New Rules for Banks Selling Insurance, Mutual Funds and Other Financial Products, Check Here!!
The Reserve Bank of India (RBI) has issued new rules regarding how banks can sell and refer third-party financial products such as insurance policies, mutual funds, pension products and other regulated financial services. The revised framework will come into effect from January 1, 2027. Customer protection, transparency, fair selling practices and responsible conduct will become central elements of how banks distribute financial products in the future.
What Has RBI Changed?
Banks today do much more than accept deposits and give loans. They also help customers buy products such as insurance policies, mutual funds, pension schemes and investment products offered by other companies. The RBI has now clearly defined how banks can participate in such activities and what responsibilities they must follow.
The RBI has revised the definition of Agency Business.
What is Agency Business?
Under an agency arrangement, a bank acts as an agent for a third-party company and helps sell that company’s financial products to its customers. These products may include insurance, mutual funds, pension funds and similar services.
The bank may market the product, promote it, assist customers, provide after-sales support and help customers with grievance redressal. However, the bank does not take any financial risk related to the product itself. It earns only a fee or commission for facilitating the sale.
For example, if a customer buys an insurance policy through a bank, the insurance company bears the risk, not the bank. The bank simply acts as a distribution channel.
The RBI has also updated the definition of Referral Services.
What is Referral Service?
In a referral arrangement, the bank’s role is much more limited. The bank can only introduce or refer its customers to a third-party financial service provider.
The bank cannot sell the product, provide after-sales service or handle customer grievances. Once the customer is referred, all further dealings happen directly between the customer and the product provider.
For example, a bank may tell a customer about an investment product offered by another company and provide a link or contact details. But the bank cannot complete the sale under the referral model.
RBI Defines Regulated Financial Products
A major change is the introduction of the term Regulated Financial Products and Services. These include products regulated by financial regulators such as:
- Reserve Bank of India (RBI)
- Securities and Exchange Board of India (SEBI)
- Insurance Regulatory and Development Authority of India (IRDAI)
- Pension Fund Regulatory and Development Authority (PFRDA)
- International Financial Services Centres Authority (IFSCA)
- Overseas financial regulators where applicable
This means banks will be allowed to deal only with properly regulated financial products and services.
New Definition of Third-Party Products
The RBI has also formally defined Third-Party Product and Service and Third-Party Product and Service Provider.
Third-Party Product and Service (TPPS): These are financial products or services offered by another company and distributed through a bank.
Third-Party Product and Service Provider (TPPSP): This refers to the company whose products are being sold or referred by the bank.
Banks Can Act as Insurance Brokers
One important provision in the revised framework is that banks can continue to act as insurance brokers through a departmental structure, subject to compliance with the new agency business rules. This allows banks to offer insurance products while following RBI’s updated regulatory requirements.
Important Rules for Agency Business
The RBI has laid down several conditions that banks must follow when selling third-party financial products.
Only Regulated Products Can Be Sold
Banks can sell only those financial products that fall within permitted banking activities and are regulated by the appropriate financial regulator.
Products Must Be Properly Listed
Only products covered under formal agreements can be displayed on:
- Bank websites
- Mobile banking applications
- Other digital banking channels
This prevents unauthorized or unapproved products from being marketed through banks.
No Risk to Banks
The RBI has made it clear that agency business must be carried out strictly on a fee basis. Banks cannot take financial risk related to the products they sell. Customers must also be informed clearly that the bank is only acting as an agent and not taking responsibility for the product’s performance.
Formal Agreement Required
Banks and their group entities must sign a formal agreement with the third-party provider before selling any regulated financial product.
Strong Grievance Redressal Needed
The RBI has emphasized customer protection. Banks must ensure that the companies whose products they sell have strong systems to handle customer complaints and grievances. Banks may also assist customers in resolving complaints.
New Rules for Referral Arrangements
The RBI has separately laid down detailed rules for referral services.
Bank’s Role Must Remain Limited
Banks can market and refer products but cannot sell them under a referral arrangement. Customers must be clearly informed that the bank is only making a referral and is not involved in the sale of the product.
Bank Brand Cannot Be Used
The name or brand of the bank cannot appear on the documents of the third-party product or service. This is intended to avoid confusion among customers regarding who is actually providing the product.
Greater Transparency
Banks will have to publish the complete list of products offered through referral arrangements on:
- Their websites
- Mobile apps
- Other digital banking channels
This will allow customers to know exactly which third-party products are being promoted by the bank.
No Integration with Bank Systems
A significant change is that third-party product processes generally cannot be integrated into the bank’s own systems. Customers should not be able to complete third-party transactions within the bank’s platform or branch premises unless specifically permitted. Banks may only provide a link that redirects customers to the third-party provider’s platform.
Due Diligence is Mandatory
Before entering into a referral arrangement, banks must conduct proper due diligence on the third-party provider. This means banks must carefully assess the company’s credibility, reputation and customer service standards to protect themselves and their customers from reputational risks. The RBI has also directed banks to ensure that the referred company has a strong customer grievance redressal mechanism in place.
What Does This Mean for Customers?
For ordinary bank customers, the new rules mean:
- Better transparency regarding third-party products.
- Clear distinction between products sold by banks and products merely referred by banks.
- Better disclosure of risks.
- Improved complaint handling mechanisms.
- More accountability from third-party service providers.
- Reduced chances of customer confusion regarding responsibility for financial products.
What Does This Mean for Banks?
Banks will need to:
- Review their existing agency and referral arrangements.
- Ensure only regulated products are offered.
- Update websites and mobile applications.
- Strengthen due diligence processes.
- Improve customer disclosures.
- Ensure compliance with RBI’s Responsible Business Conduct framework.
Conclusion
The RBI’s latest amendment aims to bring greater transparency and customer protection to the sale of financial products through banks. While banks will continue to offer insurance, mutual funds, pension products and other regulated financial services, they will now have to follow stricter rules regarding disclosures, customer protection, grievance handling and third-party partnerships. The changes are expected to make it easier for customers to understand whether a bank is selling a product or simply referring them to another provider, thereby reducing confusion and strengthening trust in the financial system.
