As RBI gears up to issue guidelines to curb mis-selling, review of commissions mooted

The Reserve Bank of India (RBI) is likely to announce its final guidelines on ‘Responsible Business Conduct’, it’s term for mis-selling by banks, soon to protect the interest of citizens. 

The draft guidelines had suggested an implementation date of July 1, 2026. These guidelines are expected to outline how banks should distribute third-party financial products, especially insurance, and how to make insurance distribution safer, fairer, and more transparent.

But the main driver of mis-selling is commissions paid by insurance companies, which fall under IRDAI’s purview.

IRDAI has been examining this issue since 2023 and initially capped total management expenses, including commissions, rather than directly targeting commissions. 

However, commission expenses across life and non-life insurance continued to rise, and in fact rising faster than premiums. 

According to IRDAI’s latest annual report, total commissions in life insurance alone amounted to ₹60,800 crore in FY25, up 18% year-on-year, while premiums grew in single digits. First-year commissions rose over 20%, and single-premium payouts jumped nearly 37%.

Industry executives point out that this reflects aggressive acquisition strategies deployed by insurers. 

Reportedly an elderly woman was recently made to withdraw all her fixed deposits to buy a single-premium policy and this case highlights how agents get enriched, at the cost of customers who ended up paying higher premiums to enable insurers to pay high commissions for customer acquisition.

IRDAI is now proposing significant changes in the insurance commission structure to address rising costs and ensure sustainability. 

Reportedly the regulator is considering fixing commissions itself rather than leaving it to insurers and/or introducing caps on commissions and expense-based limits. 

However, these may not necessarily be the most effective ways to curb malpractices, industry officials said.

“Instead, IRDAI could consider making the board of insurance companies responsible and accountable for fixing commissions. 

Insurers could be required to adopt a board-approved commission policy ensuring commissions stay within overall Expense of Management (EOM) limits, supported by regulatory disclosures. This approach would create accountability at the highest level while still allowing flexibility,” an industry official said asking not to be named.

“A still better solution would be to stagger the payment of commissions,” the official added.

Today, banking distributors earn most of their commission upfront, often passed on as incentives to staff authorized to sell insurance. 

The quantum can be significant, and because it is largely front-loaded, it tilts the scales. 

Sellers are motivated to push products aggressively, secure their fees, and move on. 

Rarely do they handhold the customer through the medium- to long-term life of the policy.

Even a good product sometimes becomes mis-sold when incentives are misaligned.

“A trail-based commission model would change this dynamic. Agents – individual, corporate, or bank employees would have a reason to stay invested in the customer’s journey, offering service and advice long after the policy is sold,” an industry official suggested.

“For customers, it would mean less pressure and more accountability; for banks, it would mean steadier and more predictable income, almost like an annuity. Insurers, in turn, would be encouraged to design more efficient products with better persistency,” the official added.

Insurance is not just another financial product. It is a safety net, a financial shield for families, and that is why the government wants it to be accessible to everyone.

If insurance is meant to be a financial shield, then the incentives of those who sell it must be aligned with those who buy it. 

Moving toward trail-based commissions and removing sales inducements may not just curb mis-selling but help restore trust in insurance itself.

Published – April 04, 2026 09:14 pm IST