking institutions to “financial supermarkets” over the past two decades, driven largely by fee‑based income. According to Dr Arunava Bandyopadhyay, assistant professor of finance at IMI Kolkata, banks now account for more than 49 % of the premium written by private life insurers in FY 2025, and corporate agents, including bancassurance partners, contributed nearly 53 % of new business premium. In FY 2024, banks earned over Rs 1,700 crore in commissions from selling insurance and mutual funds.
A 2024 survey by 1 Finance found that more than half of relationship managers admitted to mis‑selling products to meet sales targets. About 51 % feared job loss if they missed targets, and 84 % reported intense pressure to sell. Bandyopadhyay noted that the incentive structure “is essentially set up to mis‑sell by default.”
The digital transformation of banking has amplified the scale of mis‑selling. Manoranjan Sharma, chief economist at Infometric Ratings, explained that the RBI’s intervention reflects the convergence of rising complaints, surging digital distribution and adverse supervisory findings. He highlighted that pre‑ticked consent boxes, default add‑ons, algorithm‑driven sales journeys and cumbersome cancellation processes can steer customers toward products they never intended to buy. Sharma said, “Mis‑selling has evolved from isolated sales misconduct into a systemic issue, where small interface biases can affect millions of customers.”
Under the new framework, accountability shifts from customers to institutions. Shilpa Arora, co‑founder of Insurance Samadhan, said the rules mean “a bank cannot simply say you signed the form.” She added that mis‑selling now includes selling products unsuitable for a customer’s age, income, financial literacy, risk profile or needs, even if the customer signed the documents. The RBI has also clarified that a customer signature alone is not enough; institutions must demonstrate that the product was genuinely appropriate.
The regulatory change is expected to strengthen consumer protection. The RBI has introduced refund and compensation provisions for confirmed mis‑selling cases and requires documented suitability checks. However, experts caution that regulation alone will not eliminate the problem. Abhishek Kumar, a registered investment adviser, advises customers to demand a written explanation of why a product is suitable, verify charges and lock‑in periods independently, and use the regulatory free‑look period to review policy documents carefully.
As the new rules take effect on 1 January 2027, banks will need to overhaul their product‑sales processes, redesign digital interfaces to eliminate dark patterns, and establish robust suitability‑assessment procedures. The RBI will likely monitor compliance through audits and may impose penalties for non‑compliance. The regulatory shift reflects a broader move toward a suitability‑based approach in India’s financial services sector.
In the coming months, banks will be under scrutiny as they adjust to the new framework. Investors will watch for any impact on fee‑based income, while regulators will monitor whether the changes curb the rising trend of mis‑selling complaints. The ultimate test will be whether the new rules reduce the number of complaints and restore consumer confidence in the banking‑insurance ecosystem.
