Bank Account Holders in Bermuda: Protect Your Account Balance and
Qualify for Deposit Insurance Repayment When Banks Fail or Stop
The island country of Bermuda has a population of less than 70.000. Most basic necessities and luxury goods are imported which makes it an expensive location to reside. A lack of industry and natural resources is compensated by tourism and international business activities. The latter allows Bermuda to be a leading international financial center with one of the highest GDP’s per capita in the world. Its position as an international financial center is strengthened by the business friendly environment, the legal system and its tax climate. Public income is mainly derived from payroll tax and customs duties where taxes on profits, income, dividends, capital gains, estate or death are exempt for most individuals and legal persons.
Over 90% of Bermudian GDP is fueled by foreign demand and earned in the services sector. The corporate industry in Bermuda is known for its offshore services, captive insurance and reinsurance, investment services, aircraft registration and ship registry. The self-governing British Overseas Territory implemented a stable legislative framework, based on the English common law protects and maintains the industry and its local and foreign market participants.
Banking and Finance in Bermuda
Bermuda is traditionally regarded as a major international financial center. Among the reasons for this position are the business friendly environment and the domestic tax system. International financial service operators, in the insurance and reinsurance industry, collective investment schemes, financial holding companies, and more recently, firms that operate at the crossroads of finance and technology are established on the island.
The banking sector is small, with only four licensed banks and one deposit company. Even though the Banks and Deposit Companies Act (BDCA) requires licensed banks to provide minimum services to the public in Bermuda, these banks primarily provide services to international businesses. Licenses are granted to applicants able to fulfil the minimum criteria as set forth in the BDCA and where the Minister is satisfied that the economic and financial policy of the government is met. A banking license, deposit company license and restricted banking license may be granted.
Financial regulation in Bermuda is the exclusive domain of the Bermuda Monetary Authority (BMA). The independent BMA is mandated by the Bermuda Monetary Authority Act 1969 and the Bermuda Monetary Authority (Financial Institutions) (Control) Regulations of 1994. The authority does not have the traditional capacity as a lender of last resort that most traditional central banks have. Banking operations are restricted and regulation is therefore tight. For example, Bermudian banks do not engage in proprietary trading for their own risk and account, and loan loss provisions for on and off-balance sheet exposures are warranted by high capital requirements.
Financial Regulation and the Legal System
Statutes and common law make up the Bermudian statutory framework. The following acts and rules should be considered by creditors who are affected by the (potential) failure of their financial institution: the Companies Act (1981), the Companies (Winding-Up) Rules (1982), the Banks and Deposit Companies Act (1999) the Banking (Special Resolution Regime) Act (2016), the Deposit Insurance Act (2011) and the Deposit Insurance Rules (2016). The Bermudian corporate insolvency regime aims for fairness and equal distribution of assets to unsecured creditors after secured claims are reimbursed in total. Unsecured creditors, ineligible for deposit insurance or with claims exceeding deposit insurance limits, are therefore subject to repayment from the common pool of assets and therefore potentially lose part of their outstanding balance.
A key part of the duties of the BMA is to regulate and supervise the Bermuda financial sector. It has the authority to restrict licenses and apply such conditions as it deems appropriate to protect depositors of licensed bank or to safeguard its assets otherwise. The main objective of intervention is to limit damages and mitigate risk to all involved stakeholders and the Bermudian economy. As a result, the BMA may initiate a sale of the assets, business units and or license of the bank to another qualified party or liquidate and wind-up the licensed institution. An asset purchase agreement often includes the sale of the customer portfolio and therefore protects the interest of depositors. Insolvency or failure of a scheme member of the Bermuda Deposit Insurance Corporation (BDIC) allows the BDIC to determine that compensation is to be paid to insured depositors.
Bank Deposit Protection in Bermuda
Financial regulation is up to date, sufficient capital cushions are implemented and market risk is controllable in Bermuda. Yet, the financial sector is subject to several weaknesses that can have severe consequences for bank customers, creditors and the (domestic) financial sector. Therefore, the Bermuda Deposit Insurance Corporation (BDIC) has an important public duty to contribute to the stability of the financial system by protecting insurable account deposits up to 25.000 Bermuda dollars (BMD).
The objectives of deposit insurance are to protect small depositors and promote the stability of the Bermudian financial system and economy. These objectives are met by ensuring a prompt reimbursement or other swift access to insured deposits. The Deposit Insurance Act (2011) and the Deposit Insurance Rules (2016) provide for the current framework of bank deposit protection in Bermuda. The scheme is obligatory for every licensed bank and credit union operating in Bermuda.
Bank deposit protection in Bermuda exclusively applies to BDIC member institutions. Member institutions make contributions to the fund to cover the reimbursements for depositors of an insolvent member. A pay out event occurs when an order is made by a court in Bermuda or elsewhere to wind up a scheme member, or when the BDIC and BMA jointly are in the opinion that a scheme member is insolvent or that it is unable to meet its obligations as they fall due. A notification of this decision is published in the national Gazette.
Scheme members hold a register of insured deposits which is shared with the BDIC for reimbursement purposes. Creditors must submit claim evidence and identify themselves before individual repayment is effectuated. Approval of the claim results in repayment by bank transfer to the account of the creditors at another scheme member or bank cheque. Bank cheques are issued on the name of the account holders, are only valid in Bermuda and can only be cashed or deposited by the account holder.
Alternative Asset Recovery and Civil Action
Under the Banks and Deposit Companies Act (1999), the BMA may restrict or revoke the license of a supervised deposit taking institution, and the institution itself can surrender its license. The termination of activities triggers the repayment of account balances to creditors. Depending on the internal infrastructure and financial position of the bank, such repayments might be delayed, postponed or never happen at all.
Bermuda has a creditor-friendly approach towards corporate disputes and insolvency. Since several deposits fall outside the scope of protection because of their size, or ineligibility, creditors may seek an alternative approach to recovery. In matters of insolvency, the Bermudian court prefers to appoint a provisional liquidator to rescue an insolvent company through restructuring. Other insolvency procedures include the compulsory liquidation under the supervision of the court, provisional liquidation on a ‘full powers’ basis, and schemes of arrangement.
Bank regulation and insolvency procedures affect all stakeholders involved. Individual creditors often wish to investigate individual ways to secure their position. Especially when they cannot afford to lose part or all of their money held at the failed bank. The contractual agreement between the bank and its customers clarifies the individual position of both parties. Breaches of this contractual agreement and consumer protection regulation may supersede the general applicable framework. Nevertheless, this position must be strong enough for a court to override existing rules and prioritize an individual claim over all others. Neither easy nor impossible.
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This website is an initiative of Legal Floris LLC. Since more than a decade, we have helped international creditors recover money when their bank fails or their investments disappear. Due to our vast experience in dozens of bank failures in different countries we are able to maximize repayments and minimize risks for our clients. Contact us right now to find out how we can help you too to reclaim your account balance if your bank stops operating:
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