This article was originally published in BUTTERWORTHS’ JOURNAL OF INTERNATIONAL BANKING AND FINANCIAL LAW, May 2020 and is reproduced with permission from the publisher.

On 18 February 2020 the Court of Appeal handed down judgment in Sports Direct International plc v The Financial Reporting Council [2020] EWCA Civ 177, partially overturning the High Court’s decision of 2018 and clarifying that the powers of the Financial Reporting Council (FRC) do not extend to compelling delivery up of privileged documents.

Background

The FRC, exercising powers conferred on it by the Statutory Auditors and Third Country Auditors Regulations 2016 (SI 2016/649) (SATCAR), issued statutory notices to Sports Direct International plc (Sports Direct) requiring it to deliver up documents relevant to the FRC’s investigation of an audit firm. Sports Direct was a client of the audit firm but was not, itself, subject to the investigation. Sports Direct produced some 2,000 documents but withheld 40 on the ground that they were protected by legal professional privilege (LPP) because they were emails and attachments sent to Sports Direct’s internal and external counsel, including legal advice on tax liabilities; or documents attached to privileged emails, albeit the documents themselves were not independently privileged.

The FRC sought a court order compelling Sports Direct to hand over the 40 documents. It conceded that it did not have the power to compel the subject of an investigation to disclose legal advice it had received from its own lawyers but argued the same was not true for Sports Direct. The FRC’s position was that although the emails contained material that would ordinarily be regarded as protected by LPP, they were within a narrow exception recognised in case law, which meant that in the particular circumstances of this request there would be no infringement of Sports Direct’s privilege if the emails were handed over (the “no infringement exception”); alternatively any infringement would only be “technical” and that such infringement is authorised by the SATCAR regime.¹

The High Court² agreed with the FRC, holding that “… the production of documents to a regulator by a regulated person solely for the purposes of a confidential investigation by the regulator into the conduct of the regulated person is not an infringement of any legal professional privilege of clients of the regulated person in respect of those documents. That being so, in my judgment the same must be true of the production of documents to the regulator by the client”.

The judge also found that attachments to emails which were not privileged could not be withheld simply because they had been attached to emails passing between lawyers.

The High Court’s decision exposed clients of auditors (including most financial institutions) to the risk of having to disclose communications otherwise protected by LPP, in the event that their auditor fell under investigation. This was of particular concern to clients who were, themselves, regulated by the FRC.

The court of appeal’s decision

In a decision that will be welcomed by financial institutions, among others, the Court of Appeal partially overturned the decision of the High Court, holding as follows.

• The only exceptions to LPP recognised under English law are in respect of communications between a solicitor and client with a criminal purpose, or where there is a clear statutory intention to create an exclusion.
• In the latter case, privilege can only be overridden by primary legislation containing express words or by necessary implication.
• “… there is nothing in [the case law] that suggests that paragraph 1(8) of Schedule 2 to SATCAR means something different from exactly what it says. The recipient of a notice given by the FRC under paragraph 1(1) or 1(3) is not required to hand over privileged documents, whether the person entitled to the privilege is the auditor under investigation or the auditor’s clients. … Moreover, if Parliament had intended to preserve some general exception applicable where documents are sought pursuant to regulatory powers, paragraph 1(8) would not have been drafted in the way it is.”³
• Non-privileged documents do not attract LPP by virtue of attachment to a privileged communication.

Practical implications

Financial institutions should take comfort in the decision of the Court of Appeal which upholds the primacy of LPP. In particular, there had been a concern that the ruling at first instance might have been relied on by other regulators to extend the scope of their own (often wide ranging) information gathering powers. The Court of Appeal has confirmed that LPP will continue to protect documents from disclosure in the context of regulatory investigations, whether that privilege is held by the investigated party or a client of the investigated party.

It also serves as a useful reminder that:

• the circumstances in which LPP will be excluded remain exceptionally narrow and the English courts have little appetite to expand them; and
• that a party cannot claim privilege in non-privileged documents simply because they are attached to privileged communications.

At the time of writing both parties have appealed to the Supreme Court.

¹ FRC relied, in support of these contentions, on Parry-Jones v Law Society [1969] 1 Ch 1; and R (Morgan Grenfell & Co Ltd) v Special Commissioner of Income Tax [2002] UKHL 21, [2003] 1 AC 563
² Handing down judgment on 11 September 2018 The Financial Reporting Council Ltd v Sports Direct International Plc [2018] EWHC 2284 (Ch), at para 84.
³ Sports Direct International plc v The Financial Reporting Council [2020] EWCA Civ 177, at para 44.