For years, I have been writing about how the personal finance system is designed to extract money from ordinary savers rather than serve them. Just a few weeks ago, I discussed a book by John Campbell and Tarun Ramadorai that makes this case with rigorous academic evidence. They argue that the financial industry does not profit despite your mistakes–it profits because of them. In fact, they deliberately induce these mistakes. Shortly after, I wrote about how our regulations, however well-drafted, remain toothless because the consequences of violating them are trivial compared to the profits to be gained.Now comes news that the Reserve Bank of India has issued draft norms that, if (a huge if) rigorously implemented, could fundamentally change this calculus. The proposed rules would require banks not merely to obtain customer consent before selling third-party products such as insurance and mutual funds, but also to ensure that these products are appropriate for the customer. More significantly, if mis-selling is established, banks would have to refund the entire amount paid by the customer and provide additional compensation for any financial loss suffered.This last provision is what makes these draft norms potentially revolutionary. For the first time, the regulator is proposing consequences that might actually hurt. According to data compiled from annual reports, the share of insurance income in other income for the top five private sector banks rose to 10 per cent in FY25, up from 8.2 per cent in FY19. Income from insurance products sold by the top ten banks increased two-and-a-half times to Rs 16,747 crore in FY25 from Rs 6,381 crore six years earlier. These are not trivial sums. Banks have linked employee incentives and sales targets to the sale of these products precisely because they are so profitable.The question that matters now is whether this draft becomes a serious rule with genuine enforcement, or another addition to our impressive collection of regulations that exist mainly on paper. The difference between a law that works and one that does not lies entirely in the certainty of consequences. A little bit of a fine, a warning, some paperwork by your legal team–banks take these merely as costs of doing business. What actually deters misconduct is the prospect of genuine damage.What the RBI is proposing goes in the right direction. Requiring full refunds plus compensation changes the mathematics of mis-selling entirely. If every fraudulent sale carries the risk of being returned not just the premium but also additional damages, the expected value of cheating could become negative. This is exactly what I meant when I wrote that we need enforcement that genuinely hurts.Of course, I’ve seen many failed revolutions like this, so I have a good deal of scepticism. A draft norm is not a final rule. Final rules require implementation. Implementation requires investigation of complaints. The investigation requires proof of what was said during sales conversations, which typically leave no paper trail. At each stage, the system offers opportunities for dilution. Banks will lobby for softening. Insurance companies that depend on bank distribution will press their case. The machinery of business has many ways of grinding down well-intentioned regulations.The very fact that banking industry sources are already expressing concern about these norms suggests they recognise the threat as genuine. When an industry complains that regulations will hurt their business, it is usually a sign that the regulations might actually work. The head of retail banking at a private bank quoted in news reports acknowledged that the new rules will make banks “cautious” about selling third-party products.For ordinary investors, the lesson is unchanged from what I have long maintained: complexity is not your friend. Until these regulations take effect and prove their worth through actual enforcement, your best defence is radical simplicity–term insurance for protection, a few well-chosen mutual funds for investment, and the discipline to ignore everything else. But it would be wonderful if, for once, words grew some teeth.(Dhirendra Kumar is Founder and CEO of Value Research)If you have any queries for Dhirendra Kumar you can drop us an email at: toi.business@timesinternet.in
