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From Consent to Compensation: RBI’s Draft Directions for REs on Sales Practices

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Highlights

  • Mis-selling, among others, will include selling an unsuitable financial product; consequences include compensation                                                                                                                               
  • Prohibition on Compulsory Bundling, eg., sale of insurance policy along with a loan
  • Explicit consent, wherever required, to be based on unambiguous affirmative action
  • Bank to do a due-diligence of a third party financial product that it markets, to avoid reputational risk
  • DSAs and DMAs of banks to come for tighter scrutiny; with undertaking for compliance with bank’s code and disciplinary action upon violation
  • Pricing difference, if any, between directly marketed bank products and indirectly (through agents) to be disclosed
  • Banks to take after-sale feedback from customers, and make necessary amendments in selling practices
  • Dark patterns not be used by regulated entities; periodic audit mandated
  • Controls over incentives favouring mis-selling
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Insure to Ensure Your Loan? 

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Manisha Ghosh, Executive | finserv@vinodkothari.com

Introduction 

It is quite common that whenever a borrower wishes to apply for a loan, lenders require the borrower to purchase an insurance policy, as a pre-condition for sanction. One may wonder if availing insurance can be a mandatory requirement for availing any loan? Insurance is not a regulatory requirement that is needed in loans, however, lenders prefer the same to safeguard their interest in the event of default. 

Lending institutions such as banks and NBFCs may also enter into insurance business in line with the Master Circular – allied activities- entry into insurance business, issue of credit card and marketing and distribution of certain products for Banks and the “Guidelines for Entry of NBFCs into Insurance” (Annex XVI of SBR Directions) for NBFCs. Generally, lenders try to solicit customers by marketing insurance to the borrowers who have applied for a loan by acting as commissioned corporate agents of the insurance companies under the supervision of IRDAI. 

In this article, the author examines the prevalent practice of lenders requiring borrowers to obtain insurance as a prerequisite for loan sanction and evaluates its permissibility within the regulatory framework.

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