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New scheme will protect depositors' accounts to $25,000

Legislation soon to be enacted in Bermuda will provide protection for small depositors, lessening the impact should a local financial institution fail.

The Deposit Insurance Act 2011 (the “Act”) will establish a 'Deposit Insurance Scheme' (the “Scheme”) for 'insured depositors', providing deposit insurance protection up to a maximum of $25,000 in the event that a Scheme member (ie all banks and credit unions) experiences solvency problems or fails completely (“Failed Scheme Member”).

The Bermuda Deposit Insurance Corporation (the “BDIC”) is the corporate body with sole responsibility for the administration of the Scheme and the Deposit Insurance Fund (the “Fund”) from which all compensation will be paid to insured depositors and all premiums collected from Scheme members.

In order to maintain and/or increase Fund levels, the BDIC has the power to invest any monies in the Fund in accordance with certain types of investments listed under the Act (eg US dollar deposits with overseas commercial banks).

An 'insured depositor' could be an individual; an individual who makes a deposit in an account with a Scheme member in the name of a partnership, unincorporated association or sole proprietorship; a charity; or a company registered in the Register of Small Businesses.

If either an order is made by a court in Bermuda or elsewhere to wind up a Scheme member or the BDIC, after consulting with the Bermuda Monetary Authority, is of the opinion that a Scheme member is insolvent, or that it is unable to meet its obligations as they fall due, and the BDIC has determined that compensation shall be paid to the insured depositors of that Failed Scheme Member then payment of compensation will be due.

Where an insured depositor has one or more 'insured deposits' placed with a Failed Scheme Member, that

(a) the insured depositor holds in his own right;

(b) the insured depositor holds jointly with one or more individuals in a joint account; or

(c) a depositor holds in a client account for the insured depositor as the depositor's client, the insured depositor will be entitled to compensation from the Fund of no more than $25,000 regardless of the number or amount of insured deposits placed with the Failed Scheme Member. That is, the $25,000 maximum is per insured depositor, not per account.

Where there are two or more insured depositors in respect of an insured deposit (i.e. a joint account) each depositor will be deemed to have an equal share in the insured deposit unless the books of the Failed Scheme Member provide otherwise. For example, say depositor A and depositor B have their own separate bank accounts with $1,000 in each; in addition, they share a joint account that has $20,000; and depositor A has a sole proprietor account with $20,000 deposited in it.

In the event that the bank that holds these deposits fails, depositor A will get the full $25,000 compensation as the total of his account deposits are more than $25,000 ($1,000 + $20,000/2 + $20,000 = $31,000). Depositor B, on the other hand, will only get $11,000 as that is the total value of B's accounts.

The Act also sets out various offences and penalties such as furnishing false or misleading information to the BDIC, or making false or misleading statements about whether or not any person is a Scheme member or any deposit, or other financial product, is an insured deposit.

Deposit insurance will be an important safety net in the event of bank failure. The idea that you will get a portion of your deposit back could create greater confidence in financial institutions and contribute to Bermuda's economic stability.

Attorney Jamie Rego is a member of the Banking & Asset Finance Team at Appleby (Bermuda) Limited. A copy of Mr Rego's column can be obtained on the Appleby website at www.applebyglobal.com. This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.

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Published August 22, 2011 at 2:00 am (Updated August 22, 2011 at 10:53 am)

New scheme will protect depositors' accounts to $25,000

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