By Abdulali Jiwaji and Daniel Hayward-Hughes
Read the original article published in Financier Worldwide here.
On 8 June 2015, the Royal Bank of Scotland (RBS) was ordered to hand over privileged documents relating to without prejudice negotiations with the Financial Services Authority (as it was then), now the Financial Conduct Authority (FCA), over the bank’s fine for LIBOR manipulation as part of a claim brought by Property Alliance Group (PAG). RBS was ordered to hand over these documents (and others), not because privilege or confidence had been lost in them, but because RBS has sought to rely on the findings of the FCA (such findings being the result of the negotiations which were recorded in those documents) in its defence. “RBS really cannot have it both ways,” declared Mr Justice Birss. The decision is also interesting because it goes right to the heart of the difficulties in assessing and advancing claims for privilege when regulatory inquiries are ongoing. This decision by no means resolves the uncertainties, but it does give an indication of the court’s willingness to test extensive claims for privilege.
PAG’s claim arises out of the widely reported revelations in early 2013 that a number of banks (including RBS) had been engaged in deliberate and illegal manipulation of LIBOR. PAG is seeking £30m in damages from RBS. Justice Birss determined that RBS’s disclosure obligation was to include all LIBOR currencies and tenors. This resulted in some 25 million documents forming the standard disclosure. Neither the parties nor the court had the appetite for requiring RBS to review such a large volume of material. In the spirit of proportionality RBS was instead ordered to disclose any internal reports, reviews or summaries that set out the results of investigations into its LIBOR misconduct. As PAG argued, RBS must have undertaken internal investigations into its LIBOR activities, not least so that it could understand what may have gone wrong and how to prevent similar actions in the future and because banks are required to undertake such investigations as regulated entities.
RBS carried out this exercise and produced a list that included a number of high level documents of the kind envisaged. However, the documents which RBS produced for inspection by PAG from that list did not include any statement summarising the nature and extent of any manipulation of LIBOR. The balance of the documents on the list was held back by RBS, which cited a number of objections to inspection, including various claims of privilege – legal advice, litigation and without prejudice. The documents RBS sought to hold back fell into the following three categories: (i) documents relating to the work of the rate-setting investigation executive steering group (which included members of the bank’s legal advisers Clifford Chance) (the ESG), in relation to which RBS claimed legal advice privilege (the ESG documents);
(ii) communications between RBS and the FCA relating to negations with the regulator that led up to the FCA Final Notice dated 6 February 2013, in relation to which RBS claimed without prejudice privilege (the without prejudice documents); and (iii) documents which would normally be subject to both legal advice privilege and litigation privilege and which had been provided or shown to a number of regulators in the US and Japan (the non-waiver documents).
PAG challenged RBS on each of the above assertions of privilege. The court held that, firstly, RBS had failed to provide satisfactory information about the ESG, particularly the mandate of the group and the role and interactions of the Clifford Chance legal team within the wider ESG. The judge was clear that it was likely that one purpose of the ESG meetings would have been to inform the bank factually about the outcome of the investigations the ESG was set up to oversee. He also said that if part of the ESG’s role included the task of overseeing investigations and reporting to the bank, then he could not see how the privilege could arise. It was therefore ordered that in the absence of a clear understanding of the role and function of the ESG, the ESG documents should be provided to the court so that the court could determine whether any of RBS’s claims to privilege were made out or whether the documents could be provided to PAG (in redacted form if necessary).
Secondly, the court held that those parties engaged in genuine settlement negotiations with a regulator like the FCA have the right to withhold inspection of communications that formed part of those negotiations. This rule is similar, but not identical, to the without prejudice rule in civil litigation. The court ordered RBS to disclose the without prejudice documents to PAG because the bank had positively relied on the regulator’s findings which formed the basis of the FCA Final Notice, in particular the absence of findings of misconduct in relation to GBP LIBOR (RBS formally admitted that it had manipulated the Japanese Yen and Swiss Franc LIBOR rates but denied that it had manipulated the GBP LIBOR). The Final Notice was, as discussed above, arrived at following the settlement communications between the FCA and RBS. The court considered that it would be unjust for RBS to assert on the one hand that it had committed no misconduct in relation to GBP LIBOR based on a ‘negotiated’ Final Notice, yet on the other hand refuse to disclose the substance of those negotiations.
Finally, the court held that RBS was entitled to maintain its claim to privilege in relation to the non-waiver documents which had been provided or shown to US and Japanese regulators. In this case the US and Japanese regulators had not yet made onwards disclosure to third parties, as is within their power, so confidence and privilege prevailed. However, RBS was found to have itself waived privilege in the documents by deploying them in its defence, as with the without prejudice documents.
This is an important victory for PAG in its claim against RBS. The judgment looks at a number of critical issues which arise in advancing claims of privilege in these circumstances. In these types of cases, the information imbalance will always be a significant factor for the Court, as the bank holds a great deal of the relevant information. The decision confirms that when regulatory investigations are ongoing, the activities of steering groups need to be carefully controlled, and in practical terms one needs to have a clear delineation between fact finding activities and the process of requesting and receiving related legal advice on the implications of the facts. In practice, the sensitivity about the facts will sometimes lead to efforts to cloak the fact finding process with privilege, but that may then weaken and contaminate genuine claims for privilege in relation to the legal advice.
The more certain outcome is that, again reflecting the information imbalance, the court will not tolerate reliance by the bank on regulatory findings without allowing the claimant to probe the basis on which those findings were issued. Given the more frequent use of the ‘global settlement’ to deal with issues in the financial markets, and the emergence of deferred prosecution agreements, banks need to be careful in setting out their defence to this type of claim. On the face of it, the absence of a finding by a regulator of a failing in relation to a particular issue may be seen as attractive. It is nevertheless clear that the absence of a finding cannot be relied on as a ‘not guilty’ verdict without further examination of the correspondence between the regulator and the bank.