Why RBI's New Mis‑Selling Rules May Fail to Shield Your Portfolio

Key Takeaways

• RBI’s draft guidelines target banks but ignore the root cause: product manufacturers.
• Lack of a central policy repository lets insurers and fund houses oversell to unsuitable customers.
• Incentive structures that reward volume over quality create a persistent mis‑selling engine.
• Without coordinated action from IRDAI and SEBI, investors face higher churn and hidden losses.
• Strategic positioning: favor banks with strong compliance cultures and avoid firms heavily dependent on commission‑driven sales.

You’re betting on safety, but the latest RBI draft may leave you exposed.

When a car’s seatbelt fails, you don’t blame the mechanic—you go straight to the manufacturer. The same logic should apply to financial products. RBI’s newly released draft guidelines aim to curb mis‑selling by tightening bank‑level controls, yet they miss the deeper problem: the manufacturers—insurers and mutual‑fund houses—remain largely unaccountable. Below we unpack why the guidance is a cosmetic fix, how it ripples through the sector, and what savvy investors can do right now.

Why RBI's Draft Guidelines Miss the Accountability Gap

The draft insists that banks verify customer suitability before pushing life‑insurance or mutual‑fund products. In practice, banks act as distribution channels, while the underwriting standards and product design belong to the insurer or fund house. When a 90‑year‑old is sold a high‑premium term plan, the immediate question is: who failed the risk assessment? The sales clerk, the bank’s compliance team, or the insurer that never rejected the proposal?

Historical precedent from the micro‑finance boom shows a similar pattern. Lenders were vilified for over‑leveraging borrowers, but the underlying credit‑risk models and product structuring were set by the originating institutions. The lesson is clear—regulatory focus on the distributor alone leaves the originator’s incentives untouched.

How Insurers and Mutual Funds Fuel Mis‑Selling – A Deep Dive

Insurers and fund managers have little skin in the game when their products are sold through bank branches. The underwriting process often lacks strict income‑verification checkpoints, allowing policies to slip to customers who cannot meet premium obligations. In mutual‑fund distribution, the same laxity appears: no central check on existing holdings, leading to duplicate or unsuitable fund allocations.

Technical note: underwriting standards are the criteria an insurer uses to decide whether to accept a risk. When these standards are weak or bypassed, the product becomes a liability not only for the buyer but also for the balance sheet of the issuing house.

Without a regulator—IRDAI for insurance, SEBI for mutual funds—asserting authority over product suitability, the mis‑selling chain remains unbroken. RBI’s guidelines can only force banks to ask more questions; they cannot compel the originating house to say “no.”

What the Absence of a Central Repository Means for Your Risk Profile

Credit bureaus transformed retail‑loan underwriting by providing a single view of a borrower’s existing obligations. In contrast, the insurance and mutual‑fund universe lacks a comparable database. A customer could hold three term‑life policies, two health plans, and five mutual‑fund accounts without any central authority flagging over‑exposure.

This information vacuum enables “product stacking,” where the same household pays overlapping premiums, eroding cash flow and increasing the likelihood of policy lapse. For investors, the downstream effect is higher claim‑ratio volatility for insurers and higher redemption risk for fund houses—both factors that can depress earnings and share price stability.

Incentive Structures: The Hidden Driver Behind Bad Sales

Commission‑driven compensation remains the most potent catalyst for mis‑selling. Insurers lavish foreign trips, luxury gifts, and cash bonuses on bank relationship managers who meet aggressive sales targets. The result is a “carrot‑and‑stick” environment where quantity trumps quality.

From a technical perspective, this is a classic case of moral hazard: the party taking the risk (the insurer) delegates decision‑making to an agent (the bank) whose incentives are misaligned. Unless the regulator forces a redesign of fee structures—moving from per‑sale commissions to fee‑based advisory models—the incentive mismatch will persist.

Investor Playbook: Bull and Bear Cases for the Banking Sector

Bull Case: Banks that proactively adopt robust KYC and post‑sale service platforms can differentiate themselves. They may partner with fintech firms to build a shared repository of policy holdings, reducing duplication risk. Such banks could attract premium‑segment customers, improve persistency ratios, and see a valuation uplift.

Bear Case: Institutions that cling to traditional commission models face mounting litigation risk, higher policy‑lapse rates, and potential fines from a coordinated regulator response. Their earnings volatility may rise, and share price could suffer as investors reassess the sustainability of the sales model.

Action steps for investors:

• Screen banks for disclosed compliance metrics—look for “policy‑holder persistence” and “post‑sale grievance resolution” scores.
• Favor insurers and fund houses that have moved to fee‑only advisory structures.
• Monitor joint regulatory announcements from RBI, IRDAI, and SEBI for any move toward a unified policy‑holder database.
• Consider diversifying exposure away from institutions heavily reliant on third‑party distribution.

In short, RBI’s draft is a step forward but not a game‑changer. Real protection for investors will require a coordinated, cross‑regulatory push that forces product manufacturers to own the end‑to‑end customer experience. Until then, the mis‑selling engine will keep turning, and your portfolio could bear the cost.