Mis-Selling in India’s Financial Sector: What You Need to Know and How to Protect Yourself

Introduction: Mis-Selling Returns to the Spotlight

In November 2025, India once again witnessed a renewed focus on mis-selling in the financial sector. The Reserve Bank of India (RBI) signaled that stricter regulations may soon curb banks and intermediaries from selling products that are unsuitable for customers—ranging from insurance plans to investment-linked loans.

For many retail investors and borrowers, mis-selling isn’t just an inconvenience; it can translate into hidden costs, unexpected lock-ins, or products completely mismatched to one’s financial goals. Often, these pitfalls only become apparent years after signing the paperwork.

As financial advisors at Manika TaxWise, we see mis-selling as a persistent challenge affecting three groups: consumers, financial institutions, and regulators. Understanding this phenomenon is crucial for protecting your hard-earned money and making informed financial decisions. In this article, we’ll dive deep into mis-selling in India, explore regulatory responses, provide practical tips, and highlight real-life scenarios that demonstrate how easy it is to fall into these traps.

 

What is Mis-Selling?

At its core, mis-selling occurs when a financial product is marketed or sold in a way that is unsuitable for the buyer. While the term may sound straightforward, its manifestations are varied and sometimes subtle.

Common forms include:

• Omissions: Key information about risks, fees, or conditions is deliberately or inadvertently withheld.
• Exaggerations: Sales representatives overstate the benefits or potential returns of a product.
• High-pressure tactics: Urgency, fear, or “limited time offers” are used to force hasty decisions.

Globally, financial regulators expect institutions to ensure suitability—offering products that align with a customer’s financial goals, risk appetite, and investment horizon. When these standards are ignored, mis-selling occurs, sometimes with severe consequences for unsuspecting investors.

 

Why Mis-Selling Matters

You might wonder, “If I invested and earned some returns, does mis-selling really affect me?” The answer is yes, and here’s why:

1. Consumer Harm
   Many first-time investors or individuals with limited financial literacy end up paying hidden fees, facing penalties for early exit, or earning lower-than-expected returns. For example, investing in a unit-linked insurance plan (ULIP) without understanding fund management charges can erode gains over time.
2. Loss of Trust
   If customers feel misled, they may avoid financial institutions altogether. This erosion of trust can undermine broader financial inclusion, leaving many without access to formal banking and investment services.
3. Regulatory Challenges
   Regulators must balance promoting financial innovation with shielding citizens from predatory practices. Too stringent regulations could stifle growth, while lax oversight can harm consumers.

 

Mis-Selling in India: A Historical Perspective

Mis-selling in India isn’t a new phenomenon. One longstanding practice is bundling insurance with loans, often referred to as the “no policy, no loan” model. In this scenario, banks effectively force clients to buy insurance to access credit.

For instance, in 2013, Punjab & Sind Bank’s officers’ union filed a petition alleging that staff were pressured to sell insurance-linked loans, incentivized by foreign trips and commission bonuses.

Statistics confirm the issue persists:

• In FY 2022–23, about 20% of life insurance grievances were related to “unfair business practices,” including mis-selling.
• Reports suggest India’s top banks earned ₹21,773 crore in commissions from selling insurance and financial products in FY 2024—a powerful incentive to push product sales.

In 2025, the RBI indicated plans to tighten guidelines on product suitability assessments and disclosure for banks and non-banking financial companies (NBFCs). Meanwhile, the Insurance Regulatory and Development Authority of India (IRDAI) noted that while product design falls under its purview, distribution channels partly fall under RBI jurisdiction, creating a regulatory gray area.

The takeaway is clear: mis-selling is systemic, and vigilance is essential for consumers.

 

RBI’s Proposed Measures Against Mis-Selling

Deputy Governor M. Rajeshwar Rao has highlighted the need for stronger oversight. Some proposed measures include:

1. Mandatory Suitability Checks
   Banks and NBFCs may need to assess a customer’s risk profile, financial situation, and investment goals before recommending products.
2. Enhanced Disclosures
   Commissions, exit fees, and associated risks would have to be clearly disclosed.
3. Stricter Penalties
   Institutions failing to comply could face tougher sanctions, shifting responsibility to financial institutions to prove they acted in the customer’s best interest.

These proposals mark a shift in accountability, reducing the burden on customers to prove harm after-the-fact.

 

The Legal and Regulatory Framework

Several laws and regulations govern financial product sales in India:

Regulation / Principle	Key Provisions	Significance
Banking Regulation Act	Banks must avoid non-banking activities unless authorized	Bundling insurance with loans may fall in a gray area
RBI Fair Practices / Customer Rights	Transparency, disclosure, grievance redressal	Baseline standard for banks
IRDAI Unfair Business Practices	Defines unfair sales, complaint norms	Customers can challenge mis-selling
Consumer Protection Act, 2019 (CCPA)	Prohibits misleading trade practices	Provides legal recourse for misrepresentation
Banking Ombudsman Scheme	Covers improper sale of third-party products	Enables complaints through banking channels

Important nuance: IRDAI regulates product design but not distribution channels, weakening enforcement against mis-selling. Consumers must be proactive to protect themselves.

 

Common Mis-Selling Scenarios

Consumers often face predictable problems:

• No suitability assessment: Agents may ignore age, income, liabilities, or risk appetite.
• Hidden fees and commissions: Backend charges and surrender penalties often lurk in fine print.
• False guarantees: Products marketed as “capital-safe” can carry market risks.
• Unclear exit conditions: Lock-in periods and penalties can surprise investors.
• Bundling & pressure tactics: Phrases like “Loan only if you buy this insurance” push rushed decisions.

Case Study: Mrs. Sharma
Mrs. Sharma, a 50-year-old teacher, visited her bank intending to invest in a fixed deposit. The agent persuaded her to buy a ULIP, highlighting potential market growth and promising capital protection. Unaware of fund management fees exceeding 2–3%, she invested. Three years later, she discovered high surrender penalties drastically reduced her maturity value.

This scenario illustrates the intersection of aggressive sales and insufficient due diligence, common in mis-selling cases.

 

Who Benefits and Who Loses

• Banks and agents: Short-term gains via commissions and sales targets.
• Consumers: Pay higher fees, earn lower returns, or remain trapped in unsuitable products.
• Regulators and auditors: Face growing complexity and pressure to enforce compliance.

 

Implications for Stakeholders

Businesses and intermediaries:

• Must redesign incentive structures to avoid promoting unsuitable products.
• Need documented suitability assessments and client advice.
• May incur higher compliance costs and litigation risk.

Consumers:

• Should demand transparency, question agents, and retain all documents.
• Can pursue recovery through the Banking Ombudsman or CCPA.
• Financial literacy is crucial to avoid costly mistakes.

Auditors and compliance professionals:

• Must review whether advice aligns with client profiles.
• Should consider conduct risk in audits.
• Face reputational risk if systemic mis-selling persists.

Stricter supervision could reshape business models. Firms relying heavily on cross-selling may see revenue decline, while those emphasizing transparent advice could gain long-term trust.

 

Misunderstandings and Pitfalls

Many customers assume:

• Higher returns always mean a better product.
• Bank staff inherently act in the client’s best interest.
• Minor clauses about lock-in or exit fees are unimportant.
• Mis-selling only occurs in complex products.
• Compensation is automatic when mis-selling happens.

All these assumptions are risky. Awareness and proactive questioning are essential to avoid financial pitfalls.

 

Expert Insights

Over two decades of observing India’s financial sector reveals a recurring pattern: mis-selling resurfaces whenever incentives go unchecked.

A senior compliance officer (anonymously) notes:
"You cannot expect sales culture and ethics to coexist overnight. Guardrails and accountability are essential."

At Manika TaxWise, we emphasize that mis-selling is not just a consumer problem—it’s a business model, regulatory, and compliance challenge.

 

Actionable Steps for Consumers

With RBI focusing renewed attention on mis-selling, consumers can protect themselves by following these strategies:

1. Know your risk profile: Are you low, medium, or high risk?
2. Request written disclosures: Especially fees, commissions, and penalties.
3. Demand suitability justification: Ask how the product fits your financial goals.
4. Check guarantees vs. trade-offs: No guarantee is truly free.
5. Scrutinize lock-in and surrender charges: Often hidden in annexures.
6. Avoid forced bundling: Question products tied to loans or other investments.
7. Evaluate net returns: Ask what you’ll receive if you exit in 2, 3, or 5 years.
8. Seek independent advice: Use financial advisors for complex or opaque products.
9. Retain all documents: Brochures, emails, and contracts are essential.
10. File complaints promptly: Approach the Banking Ombudsman or CCPA if mis-selling is suspected.

 

Frequently Asked Questions (FAQs)

Q1. Can a product be mis-sold even if it earns returns?
Yes. Suitability and disclosure are more important than performance.

Q2. How long do I have to file a complaint?
Typically 1–3 years from discovery, depending on the regulator and product.

Q3. Mis-selling vs. fraud?
Mis-selling involves poor disclosure or unsuitable products, while fraud requires intent to deceive.

Q4. Can RBI or IRDAI be approached directly?
Not initially. Complaints must go through the institution, then the Ombudsman or Consumer Protection channels.

Q5. Can auditors or CAs detect mis-selling?
They can advise or review financial plans, but standard audits may not cover mis-selling unless explicitly engaged.

 

Looking Ahead: The Future of Mis-Selling Regulation

Regulatory reforms may bring:

• Greater convergence between RBI, IRDAI, and SEBI.
• Class-action style consumer claims or public interest litigation.
• Fiduciary frameworks for non-investment financial domains.
• Advisory labels signaling fair practice for financial products.

Until these changes are fully implemented, awareness remains the best defense.

 

Conclusion: Staying Vigilant in a Complex Financial Landscape

Mis-selling isn’t just a regulatory issue—it’s a financial literacy challenge. Banks and intermediaries benefit from aggressive sales, while consumers bear the risk of higher fees and lower returns. Regulators strive to maintain balance, but vigilance is ultimately the consumer’s first line of defense.

At Manika TaxWise, we encourage all investors to ask questions, read disclosures carefully, and seek professional guidance. Remember: informed decisions today protect your financial tomorrow.

By understanding mis-selling, monitoring regulatory changes, and taking proactive steps, you can navigate India’s financial landscape safely and confidently.

 

References

1. “No Policy, No Loan” – Moneylife
2. RBI Reports on Mis-Selling
3. SEBI / RBI Reports on Insurance Product Sales
4. Banking Ombudsman Scheme
5. Consumer Protection Act (CCPA), 2019