Banks Mis-Selling Mutual Funds and Insurance

Banks are guilty of mis-selling mutual funds and insurance when they try to sell you a product that just isn’t right for your needs or risk tolerance. Or worse still, they either fob you off from the key risks, charges and exit terms.

The product itself might be genuine but it is often sold as “completely safe” or “bank-backed” even if its performance is tied to the market.

IRDAI reported a 14% leap in unfair business practice complaints against life insurers reaching 26,667 in the year that just ended. And now RBI’s ‘anti-mis-selling’ rules are coming into effect on 1st of January, 2027.

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Key Takeaways

• Banks sell third-party products as distributors, not neutral advisers.
• Mutual funds and ULIPs are not bank deposits and carry market risk.
• RBI’s new rules define mis-selling, ban forced bundling and require refunds from January 1, 2027.
• Check charges, lock-ins, surrender value and risks before signing.
• Keep records and complain to SEBI, IRDAI or the RBI Ombudsman.

What is Mis-Selling of Mutual Funds and Insurance by Banks?

Mis-selling is when a bank pushes a financial product that is completely unsuitable for your own circumstances. This can be either because they haven’t told you the whole story or didn’t get your okay before making the sale – or even worse just turned it into an ‘add on’ you had to have.

When RBI issued its final guidance on this in June 2026, they defined it more or less exactly the same way. A sale can technically be a mis-selling even if you signed on the dotted line as long as the product clearly didn’t suit you when you bought it.

For example, it is actually possible to buy a ULIP – that is a product which doubles up as a life insurance policy and a savings plan. But if your relationship manager tries to sell it to you as some kind of ‘FD that gives guaranteed returns’ to an older person who just wants to have some basic life cover or easy access to their cash, that starts to sound like mis-selling

Simple Rule:

If you can’t explain what you bought, why, what it costs and how you exit, pause before signing.

How Big is the Mis-Selling Problem in India?

With banks bringing in about half of private life insurers’ new individual business, the branch counter is where many of these sales happen.

Why do Banks Mis-Sell Financial Products?

Banks essentially act as middlemen between you and the insurance companies and mutual fund houses and they get a commission for every sale they make.

Also, branch staff are usually expected to meet sales targets which can create a conflict of interest. So, the product that pays the biggest commission isn’t necessarily the one that is right for you.

RBI’s new rules ban sales contests that encourage push-selling and any third-party incentives to staff selling those products.

Common Mis-Selling Traps to Watch For

1. “Guaranteed returns” on market-linked products.

No equity mutual fund or ULIP can guarantee returns. If someone promises “assured 12%,” ask for it in writing with the risk disclosure.

2. Mutual funds are sold as “safer than FDs.”

Equity funds can fall sharply, and debt funds carry credit, interest-rate and liquidity risk.

3. Insurance is sold as an investment.

To protect your family’s income, a term plan usually beats an endowment, money-back or ULIP policy.

4. Long lock-ins in the fine print.

Many traditional policies run 10 to 20 years and pay a low surrender value in the early years.

5. Products bundled with loans, cards or FDs.

RBI’s 2026 rules prohibit compulsory bundling of third-party products and bar banks from funding a product out of your loan without explicit consent.

6. Charges buried in the brochure.

Allocation, administration, mortality and fund management charges, plus surrender charges and exit loads, quietly eat your returns.

FD vs Mutual Fund vs Insurance: What are You Actually Buying?

A bank selling a mutual fund or insurance policy doesn’t make it a bank deposit.

Red Flags Before You Sign

• “This is guaranteed, just like an FD.”
• “Sign today, the offer closes tonight.”
• “You need this to get your loan or credit card.”
• Staff dodge questions on charges, surrender value, exit load or risk.
• The pitch is based on your bank balance, not your goals.
• You don’t receive the policy document, benefit illustration or fund factsheet.

How to Protect Yourself from Bank Mis-Selling

Ask These Questions First

1. Is this a deposit, mutual fund, insurance policy or hybrid product?
2. Who issues it, and which regulator oversees it?
3. Is my principal guaranteed? If not, what are the risks?
4. What is the total cost, including commissions and exit costs?
5. What happens if I stop paying, surrender early or redeem in a market fall?
6. Are you advising me as a bank employee, insurance agent or mutual fund distributor?

Check Suitability, Not Just Returns

A good product matches your goal, time horizon, income stability, dependants and need for liquidity. Saving for a home in two years? A long lock-in policy is a poor fit.

Demand Full Cost Disclosure

Compare Direct and Regular Mutual Fund Plans

Banks sell regular plans. In equity funds, the cost gap is often around 0.5 to 1 percentage point a year. This compounds into a large sum over 15 to 20 years.

Use the 30-Day Free-Look Period

IRDAI gives you 30 days from the time you get the policy document to take a long hard look at what you are being sold. That is for life and health insurance policies that last a year or more.

If you decide the policy isn’t what they have promised, just send a written request to cancel it within that time period. If you do decide to cancel, the insurer may still charge you a bit for the time you had the policy – but that would be all.

At the end of the day, the most important thing is to never let anything pressure you into buying something. Give yourself a day or two – ask them to send you the paperwork by email. Then spend some time at home going over it all before you make any decisions.

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What to Do if You Were Mis-Sold

Step 1: Collect evidence.

Save application forms, policy or scheme documents, receipts, messages and the names of staff involved.

Step 2: Complain in writing.

Approach the bank, insurer or AMC first and get a complaint reference number.

Step 3: Escalate to the right forum.

You can approach the RBI Ombudsman if the bank rejects your complaint or doesn’t reply within 30 days. From January 1, 2027, if mis-selling is established, the bank must refund what you paid and compensate any loss under its board-approved policy.

Step 4: Don’t stop premiums impulsively.

Check surrender value and tax impact first.

Building the knowledge that stops mis-selling is the key. The best protection is knowing what you are buying. Entri’s stock market and trading courses teach how mutual funds, risk and returns really work.