Claiming privilege in investigations: whose decision is it?

The recent decision of A v B and another arises in the context of an investigation by a regulator and deals with an important issue of privilege. Regulated service providers and their clients alike should take note of the decision.

Background

The case arises out of an investigation being conducted by the Financial Reporting Council Ltd (the FRC) (the regulator for auditors in the UK) into a retailer’s 2018 accounts. The subjects of the investigation were the retailer’s former auditor and the audit partner responsible for that audit. As the regulator, the FRC has statutory powers to investigate and impose sanctions on its regulated persons. These powers include requiring the production of documents, albeit this is subject to an express carve out for documents protected by legal professional privilege.

In the course of its investigation, the FRC requested disclosure from the auditor of documents belonging to the auditor’s client. The client claimed privilege over some of those documents (which had been provided to the auditor during the audit and were in the auditor’s possession). It was accepted that the client had not waived its privilege in providing the documents to its auditor. The auditor was therefore obliged to assert privilege over those documents on its client’s behalf (provided they were actually privileged).

However, there was a dispute between the auditor and its client as to whether the documents were, in fact, privileged. The auditor determined that some of the documents were not privileged and, on that basis, had to be disclosed to the regulator.

The court was required to determine who was entitled to determine the privilege in the documents sought by the FRC. Was the auditor obliged to withhold disclosure on the basis of its client’s assertion of privilege? Or was it for the auditor to make up its own mind about whether those documents were privileged and therefore, whether or not they should be disclosed to the regulator?

Decision

The court held that an auditor required to produce documents to its regulator (in this case, the FRC) must form its own view on whether documents are privileged and can therefore be withheld on that ground. This is the case regardless of whether the privilege is that of the auditor or its underlying client. The court considered that the duty to disclose was on the auditor and disclosure could only be refused on the grounds that a document was actually privileged. A mere assertion of privilege by the client was insufficient to withhold documents from disclosure to the regulator.

What does this mean for practitioners and investigations?

This case may have a wider impact on other regulated sectors and service providers. There are a number of regulators with similar powers to investigate and request or compel the disclosure of documents by its regulated persons. However, such powers are almost invariably limited in that privileged documents need not be provided.

For example, in Sports Direct International plc v The Financial Reporting Council, the Court of Appeal found that disclosure of privileged documents to the regulator (the Financial Conduct Authority (FCA), in that case) was not required as the relevant statute did not override privilege. However, the current case may be relevant to FCA investigations, particularly as regards which party (the client or the regulated persons) is required to determine whether the document is actually privileged.

Subject to any appeal, the current case suggests that regulated service providers must form their own view about whether a document is privileged, and therefore whether or not it is compelled to disclose such documents to the relevant regulator. In those circumstances, it seems that disclosure cannot be refused on the basis that their client (or, other third parties) has asserted (or, might assert) privilege over the documents.

Following this case, regulated services providers and their clients should therefore keep in mind the following:

Duties of confidentiality: The service provider will have duties of confidentiality to its clients and potentially other third parties. If the service provider makes the wrong call and discloses a privileged document, it may be in breach of its obligations to its client or another party.

Dispute between the service provider and client: Any dispute which arises between the service provider and its client about whether or not a document is privileged and should be disclosed to the regulator, can, of course, be determined by the court. But that will obviously cost time, resources and money to resolve, as well as potentially damaging client relationships.

Practically, if a client disagrees with its service provider’s analysis of privilege, then a constructive engagement between them might assist. For example, the parties might want to consider engaging an independent counsel for a view on the claims to privilege. That could also be helpful if mediation was seen as a possible solution.

The ultimate backstop for a client, however, is to apply to the court for injunctive relief preventing the service provider from disclosing the document to the relevant regulator. In those circumstances, the regulator may be interested in the court’s decision and seek to join those proceedings. However, in reality, the matter is between the client and the service provider.

Terms of engagement: Clients who share privileged documents with regulated service providers should pay particular attention to the terms of their engagement. Service providers should ensure that they notify clients of the regulatory rules concerning the disclosure of documentation, which may be privileged (and clients should, in any event, ensure that they familiarise themselves with such rules).

For clients, in order to mitigate the risk of privileged documents being disclosed to the relevant regulator, it is important that all contracts with regulated service providers include wording to protect the client’s privilege. This should include an obligation on the service provider to notify the client when they receive a request or demand for documents from its regulator, and engage with the client about the status of their documents.

This should enable issues of privilege to be aired between the client and service provider and, hopefully, resolved without involving the courts. Failing this, the provision of this information should give the client enough information (and, hopefully, time) to seek an injunction to prevent the disclosure of documents they assert are privileged.

This article was first published on Practical Law.