Mutual Fund Mis-Selling: India’s financial regulator, the Reserve Bank of India (RBI), is set to introduce new rules against financial mis-selling from January 1, 2027, aiming to strengthen consumer protection and make banks and financial institutions more accountable.
Mis-selling has been a long-standing problem in the domain of insurance plans, mutual funds, fixed deposits, loans, and investments. The common practice among financial advisors is to sell products that are not suited for the investor due to misleading statements and high-pressure sales tactics or lack of disclosure of risks involved.
Speaking on Zee Business, financial planners Mrin Agarwal, Founder & CEO of Finsafe, and Prathiba Girish, Founder of Finwise, hed light on the process of identifying mis-selling and implications of the latest RBI framework, and the precautions consumers should take before investing.
What is Financial Mis-Selling?
According to Mrin Agarwal, mis-selling occurs when a financial product is sold to a customer even though it is not suitable for their financial goals, risk profile, or requirements.
She explained that common examples include:
- Promising “guaranteed” returns without adequately disclosing risks.
- Selling insurance policies to customers seeking fixed deposits.
- Bundling products such as insurance with home loans or bank lockers.
- Creating artificial urgency by claiming an offer is available only for a limited period.
- Highlighting only positive features while hiding risks, charges, or limitations.
“The biggest mis-selling is when the product being sold is not in the customer’s interest and is not suited for them,” Agarwal said.
How banks and financial institutions mis-sell products?
Experts noted that senior citizens are among the most vulnerable groups.
Agarwal cited cases where retirees visiting banks to invest in fixed deposits were instead sold long-term insurance products without fully understanding the implications.
She also pointed to practices where customers are told they must buy an insurance policy, make investments, or maintain deposits to access services such as bank lockers.
In the digital space, mis-selling often occurs through investment apps that prominently display recent high returns while giving less visibility to the associated risks.
What warning signs investors should know
Prathiba Girish said investors should become cautious whenever a salesperson uses phrases such as:
“Guaranteed high returns”
“Completely safe investment”
“Buy today or miss the opportunity forever”
“This offer is available only for a few days”
“If someone says the product is guaranteed, safe, and unavailable tomorrow, your antenna should immediately go up,” Girish said.
She emphasised that every investment offering higher returns also carries some degree of risk.
Investors should always ask what could go wrong rather than focusing solely on potential gains.
Insurance Mis-Selling: A major area of concern
According to the experts, insurance-related complaints remain among the most common forms of financial mis-selling because commissions on insurance products can be significantly higher than those on mutual funds.
Girish warned that insurance-cum-investment products are often marketed attractively but may lock investors in for years.
She advised consumers to carefully review:
- Exit clauses
- Liquidity provisions
- Surrender charges
- Lock-in periods
- Expected returns after accounting for inflation
“If you discover later that the product is unsuitable, getting out can become difficult and costly,” she said.
How does mis-selling happen in mutual funds?
While both experts agreed that mutual fund mis-selling exists, they said it is generally less prevalent than insurance mis-selling.
- Pushing thematic funds solely because they recently delivered strong returns.
- Promoting New Fund Offers (NFOs) without assessing investor suitability.
- Encouraging unnecessary switching between schemes due to distribution incentives.
Girish cautioned investors against assuming that a fund’s past performance guarantees future returns.
RBI Mis-Selling Rules: What changes from January 1, 2027?
The new RBI framework is expected to introduce stronger accountability for regulated entities and improve customer protection.
According to Agarwal, key provisions include:
1) Mandatory informed consent
The banks and other financial entities will have to seek informed consent from their clients and keep the records of such consent.
2) Improved disclosure standards
Institutions will be required to clearly disclose:
- Features of the product
- Risk involved
- Charges
- Suitability of the product for the customer
3) Limitations on incentive structures
As Agarwal pointed out, one of the biggest changes would be the RBI’s emphasis on employee incentive structure.
The banks will not be allowed to create incentive schemes that motivate their employees to mis-sell products just to meet their sales targets.
4) Limits on product bundling
The framework seeks to curb practices where customers are pressured into purchasing additional products to access banking services.
5) Compensation for victims of mis-selling
A major change under the proposed framework is that the responsibility for mis-selling will rest with the institution rather than just the individual agent.
“If mis-selling is verified, the institution may be required to refund the entire amount paid by the customer,” Agarwal said.
She noted that this could reduce the burden on consumers, who currently often spend considerable time pursuing complaints through multiple channels.
What questions every investor should ask before buying any financial product
Girish recommended that investors ask the following questions before making any financial commitment:
1. Is this product suitable for my age, goals, and financial situation?
2. What risks are involved?
3. How much commission or incentive does the seller receive?
4. What are the exit options?
5. What are the lock-in periods and surrender charges?
6. Are there alternative products available?
She also advised investors to insist on written documentation rather than relying on verbal promises.
‘Don’t ignore the fine print’
Both experts stressed that many investors become victims of mis-selling because they fail to read product documents carefully.
Girish urged consumers to review policy documents immediately after purchase, especially during the free-look or cooling-off period available for many insurance products.
Depending on the product, customers may have a 15-30 day window to cancel without significant penalties if they find the product unsuitable.
Where to complain if you have been mis-sold a financial product?
In case of being wrongfully sold an investment product, an investor must file a complaint with the concerned bank, insurance company, mutual fund house, or other financial firm.
In case if the problem persists, the consumers may proceed with their grievances redressal process and further contact the concerned ombudsman.
Investors were advised by the experts to keep track of all communications, documents, and written assurances made by the salesman during the course of the selling process.
Mis-selling of financial products is known to survive on fear, greed, urgency, and ignorance. Even with the upcoming guidelines from RBI, which will definitely provide consumer protection measures, the experts feel that it is the vigilance of the investors which is the most important thing.
Investors should make sure that before signing anything, they are aware of the product they are buying, evaluate its suitability, consider alternative products, and most importantly, check the small print thoroughly.
Key Takeaways: 7 Red Flags of Financial Mis-Selling
1) Guaranteed promises of great profits from investments.
2) Assurances that your investment is risk-free.
3) Urgency in purchasing your investments.
4) “Buy now or lose out forever” marketing ploys.
5) Emphasis on gains but ignoring the potential risks.
6) Advice that does not fit in with your financial objectives.
7) Investments where key information such as your exit strategy is unclear.
