Delivering documents to a regulator – a question of legal privilege

In the recent case ofThe Financial Reporting Council Ltd and Sports Direct International Plc [2018], the High Court stated that, when responding to a regulator investigating into the conduct of a regulated entity, the client of a regulated entity could not refuse to deliver requested documentation on the grounds of legal privilege. In this circumstance, where the privilege belongs to the client of a regulated entity, there is no breach of the client’s privilege.

Legal privilege is a principle protecting all communications between a professional legal adviser and his or her clients from being disclosed without the permission of the client. The privilege belongs to the client and not to the lawyer. The purpose behind this legal principle is to protect an individual’s ability to access the justice system by encouraging complete disclosure to legal advisers without the fear that any disclosure of those communications may prejudice the client in the future.

THE FACTS

The Financial Reporting Council (“FRC”) issued notice under their statutory powers to Sports Direct International (“SDI”), a client of an accountancy firm undergoing investigation, requiring SDI to provide documents in order for the authority to investigate the accountancy firm’s audit of SDI’s financial statement. SDI refused to deliver the documents, arguing that it was entitled to hold certain documents on the grounds of legal privilege. The FRC contended the fact that legal privilege attached to the documents and sought a court order for compliance.

It was commonly believed that as the documents were covered by privilege, this privilege would have been breached by disclosure to the FRC and therefore SDI was entitled to hold onto the documents. SDI’s claim was based on a carve out in the regulation, according to which documents of information that a person “would be entitled to refuse to provide or produce in proceedings in the High Court on the grounds of legal professional privilege” expanded to the regulatory authority. The FRC however, did not accept this claim to privilege.

THE CASE

There were three main issues of principle for the Court to resolve, with regard to the claim of privilege:

  1. Whether legal advice privilege applied to documents that were attached to emails between SDI and its lawyers(the“Communication Issue”):

The court held that legal advice privilege did not apply to the documents and were not privileged in themselves just because they were attached to emails sent between SDI and its lawyers.

  1. Whether SDI’s waiver of privilege, by sending copies of documents to its auditors for the purposes of the audit, extended to the FRC (the “Waiver Issue”);

SDI accepted that, in sending the emails to the auditors, there was a selective and limited waiver of privilege, but contended that the waiver did not extend to the FRC as the auditor’s regulator.

The Court referred to authoritative cases on the question of whether waiver for a particular purpose entailed a broader waiver, and found that two were applicable to the circumstance:

  • In British Coal Corporation v Dennis Rye Ltd (No 2) [1988] 1 WLR 1113, the claimants had handed privileged documents to the police to assist with a criminal investigation which were subsequently disclosed to the defendants, who were then acquitted. The court held that the claimants were still able to claim privilege over the documents in subsequent civil proceedings against the defendants because they had made the documents available for a limited purpose only, which did not expand to a broader waiver of privilege.
  • InBelhaj v Director of Public Prosecutions [2018] EWHC 513 (Admin), a government department had passed privileged material to the police and the Crown Prosecution Service for the purposes of an investigation. A query arose as to whether the privileged material could be used for the purposes of a judicial review of the case. The court held that privilege had only been waived for the purposes of the initial investigation and not the subsequent judicial review proceedings challenging the decision of the investigation.

The Court held that the present case was analogous to British Coal and Belhaj because the regulatory process was entirely distinct from the audit process. By sending privileged documents to the auditors for the purposes of an audit, SDI did not therefore waive privilege against the FRC.

  1. Whether production of the documents to the FRC would infringe any privilege of SDI (the“Infringement Issue”):

The starting point of the Court’s analysis was the evaluation of numerous case law where privilege could be relied on as an objection to the production of documents to regulatory bodies. Nevertheless, the Court held that where a regulated person produces documents to a regulator solely for the purposes of a confidential investigation into its conduct, that does not infringe any privilege of the regulated person’s clients. The same extends to the case of documents produced to the regulator by a client.

However, the Court held that in some circumstances privilege could still be preserved. The example given was that of a client such as SDI contemplating a claim for negligence against the auditor, and obtained legal advice as to the merits of that claim.  In those circumstances the client would be able to rely on privilege.

CONCLUSION

Conclusively, the High Court held that, to the extent the documents were privileged, SDI had not waived that privilege in respect of the FRC by sending copies to its auditors. Therefore, production of the documents to the FRC would not infringe SDI’s privilege, and so SDI was required to produce them.

It is worth noting that although this decision was controversial, firms should still be aware of the implications for this decision on investigatory work carried out by other regulators such as the Financial Conduct Authority and consider the impact of potentially having to disclose a wider array of material than previously expected. As this case demonstrates the regulator’s powers of investigation may override a client’s presumed entitled to legal professional privilege.

For more information on or any guidance or advice on the powers of regulators such as the FCA, Cleveland & Co External in-house counsel, your specialist outsourced legal team are here to help.

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