Our Response to the Draft Reserve Bank of India (Commercial Banks – Responsible Business Conduct) Amendment Directions, 2026

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We commend the RBI for taking several strong measures to protect consumer interests in banking and financial services, as stated within the Draft Reserve Bank of India (Commercial Banks – Responsible Business Conduct) Amendment Directions, 2026¹ (referred to hereafter as Draft Conduct Directions, which are open to public comments and feedback), and related other draft directions for small finance banks, payments banks, non-banking financial companies and payments aggregators.

The RBI has for the first time, codified into regulatory directions, language that formalizes the Right to Suitability in the RBI's Charter of Customer Rights that was launched on 3^rd December 2014. Among the 5 Rights, the 'Right to Suitability' required that "the products offered should be appropriate to the needs of the customer and based on an assessment of the customer's financial circumstances and understanding". The RBI was to then monitor the progress and oversee the adherence by banks over a period of time. And yet, the rules introduced then have not been effective enough in bringing the menace of mis-selling under control, thus warranting the new amendments from the RBI.

We would like to place for the RBI's consideration, our responses to the new Draft Conduct Directions. These are organized along 3 themes, namely,

THEME 1: Adopting an Orchestration Approach to shift Indian retail banking away from mis-selling

The Draft Conduct Directions currently do not place any prohibition on mis-selling, but rather chooses to require banks to a) prevent it via bank-led policies and processes, b) remove conflicting sales-based incentives, and c) compensate customers if mis-selling is established.

The RBI will want to ensure that these suggested amendments can have teeth, and they can significantly result in outcomes that are far better than before, especially given that the last major regulatory changes were a decade back in 2014. We submit that these amendments will need to go hand-in-hand with a very concerted and proactive approach by the RBI to ensuring banks can demonstrate improvements to their 'institutional conduct' that is in line with what the RBI wants. We believe that the RBI can do well to clarify how it expects regulated entities to uphold these directions in letter and spirit. We provide some ways to do so –

Supervision & Enforcement will need to be tackled separately to complete the loop for obtaining the desired market shift. The RBI will need to draw up a revamped supervisory process that must also include, to a significant degree, an empowered 'market conduct' function or department whose role is to continuously monitor the markets from the perspective of institutional conduct, product suitability, process suitability, post-sale servicing and such. In addition to this, the RBI can build out a system of transparent penalties that will kick in based on off-site reporting, on-site supervisory inspections and mystery shopping results. These penalties too need to be set based on a set of principles such as the systemic importance of the bank, the prevalence of the established malpractices, the vulnerability of the customer segments involved (and not just on the volume of money implicated in the malpractice).

THEME 2: Focusing on the sale process, stratifying it for better clarity for the seller, and building in transparency & accountability

Distinguishing between employee & Direct Sales Agents/Direct Marketing Agents (DSA/DMA)

It may seem pragmatic to not introduce a prohibition around mis-selling, and also pragmatic to not place any explicit responsibility to uphold Suitability and Appropriateness on DSAs/DMAs – One can argue that DSAs/DMAs are only for lead-generation and since they anyway do not have access to core banking systems of banks, it may be too onerous to expect them to assess suitability and appropriateness. This stance, however, does not adequately prevent DSAs/DMAs from making claims which prima facie, may not look misleading, but can become misleading during the sale conversation. For instance, if during the sale conversation, the customer were to reveal their specific financial situation or life cycle stage, (or just their ignorance) and the DSA/DMA makes statements that incorporate this new information, they can mislead or falsely imply the suitability or appropriateness of the product for the specific customer. This further destroys trust in the system for the customer if he/she gets subjected to a different sale pitch by a bank employee (of same or different bank), and continues to perpetrate existing distrust in the banking system.

We believe it will therefore be important for the RBI to make a clear distinction between bank employees and DSAs/DMAs, that articulate how the DSA/DMAs' activities will be different from that of bank employees.

While the bank's employee has access to specific information/intelligence about a customer's financial life, life cycle stage and unfulfilled needs, such information/ intelligence may not be available to a DSA/DMA, hence, giving the latter more interpretational leeway in how they sell the bank's products – this will continue to remain problematic unless the RBI can introduce a rationale for why a distinction is needed between the bank employee and the DSA/DMA in the 'pre-sale process' itself. For instance, the RBI can make a distinction between factual information and financial product advice – and clearly restrict the grounds on which DSAs/DMAs can undertake a customer advertising/sales conversation. For instance, the DSA/DMA must not comment on or provide any advice that accounts for the customer's unique needs, financial situation or life stage. Once this distinction is made, the DSA/DMA's activities can be separately regulated – the activity of the DSA/DMA can then be clustered into buckets across a spectrum (for instance, across a 2x2 matrix as given below, the bank can then decide in its policy, what activities of the DSA warrant a higher responsibility than others, and therefore a higher degree of training, certifications, data privacy checks, communications training etc.

Instead of banning bundling, bring in transparency of the assessment and the altered offering

Under the Draft Conduct Directions, while compulsory bundling is construed as mis-selling, selling a package of products with customer consent is not. This we believe is an artificial distinction because a retail customer (irrespective of whether he/she is illiterate or educated) can be easily made to provide consent on paper, separately for each product in a bundle or package, and yet be knowingly or unknowingly mis-sold one or more products in the bundle/package.

Hence, we believe this artificial distinction can be done away with. Instead, in addition to explicit consent, the RBI can require banks to establish whether each product in a bundle / package meets the suitability / appropriateness test, and if not established, to ensure that the customer is clearly informed about the respective case of –

THEME 3: Aligning incentives Instead of propagating conflicted Incentives

We welcome the strong pro-consumer intent behind RBI's stance in reducing the menace of conflicted incentives in the sale of own and third-party products. It does not require removing volume-based incentives. However, we believe a more tempered approach may be beneficial in the long run for moving the needle on gaining insurance, investment and credit depth for the country's citizens.

Volume-based variable pay that is linked to the efforts of successful closure of sales by sales-persons is indeed a powerful motivator of their performance. We argue that such incentives cannot be done away with at this current stage – but the volumed-based incentive needs to be decoupled from the incentive to mis-sell. The incentive to mis-sell stems from the fact that certain products give much higher commission payouts than others, while there are certain other products that do not produce any sizeable commission whatsoever, even if they may be the most suitable for the customer at hand.

Hence there is a need to align the "incentive to sell" with the "incentive to do right" by the customer. In other words, targets can indeed be allowed if it is quality-based rather than product-sale-volumes based.

The RBI can lay out a principle of incentive alignment that it can then expect banks to uphold, rather than leaving it to each bank to prove how their incentives policy did not result in mass mis-selling, or how it did not encourage their representatives to 'push' the sale of products / services. It is common knowledge that while the word 'push' is used here pejoratively, in reality, many well-meaning bank managers and relationship managers have built their influence over time through hard work invested in relationship-building and by being of service to the customer in order to gain their trust. Hence, in these cases, where the bank employee has built his/her own personal social capital, their influence and persuasive power over the customer is precious and must be acknowledged and upheld.

Once the RBI lays out this principle, it can then require banks to develop and deploy policies that drive an alignment between the incentive to sell and the incentive to do right by the customer.

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