[By Neha Lodha and Vivek Kumar]
Ms. Neha Lodha is a Team Lead and Mr. Vivek Kumar is a Research Fellow at the Vidhi Centre for Legal Policy.
Introduction
In February 2026, the Reserve Bank of India (“RBI”) issued the Draft Amendment Directions for ‘Advertising, Marketing and Sales of Financial Products and Services by Regulated Entities’ (“Directions”) covering various aspects relating to marketing and sale of financial products and services. One of the central goals of these directions is to prevent mis-selling of financial products and services by ensuring the suitability and appropriateness of financial products and services for the customer.
Though the Directions are a significant step towards protecting consumer interests in the banking sector, certain provisions may need revisiting in order to ensure a balance between protection of consumer interest and efficient conduct of financial activities by regulated entities (“REs”), which include banks and non-banking financial companies. This article aims to analyse certain provisions of the Directions in light of international practices and the existing jurisprudence around seller liability to suggest a balanced approach to the requirement of customer suitability assessment.
The Directions define mis-selling as, inter alia, “sale of a product/service, which is neither suitable nor appropriate in view of the customer’s profile even if with his/her explicit consent;” In pursuance of this, the Directions explicitly require an RE to ensure the suitability and appropriateness of a financial product or service by analysing the features of such products and services against the customers profile, before they are marketed or sold to a customer.
The requirement of customer suitability assessment is aimed at addressing the increasing customer complaints around aggressive marketing strategies and mis-selling by REs. However, to adopt a balanced approach, the scope of liability of REs may be circumscribed by providing the following: (i) distinction between retail and non-retail customers to calibrate compliances with the level of customer’s sophistication and knowledge, (ii) a graded approach to suitability assessment to link it with complexity of the product and the risk involved, and (iii) differentiation between solicited and unsolicited sales to recognise a greater reliance of customers on the recommendations or advice provided by an entity.
(i) Distinction between retail and non-retail customers
The Directions provide for customer suitability assessment as a blanket requirement across all classes of customers, without regard to the expertise or sophistication of the customer. IOSCO’s Report on Suitability Requirements with Respect to the Distribution of Complex Financial Products (“IOSCO Report”) includes ‘Classification of Customers’ as its first principle and advises regulatory systems to establish a process to distinguish between retail and non-retail customers, in light of the complexity and the relative risk of different products, when assessing suitability.
The EU Markets in Financial Instruments Directive 2014 (“MiFID II”) also follows this approach and provides, “Measures to protect investors should be adapted to the particularities of each category of investors (retail, professional and counterparties).”
It is also relevant to mention that the distinction between retail and institutional/professional customers is well established in Indian jurisprudence. The Delhi High Court’s judgment in the case of Punjab National Bank v. Kohinoor Foods is a case in point. In this case, the respondent alleged mis-selling of certain derivative transaction by the petitioner on the ground that the said derivative transactions were entered into even though the risks involved were not commensurate with the respondent’s business, financial operations, skill and sophistication, internal policy and risk appetite and that the petitioner failed to carry out a proper due diligence, concerning user appropriateness, or suitability of the product qua the respondent. However, the Delhi HC ruled on the contrary, denying any allegation of mis-selling or fraud on the ground that the respondent was a sophisticated customer who routinely entered into such transactions and that he had consented to the transaction after understanding the impact of the transaction.
Past experiences in financial markets also indicate that retail customers are more susceptible to mis-selling than non-retail customers, entailing a greater level of protection. The insurance sector alone saw 1,20,429 grievances regarding unfair business practices by insurance providers in FY24-25. However, a blanket requirement may be too onerous and may lead to high operational costs for REs. Further, the definition of mis-selling under the Directions includes the sale of an unsuitable or inappropriate product, even with the consent of the customer. In essence, this confers upon the RE a veto power, transforming a tool for the protection of retail customers into a restraint on a customer’s freedom to deal with certain financial products, even if they are willing to take the risks associated with such products or services. This is in sharp contrast to the position in the USA, where institutional investors are allowed to waive suitability assessment by indicating that it is exercising independent judgment. Thus, there is a need to recalibrate the requirement for suitability assessment for different categories of customers.
(ii) Graded approach to suitability assessment
To ensure compliance and avoid onerous obligations on REs, it is necessary that suitability assessment requirements are proportionate to the complexity of the product and the risk involved in dealing with such products. It would not be appropriate to mandate the same suitability assessment requirements for both non-complex products with minimum risk and complex products with high-risk profiles. Therefore, the Directions should provide for a graded approach commensurate with the level of complexity and risk involved in sale of such products, instead of blanket suitability assessment requirements.
In contrast to the Directions, MiFID II follows a graded approach concerning suitability assessment. While article 25(2) provides that investment advice or portfolio management services to retail customers have to be suitable, requiring a written statement on suitability, as per article 25(3), other services only entail an assessment of whether a product or service is appropriate. Further, article 25(4) allows firms to skip such assessment entirely for certain non-complex products, including in situations where the service is provided at the initiative of the client or potential client.
It is apposite to mention that the RBI (Non-Banking Financial Companies – Undertaking of Financial Services) Directions, 2025 stipulate that “complex products with investment components will require a customer need assessment before sale, while pure risk term products with no investment or growth components that are simple and easy for the customer to understand will be deemed universally suitable products.” However, these directions only pertain to Housing Finance Companies undertaking insurance distribution businesses. It is interesting to note that such a distinction has been avoided under the Directions. A similar graded approach for different financial products based on the complexity and risk involved may be appropriate for the purpose of these directions.
(iii) Differentiation between solicited and unsolicited sales
The Directions require that REs analyse the suitability and appropriateness of a financial product or service, before it is sold or marketed to a particular customer. While suitability assessment is an omnipresent practice in the sale or marketing of financial products or services, in most jurisdictions, such a requirement only arises when a firm makes a recommendation or provides advice to a client to purchase a product or avail a service. The IOSCO Report clearly recognises the distinction between products and services sold on an unsolicited basis (no management, advice or recommendation) (Principle 4) and when such products and services are recommended (Principle 5). The rationale behind this distinction is that there is a greater reliance of customers on the recommendations or advice provided by an entity; thus, the provision of such services calls for stricter protections.
MiFID II takes this conception even further by providing that a service can be assumed to be provided at the initiative of a client, unless “the client demands it in response to a personalised communication from or on behalf of the firm to that particular client, which contains an invitation or is intended to influence the client in respect of a specific financial instrument or specific transaction.” The Directions, however, require an RE to conduct a suitability assessment irrespective of whether the sale was recommended or unsolicited. This overlooks the fundamental distinction between the obligation of an RE vis-à-vis solicited and unsolicited sales, which is recognised globally. In practice, it would impose a fiduciary obligation on the RE similar to that on an Investment Advisor under SEBI (Investment Advisers) Regulations, 2013.
The judgment of the U.S. Court of Appeals in the case of Henryk De Kwiatkowski v. Bear, Stearns & Co. highlights this distinction. In this case, the plaintiff was a wealthy investor routinely trading in currency futures. However, after making huge losses in the market, the plaintiff sued his brokerage firm, alleging that the defendant failed to warn him of risks, failed to keep him apprised of market forecasts, and gave him negligent advice concerning the timing of his trades. The Court, while rejecting these arguments, held that brokers generally owe only a limited, transaction-by-transaction duty to non-discretionary clients who maintain control over their own investment choices. The Court also mentioned that a broker may be held to have extra-contractual fiduciary duties towards certain clients who, by way of some incapacity or lack of sophistication, may require a higher level of protection. However, sophisticated investors cannot be put on the same pedestal due to their wealth, trading experience, sophistication, and appetite for risk.
Conclusion
The Directions, though a step in the right direction for the protection of retail customers of financial services, suffer from overgeneralisation. An examination of the international jurisprudence highlights a more nuanced approach towards such requirements.
In light of the above analysis, it may be relevant to (i) provide a clear classification of customers commensurate with their level of financial sophistication and ability to absorb losses, (ii) formulate a graded regulatory approach keeping in mind the types of investors and complexity of the financial product involved, and (iii) provide for a differential regulatory treatment for solicited and unsolicited sales of financial products and services.