A retired schoolteacher walks into her bank branch to renew a fixed deposit. She leaves with an insurance policy. She did not ask for it. She may not even realise she bought it. The bank staff told her it was a "guaranteed return product" — better than a fixed deposit — and she trusted the person behind the counter because that person worked at her bank. Six months later, when she tries to withdraw her money, she discovers it is locked in a unit-linked insurance plan with a five-year surrender penalty. The fixed deposit she wanted would have paid her 7.1% with no lock-in. The insurance product pays nothing for three years and charges a 30% deduction if she exits early.
This is not a hypothetical. It is the pattern that the Reserve Bank of India's Ombudsman Scheme has documented year after year. The Annual Report of the Ombudsman Schemes for 2018-19 (Reserve Bank of India releases Annual Report of Om) noted that complaints related to deposit accounts and mis-selling of third-party products consistently ranked among the top categories. And in February 2026, the RBI finally decided to write comprehensive rules to address it.
See also: What the RBI Is Changing Right Now: The Active Draft Pipeline | NBFC Regulation: The Complete Timeline
What is bancassurance — and why do banks sell insurance at all?
Bancassurance is a distribution arrangement where banks sell insurance products at their branches on behalf of insurance companies. The bank earns a commission. The insurer gets access to the bank's customer base — millions of depositors who walk into branches regularly and trust the institution. The customer gets a one-stop financial services experience, at least in theory.
Why do banks do it? Because insurance distribution generates fee income without credit risk. When a bank lends money, it takes the risk that the borrower will default. When a bank sells an insurance policy, the insurer bears all the risk. The bank collects a commission — typically 15% to 40% of the first-year premium — and moves on. For a bank under pressure to diversify revenue beyond net interest income, bancassurance is attractive precisely because it is risk-free income.
The Master Circular on Disclosure in Financial Statements RBI/2011-12/55 requires banks to report fee-based income separately. Insurance commissions show up in this line. For some large private banks, third-party distribution income — dominated by insurance — constitutes a material portion of non-interest income. Why does this matter? Because when a revenue line becomes material, the incentive to protect it intensifies. Branch targets get set around insurance sales. Staff performance evaluations include insurance metrics. The product stops being a service offered to customers who need it and becomes a quota that must be filled.
"Mis-selling financial products and services by any RE has significant consequences for both customers as well as the RE. There is a felt need to ensure that third party products and services that are being sold at the bank counters are suitable to customer needs and are commensurate with the risk appetite of individual clients." — Statement on Developmental and Regulatory Policies, February 2026 (Statement on Developmental and Regulatory Policies)
How does mis-selling actually happen at bank branches?
The mechanism is deceptively simple. A customer visits a bank branch for a routine transaction — renewing a deposit, opening an account, withdrawing cash. A bank employee identifies the customer as a potential insurance buyer, often based on the deposit balance. The employee describes an insurance product in terms the customer understands — "guaranteed returns," "better than FD," "tax-saving" — without disclosing that the product is insurance, not a bank deposit.
The RBI's 2013 draft guidelines on Wealth Management, Marketing and Distribution Services (RBI releases Draft Guidelines on Wealth Management) attempted to address this a decade ago. The draft proposed rules for how banks should conduct marketing and distribution of third-party products. Why did it take until 2026 for comprehensive rules? Because the problem sits at the intersection of two regulators: the RBI regulates banks, and the Insurance Regulatory and Development Authority of India (IRDAI) regulates insurance products and their distribution.
The customer complaint data tells the story. When a customer buys an insurance policy at a bank and later feels cheated, where does she complain? If she complains to the Banking Ombudsman, the response is that the product is insurance, regulated by IRDAI. If she complains to the IRDAI Ombudsman, the response is that the sale happened at a bank, and the bank's sales practices are the RBI's domain. This regulatory gap — where the point of sale is regulated by one authority and the product by another — is why mis-selling persisted for so long.
"It has therefore been decided to issue comprehensive instructions to REs on advertising, marketing and sales of financial products and services. The draft instructions in this regard shall be issued shortly for public consultation." — Statement on Developmental and Regulatory Policies, February 2026 (Statement on Developmental and Regulatory Policies)
Why "comprehensive"? Because previous instructions were fragmented. Insurance-related conduct rules existed for scheduled commercial banks but not for co-operative banks. Marketing guidelines existed in Master Circulars but not as standalone directions. The November 2025 Responsible Business Conduct Directions — issued separately for commercial banks (Reserve Bank of India (Rural Co-operative Banks –), NBFCs (Reserve Bank of India (All India Financial Institu), and other entity types — replaced and consolidated the earlier fair practice codes that had governed customer-facing conduct since 2003. The February 2026 draft builds on that consolidated foundation rather than layering yet another standalone circular on top of the old patchwork. The word "comprehensive" signals that the RBI intends to cover every regulated entity and every product type in a single framework.
What did the February 2026 draft directions actually propose?
The Draft Amendment Directions on Advertising, Marketing and Sales of Financial Products and Services (RBI_DRAFT_NOTIFICATIONS_62207) released on February 6, 2026, proposed amendments to the Responsible Business Conduct Directions for every category of regulated entity — commercial banks, small finance banks, payments banks, local area banks, regional rural banks, urban co-operative banks, rural co-operative banks, all India financial institutions, and NBFCs.
The scope is remarkable. The draft covers "activities of Direct Sales Agents (DSAs) / Direct Marketing Agents (DMAs), dark patterns, prevention of mis-selling" and more. The term "dark patterns" — borrowed from digital consumer protection — refers to design choices that manipulate customers into purchasing products they did not intend to buy. Why is an RBI direction using terminology from digital regulation? Because mis-selling has migrated online. When a customer logs into her bank's mobile app to check a balance and is shown a pop-up offering "guaranteed 12% returns" on an insurance product, the dark pattern is digital. The same manipulation that happened at the branch counter now happens on a screen.
The draft amends the Responsible Business Conduct Directions for Commercial Banks (Reserve Bank of India (Rural Co-operative Banks –), the Responsible Business Conduct Directions for All India Financial Institutions (Reserve Bank of India (All India Financial Institu), and equivalent directions for every other entity type. This is not a separate regulation sitting alongside existing ones — it is integrated into the conduct framework established in November 2025. Why does integration matter? Because it means non-compliance with the advertising and marketing rules carries the same enforcement consequences as non-compliance with any other Responsible Business Conduct provision.
What is the regulatory gap between IRDAI and RBI — and why does it matter?
Insurance in India is regulated by IRDAI under the Insurance Act, 1938 and the IRDA Act, 1999. Banks are regulated by the RBI under the Banking Regulation Act, 1949 and the RBI Act, 1934. When a bank sells an insurance product, both regulators have jurisdiction — but over different aspects. IRDAI regulates the product: its features, its pricing, its solvency requirements. The RBI regulates the seller: the bank's conduct, its customer service obligations, its governance standards.
The Master Circular on Credit Card, Debit Card and Rupee Denominated Co-branded Pre-paid Card Operations RBI/2015-16/31 (since withdrawn) shows how the RBI handles products it directly regulates — with detailed conduct rules covering issuance, billing, closure, and customer rights. But for insurance sold through bank channels, the RBI historically deferred to IRDAI on product-level conduct, focusing only on whether the bank had appropriate arrangements with the insurer.
Why does this gap create regulatory arbitrage? Consider a bank that aggressively sells an insurance product with misleading claims. IRDAI can penalise the insurance company for the misleading product literature. But the bank employee who made the verbal misrepresentation — "This is better than a fixed deposit" — falls under the RBI's jurisdiction. If the RBI has no specific rule against such verbal mis-selling, the conduct goes unpunished. The customer loses money. Neither regulator acts. The gap is not a failure of either institution — it is a structural consequence of having two regulators share jurisdiction over a single transaction.
The Financial Stability and Development Council (FSDC), chaired by the Finance Minister, is the body that coordinates across regulators. But coordination at the policy level does not automatically translate to enforcement at the branch level. The February 2026 draft is the RBI's attempt to close its side of the gap — by regulating the sales conduct of banks comprehensively, regardless of whether the product being sold is a bank deposit, a mutual fund, or an insurance policy.
"Currently, instructions on customer appropriateness and suitability and other related matters in the context of insurance agency business have been issued to Scheduled Commercial Banks (excluding Regional Rural Banks) and Housing Finance Companies." — Draft Directions on Advertising and Marketing, February 2026 (RBI_DRAFT_NOTIFICATIONS_62207)
Note the qualifier: "excluding Regional Rural Banks." The existing rules did not even cover all bank types. The draft proposes to extend coverage to every regulated entity. Why were RRBs excluded before? Likely because RRBs were not significant insurance distributors when the original rules were written. But as RRBs have expanded their product offerings, the exclusion became a gap that mis-selling could exploit.
What protections already exist — and why are they insufficient?
Insurance products already come with a cooling-off period — a "free-look" period of 15 to 30 days during which the policyholder can cancel and get a refund. IRDAI mandates this for all insurance policies. The logic is sound: because insurance is often sold through high-pressure tactics, the buyer should have time to reconsider after the sales pressure subsides.
But the free-look period assumes the customer knows she bought insurance. When a bank employee describes a ULIP as a "guaranteed returns scheme" and the customer signs documents without reading them, the 15-day clock starts ticking on a product the customer does not know she owns. By the time she discovers the truth — often months later, when she tries to access her money — the free-look period has expired. The protection exists on paper but fails in practice because the mis-selling obscures the very information the protection is designed to address.
The Guidelines on Fair Practices Code for NBFCs, October 2007 RBI/2007-08/158 required NBFCs to adopt transparent practices in lending. The December 2008 guidelines on disclosing processing fees (Guidelines on Fair Practices Code for Lenders - Di) (since withdrawn) extended disclosure requirements to all fees and charges. The February 2013 guidelines on Nodal Officers for NBFC grievance redressal RBI/2012-13/416 added another layer. Each of these addressed a symptom — lack of disclosure, lack of fee transparency, lack of complaint resolution — without addressing the root cause: that the incentive structure of bancassurance encourages mis-selling. Notably, the earlier para-banking guidelines that governed how banks could engage in insurance distribution were superseded by the consolidated Master Direction framework; the scattered circulars on permissible activities were amended and absorbed into the Undertaking of Financial Services Directions issued entity-by-entity from late 2025 onward.
Why does the incentive structure matter more than the rules? Because compliance staff at banks audit paperwork, not conversations. A bank employee can obtain a customer's signature on a fully compliant insurance proposal form — one that discloses every feature, every charge, every risk — while verbally telling the customer something completely different. The form complies. The conversation does not. And no amount of paperwork-based regulation can address verbal misrepresentation at scale.
The February 2026 draft, by introducing the concept of "dark patterns" and "prevention of mis-selling" as regulatory categories, signals that the RBI is shifting from disclosure-based regulation to conduct-based regulation. The question is no longer just "Did you disclose the terms?" but "Did you sell the product appropriately?"
What happens next — and what should customers know?
The draft directions are open for public consultation. The final directions, once issued, will be integrated into the Responsible Business Conduct framework for each entity type. The Small Finance Banks – Undertaking of Financial Services Amendment Directions, December 2025 (Reserve Bank of India (Small Finance Banks – Under) already shows the direction: granular, entity-specific conduct rules embedded in Master Directions rather than scattered across standalone circulars.
For customers, three things matter now. First, if someone at a bank branch offers you a "better than FD" product, ask explicitly: "Is this a bank deposit or an insurance policy?" The answer determines which regulator's protections apply to you. Second, if you discover you were sold insurance without understanding it was insurance, file a complaint with both the Banking Ombudsman (for the bank's conduct) and the IRDAI Ombudsman (for the product). Third, exercise the free-look period immediately if you receive an insurance policy you did not intend to buy — the clock starts from the date you receive the policy document.
"Upon a review, it has been decided to issue comprehensive instructions on advertising, marketing and sales of financial products and services (including third-party products and services) to all banks and NBFCs." — Draft Directions on Advertising and Marketing, February 2026 (RBI_DRAFT_NOTIFICATIONS_62207)
The regulatory direction is clear. The RBI spent two decades building disclosure-based protections. Disclosure failed because mis-selling operates through verbal misrepresentation, not written omission. The February 2026 draft moves toward conduct regulation — rules about how products are sold, not just how they are documented. Whether the final directions are strong enough to change the incentive structure at the branch level will determine whether the retired schoolteacher walks out with the fixed deposit she wanted, or the insurance policy she did not.
Last updated: April 2026