Privilege will not always be a bar to disclosure

This case raised the difficult, and potentially far reaching issue of whether a client of a regulated person (in this case an auditor), can rely on privilege to withhold documents in circumstances where those documents are requested by a regulator exercising statutory powers in connection with an investigation into that regulated person's conduct.

The High Court held that in those circumstances disclosure to the regulator would not infringe the client's privilege. The decision means that regulated persons (and their clients)  will not be able to withhold the client's privileged documents in circumstances where the regulator is conducting an investigation into the regulated person and requires those documents for the purposes of its investigation.

This case is a further illustration of the regulators' increasingly robust approach towards claims of legal privilege. 

Background

The Financial Reporting Council (FRC) is the UK regulatory body responsible for the regulation of statutory auditors and audit work. It can carry out investigations into statutory auditors and audit work and impose and enforce sanctions for failures to comply with its requests. These powers derive from the Statutory Auditors and Third Country Auditors Regulations 2016, SI 2016/649 (SATCAR) and paragraph 10(b) of the FRC’s Audit Enforcement Procedure (AEP).

The FRC was conducting an investigation into an accountancy firm and an individual at the accountancy firm in connection with its audit of the financial statements of Sports Direct International Plc (SDI). In connection with this investigation, the FRC exercised its SATCAR and AEP powers to issue notices (known as Rule 10 Notices) to SDI requiring the provision of certain documents. 

Access to certain documents was denied on grounds of legal advice privilege. The FRC applied to the High Court contending that SDI had failed to comply with the Rule 10 Notices and sought an order from the court compelling compliance. SDI disputed this.  

The issue for the High Court was whether SDI was entitled to withhold the documents on grounds of privilege. Three issues needed to be addressed:

• whether legal advice privilege applies to documents purely by virtue of those documents having been attached to emails passing between SDI or its subsidiaries and its external lawyers (the Communication Issue);
• whether SDI’s waiver of privilege by sending copies of documents to its accountants for the purposes of audit extends to the FRC (the Waiver Issue); and
• whether production of the documents to the FRC would infringe any privilege of SDI (the Infringement Issue).

The Communications Issue

SDI argued that the attachments were privileged as they formed part of the lawyer/client continuum of communication per Lord Justice Taylor in Balabel v Air India. The Judge disagreed that Balabel supported such a proposition. Instead, he considered the 2015 judgment in Property Alliance Group Ltd v Royal Bank of Scotland plc (PAG) where Snowden J had found that documents prepared by external lawyers for use at meetings were privileged even though they contained public information. However, the Judge distinguished that case by looking at the context in which the documents were created. In PAG, the documents had been created for the purpose of furthering discussions at meetings between the client and lawyers during which the lawyers were providing legal advice. There was a legal context. In that sense they were part of the continuum of communications between the lawyers and their clients. 

The same could not be said of these attachments. These were pre-existing non-privileged documents and did not become privileged by virtue of being attached to a lawyer/client communication.

The Waiver Issue

It is possible to share privileged documents with third parties on a restricted basis. This limited waiver means that the recipient can only use the document for a specific purpose and the right to claim privilege generally is not lost.

SDI accepted that, in sending privileged documents to its auditors, it had waived privilege on a limited basis. However, the FRC attempted to take this one stage further, arguing that any waiver as against the auditors, even only for audit purposes, necessarily entailed a waiver as against the FRC as its regulator. It argued that disclosure of privileged material to an auditor for the purposes of an audit necessarily required the regulator of that auditor to have access to the same material when investigating the auditor’s conduct of the audit. To allow privilege to be asserted against the FRC would inhibit the proper operation of the procedure for the purposes of which the material was disclosed. Furthermore, on the facts of the present case, this should not have come as any surprise to SDI since the auditors' terms of engagement warned them that the regulator may request confidential documents and that the auditor would be obliged to comply.

The Judge rejected FRC's argument. The regulatory process is distinct from the process of audit. Therefore it was outside the terms of the waiver and the terms of business did not assist as they did not refer to privileged documents.

The Infringement Issue

The FRC had more success with its final argument. It argued that in the event the documents are privileged and there has been no waiver, disclosure should still be permitted as production of those documents to the FRC for the purposes of the investigation would not infringe SDI's privilege. The Judge found this to be "the most important and far-reaching issue raised by the present application, and the most difficult."

The FRC relied on a line of cases in which it has been held that a regulated person cannot rely on a client's privilege as an objection to the production of documents to a regulator when investigating that regulated person's conduct. The reasoning behind those decisions was considered by the House of Lords which determined that, in those circumstances, the disclosure did not constitute an infringement of the client's legal professional privilege because the regulator was not entitled to use the information disclosed for any purpose other than the investigation. Alternatively, disclosure is authorised by the relevant statute/statutory powers conferred on the regulator.

In FRC, the Judge acknowledged the criticisms that have been made of the case law, but accepted that this was the current state of the law. As such, the provision by the accountancy firm of the documents would not infringe any legal advice privilege of SDI in those documents, and the same was true of any production ordered of SDI.

The Judge struggled with the alternative argument that if the above did not represent the law, the statute itself can be construed as having authorised production. He accepted, with some hesitation, FRC's argument that SATCAR and the statutory powers pursuant to which those rules were made impliedly authorised disclosure. 

Permission to appeal was granted on this issue. It will be interesting to see how the Court of Appeal deals with it.

Authors: Anna Varga and Lianne Sneddon

Cases referred to:

The Financial Reporting Council Ltd v Sports Direct International Plc [2018] EWHC 2284 (Ch)

Balabel v Air India [1988] 1 Ch 317