Mis-selling’s Structural Problem. But, What Next?

When the Union Finance Minister publicly reminds banks to refocus on their core business and cautions against mis-selling, the intervention carries unusual weight. Mis-selling in Indian finance is neither new nor episodic. It has persisted in plain sight for years. What has changed is that the distortion has now become too visible, too normalised and too misaligned with the customer centric system that policymakers seek to advance.

The recent remarks welcoming regulatory guidance are therefore not routine signalling. They acknowledge a deeper institutional drift. What does invite some surprise is the timing of this ministerial focus. The Ministry maintains regular oversight of public sector financial institutions, and mis-selling has hardly been an invisible concern in public discourse. The sharper question now is whether this intervention will translate into sustained supervisory seriousness or settle into another fleeting policy moment. Equally, attention must extend beyond banks. The insurance regulatory architecture will also need to demonstrate credible course correction if the sector is to become genuinely trustworthy and consistently policyholder focused.

Banks were not designed to be relentless product distributors. Yet over time, distribution metrics have steadily begun to overshadow fiduciary responsibility. When selling begins to define banking behaviour, the relationship risks becoming transactional rather than trusted.

It may also be an appropriate moment for the Financial Stability and Development Council to elevate consumer protection against mis-selling into a coordinated system level priority.

Structural Drift
For more than a decade, the architecture of retail finance has evolved toward bundled convenience. Loans routinely travel with insurance covers. Savings accounts are linked to investment offerings. Relationship managers are evaluated on cross product penetration. Each step has been justified in the language of comprehensive service and financial deepening.

In theory, financial supermarkets expand access. In practice, they often blur the boundary between advice and pressure.

Mis-selling has therefore not flourished because of a few ambiguous consent forms. It has endured because the underlying incentive system rewards attachment rates, quarterly fee income and product density per customer. Behaviour has followed design. Relationship managers rarely set out to mislead. They respond rationally to performance scorecards that narrowly define success.

This is why the present debate must resist the comfort of treating mis-selling as episodic misconduct. It is better understood as an emergent feature of the current distribution economics.

Incentives And Supervision
Distribution income today forms a meaningful component of bank profitability. Public sector banks, still rebuilding balance sheet resilience, have leaned on non interest income streams. Private banks, competing on growth narratives and return metrics, have embedded cross selling deeply into retail strategy. Insurance companies, operating in an under penetrated market, have relied heavily on bancassurance partnerships to achieve scale.

In such a configuration, frictionless selling is not accidental. It is economically encouraged.

Regulatory guidance, welcomed by the Minister, can begin to recalibrate the environment. Yet compliance cannot stop at cleaner consent architecture. Digital tick boxes rarely guarantee informed understanding. Supervisory focus must move toward granular examination of complaint patterns, product persistency, claims experience and concentration of sales through specific channels.

Equally important is the question of visible deterrence. The system has seen widespread consumer grievance, yet large and proportionate enforcement actions against major institutions have been relatively infrequent in public view. Constructive reform is not about punitive spectacle. It is about establishing credible signalling that customer outcomes are a supervisory priority throughout the financial cycle, not only during episodic reviews.

Even the insurance regulatory system must confront an uncomfortable question. A supervisory architecture that routinely reviews market conduct, tracks consumer grievances and undertakes mystery shopping where necessary should ordinarily be able to detect persistent policyholder stress early. Yet visible, system level demonstration of such proactive consumer centric enforcement has remained limited. The experience around health insurance claims, where opacity in settlement practices and hospital billing disputes continues to trouble policyholders, illustrates the gap between regulatory intent and customer reality. One hopes the sector does not require another round of ministerial prodding after a prolonged interval before meaningful corrective action begins to take hold.

There also remains a visible asymmetry in supervisory depth across the three principal financial regulators. Differences in bench strength, domain capability and supervisory intensity have created uneven market signals. If consumer protection is to command credibility, the system will need to converge toward a consistently high common standard of supervision. Regulatory coordination cannot remain episodic. It must translate into comparable rigour in conduct oversight across banking, insurance and market intermediaries.

A coordinated approach through the Financial Stability and Development Council could strengthen this effort. Mis-selling today cuts across banking, insurance and investment products. Siloed oversight risks leaving gaps that sophisticated distribution models can easily navigate.

Given that the current leadership across the principal financial regulatory institutions brings seasoned public policy experience and intimate familiarity with the Finance Ministry’s expectations, the system is not short of capacity to restore consumer trust. What will matter now is the clarity and consistency of follow through.

Restoring Trust
India seeks deeper insurance penetration and wider financial inclusion. Distribution networks are indispensable to that ambition. If coercive bundling is meaningfully curbed, growth in certain channels may initially moderate.

Insurance, by design, is a promise delivered in moments of vulnerability. If customers come to believe that policies are sold aggressively but honoured reluctantly, participation will remain hesitant regardless of distribution scale. Penetration without trust produces fragile expansion.

Rebuilding confidence will require institutions to revisit internal success metrics. Suitability, long term retention, complaint resolution quality and claims satisfaction ratios must carry greater weight alongside revenue targets. Boards and senior management will need to treat conduct risk as a strategic variable, not merely a compliance checklist.

The harder task ahead lies with the financial system itself. Durable reform will not come from better forms alone. It will come when incentives, supervision and institutional culture begin to point in the same direction. That of the consumers.