Banks Must Conduct Customer-Needs Analysis When Selling Investment-linked Insurance Products: RBI Governor

Mis-selling of insurance products is a serious danger many bank customers don’t see coming until it is too late. You walk into your trusted bank branch to open a fixed deposit or maybe ask about safe investment options. What you walk out instead with a life insurance plan bundled with investments you barely understand, tied up for a for a long time, and often, with returns that are nowhere near what you were promised.

This is a pattern where many banks aggressively sell investment-linked insurance products without proper disclosure or suitability checks. However, all this is under a regulatory lens to curb instances of mis-selling.

In an interview with The Times of India, new RBI Governor Sanjay Malhotra said the central bank is closely watching this space, especially the complaints around mis-selling by bank relationship managers (RMs).

“We are indeed concerned about the complaints,” Malhotra told TOI, adding that banks are required to conduct a customer-needs analysis before selling such products. “Our regulations require banks to ensure the suitability and appropriateness of insurance products before selling them… We have emphasised these points to the boards and senior management of our regulated entities.”

The governor further added that complaints of mis-selling fall within the ambit of the RBI Banking Ombudsman scheme and are also actively examined during inspections of banks. If needed, the central bank may introduce additional safeguards, he said.

However, this is not just about regulatory checklists. The issues with this problem are more systemic.

Sales Targets Over Suitability

A deep dive by Outlook Money in its April 2024 cover story, “Mis-Selling Saga: Lies Bank RMs Tell You To Meet Targets” revealed a rather worrying pattern: pressure to meet steep sales targets is driving RMs to push unsuitable or opaque financial products, often at the expense of uninformed and ignorant customers.

The complaints regarding mis-selling of insurance products are not just anecdotal. The financial year 2023 report by the Insurance Regulatory and Development Authority of India (Irdai) shows that over 127,000 complaints were filed against life insurers, and 20 per cent were flagged under unfair business practices, including mis-selling.

Even the Economic Survey 2024 bluntly stated that insurance is among the most mis-sold financial products in the country, frequently by bank RMs.

In practice, this means people seeking basic FDs are being lured into complex unit-linked insurance plans (Ulips) or bundled schemes they don’t need or, worse, don’t understand.

Sometimes, these products are misrepresented as short-term investments. In other cases, customers are nudged to take personal loans to fund insurance purchases, a practice that could result in net losses due to mismatched interest and return rates.

An unnamed RM quoted in the Outlook Money story admitted: “Let’s say I have a target to sell 20 Ulips a month. My performance metrics are linked to that. So whenever there is a chance, I pitch Ulips.”

Who is at the most risk? While younger, financially aware customers might sense the trap, senior citizens remain especially vulnerable. Several cases involve elderly clients being sold long-term deferred annuity plans or market-linked insurance products under the guise of fixed deposits with “better returns.”

RBI Governor Malhotra stated that the regulator (RBI) continues to scrutinse bank practices during supervision visits, and the “mis-selling is a valid ground” for customer redress through its ombudsman framework.

What You Must Do

Consumers, however, must remain alert. You should always ask for detailed documentation and take time to read the fine print before purchasing any insurance policy or investing in any insurance-linked product.

A relationship manager is not a fiduciary; they are ultimately a sales channel, often incentivised to push certain products.

As Madhupam Krishna, Sebi-registered investment advisor, put it clearly in Outlook Money: “This problem exists even in public sector banks. Many seniors have ended up signing Ulip or mutual fund forms thinking they were just opening FDs.”

So, the next time someone at your bank pitches an “exclusive plan” that “beats FDs”, you must take a pause and ask: Is this really for me? Or just for their target sheet?