RBI & IRDAI: Joint Crackdown on Financial Mis-selling
📅 Published 05 Apr 2026 · April
RBI & IRDAI: Joint Crackdown on Financial Mis-selling
Context:
- The Reserve Bank of India (RBI) is set to release final guidelines on ‘Responsible Business Conduct’, targeting the aggressive mis-selling of third-party products (like insurance) by banks.
- The Problem: A massive spike in commissions—₹60,800 crore in life insurance alone for FY25 (up 18%)—while premiums grew only in single digits. This indicates that insurers are paying more to “acquire” customers than they are earning from them.
BACKGROUND CONCEPTS
1. What is Mis-selling?
Mis-selling occurs when a financial product is sold to a customer using deliberate misrepresentation or by hiding key risks. In banks, this often looks like “bundling” insurance with a loan or pushing a complex investment product to someone seeking a simple savings account.
2. Bancassurance
This is the partnership between a bank and an insurance company. Banks use their massive branch networks to sell insurance. While efficient, the high “upfront commissions” create a perverse incentive for bank staff to prioritize sales targets over customer needs.
3. Expense of Management (EOM)
IRDAI limits the total amount an insurer can spend on operating costs and commissions, known as EOM. However, despite these caps, commission expenses have continued to rise faster than actual business growth.
PROPOSED REGULATORY SHIFTS
The RBI and IRDAI are looking at different “levers” to fix the system:
- Staggered/Trail-based Commissions: Instead of paying the agent 30–40% of the premium in the first year (front-loading), commissions would be spread out over the life of the policy. If the customer stops paying because they were cheated, the agent stops earning.
- Board Accountability: Industry experts suggest that the Board of Directors of insurance companies should be held personally responsible for fixing commission policies that stay within legal limits.
- Removal of Sales Inducements: Moving away from internal bank contests or “sales prizes” for staff who sell the most insurance, which currently fuels aggressive behavior.