No infringement of privilege in regulator investigations – Abdulali Jiwaji and Alasdair Glass

By Abdulali Jiwaji

Partner Abdulali Jiwaji and Associate Alasdair Glass examine the impact of The Financial Reporting Council Ltd v Sports Direct International plc impact on the issue of privilege and also discuss its consequences of the decisions on auditors.

Abdul and Alasdair’s article was published in economia, 9 October 2018, and can be found here.

The High Court has recently reaffirmed the somewhat controversial principle that disclosure of privileged client documents by a regulated entity to its regulator does not infringe the client’s privilege. (Financial Reporting Council Ltd v Sports Direct International plc [2018] EWHC 2284 (Ch))

The case was brought by the Financial Reporting Council Ltd (FRC), the body responsible for regulating statutory auditors, against Sports Direct in the context of an investigation the FRC was conducting into Grant Thornton’s audit of Sports Direct. The FRC sought an order requiring Sports Direct to disclose certain documents pursuant to the Statutory Auditors and Third Country Auditors Regulations.  The demand included documents disclosed to Grant Thornton recording advice provided to Sports Direct in relation to certain contentious tax issues.  Predictably, Sports Direct claimed privilege over those documents and refused to provide them to the FRC.

Mr Justice Arnold was required to decide three key points:

  • Whether privilege could be asserted in respect of a document that was otherwise not privileged but which was attached to a communication between a client and its lawyers (the communication issue).
  • Whether Sports Direct’s limited waiver of privilege, by sending copies of privileged documents to Grant Thornton, extended to the FRC (the waiver issue).
  • Whether production of the privileged documents to the FRC would infringe that privilege (the infringement issue).

First, regarding the communication issue, Arnold J found it a “startling proposition” by Sports Direct that privilege could be claimed over a non-privileged document merely because the document was attached to a lawyer-client communication. Following a well-established line of authority, he rejected that proposition and found that Sports Direct was not entitled to legal advice privilege in respect of the email attachments.

Secondly, as to the waiver issue, it was common ground between the parties that Sports Direct’s provision of privileged documents to Grant Thornton was a limited waiver of privilege. FRC contended however that any waiver of privilege against Grant Thornton necessarily entailed a waiver as against FRC as Grant Thornton’s regulator. FRC relied on previous caselaw to the effect that where there are multiple stages which form part of a single process, waiver of privilege in relation to the first stage of that process applies to the entire process. However, in this instance, Arnold J concluded that the FRC’s regulatory process in respect of Grant Thornton was distinct from the audit process, under which Sports Direct had provided documents to Grant Thornton. As such, there had been no follow-on limited waiver of privilege as against FRC.

Thirdly, Arnold J considered the infringement issue. Prior cases on this point, most notably R. (on the application of Morgan Grenfell & Co Ltd) v Special Commissioners of Income Tax [2002] UKHL 21, had confirmed that a client’s legal professional privilege was not infringed by limited disclosure to a regulator or tax authority for the purpose of investigations into the adviser of the client. In that case, Lord Hoffman, commenting on a prior case, Parry-Jones v Law Society [1969] 1 Ch1, had observed that there was no such infringement as the Law Society was not entitled to use privileged client information disclosed by a solicitor for any purpose other than their investigation into the solicitor.  Arnold J noted that Lord Hoffman’s findings in Morgan Grenfell & Co Ltd in relation to this issue had been “trenchantly criticised“. One of the key criticisms is that the use such privileged documents are put to by a regulator is often not black and white. Despite these criticisms, and despite finding that Lord Hoffman’s comments were strictly obiter (albeit with persuasive force) Arnold J followed the findings in Morgan Grenfell & Co Ltd.

What does this mean for businesses? Well, it must be accepted that privileged documents in the hands of an adviser may at some point be provided to an authority investigating the activities of that adviser. Some comfort can be drawn from the proviso in Morgan Grenfell & Co Ltd that the authority was not entitled to use privileged information disclosed to it for any purpose other than the investigation into the adviser (as supported by Arnold J in this case). However, that comfort requires the relevant authority to abide by the restriction. For example, would a tax authority, in the context of an investigation into an adviser, ignore evidence of a client’s tax affairs in client material disclosed by that adviser? There has to be a risk that such evidence would influence that tax authority’s dealings with the underlying client, albeit one would expect the Courts to take a dim view of any misuse of privileged material.

Arnold J’s decision may not be the final word on this issue as leave to appeal his infringement findings has been granted.

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