Privilege in regulatory investigation context: Sports Direct v Financial Reporting Council

The FRC, the UK's regulatory body for accountants, auditors and actuaries, has been investigating Grant Thornton in relation to its audit of the financial statements of Sports Direct International (Sports Direct), since 2016.  The FRC issued several statutory notices to Sports Direct, seeking material relating to the audit that Sports Direct argued was protected by legal privilege. 

Arnold J held at first instance that the disclosure to the FRC of this material did not infringe Sports Direct's privilege, as it was only being relied on by the FRC in its investigation into Grant Thornton, and not made publicly available or used against Sports Direct.  Arnold J went on to state in the alternative that, even if disclosure to the FRC did infringe this privilege, it was only a "technical" infringement, which was impliedly authorised by the FRC's statutory powers to seek documents.  This was a worrying development for companies as it gave the FRC the possibility of obtaining a company's privileged material via an investigation into its adviser.

Privilege protected where statutory disclosure powers are subject to exceptions for privileged material

Lady Justice Rose, giving the leading judgment, disagreed.  Rose LJ held that where the statutory powers on the basis of which disclosure is being sought expressly provide an exception for privileged material, then the recipient of a disclosure request is not required to disclose the privileged material.  It is immaterial to whom the privilege belongs.  

While this conclusion does not seem altogether surprising given the express wording in the relevant statute provided an exception to disclosure of privileged material, Rose LJ emphasised the importance of simple statutory interpretation.  There was nothing in the relevant statute to suggest it meant anything other than that privileged material was exempted from any request for disclosure.    

Rose LJ found that the case law was consistent with a finding that privilege should be protected where that is the express intention of Parliament.    

Privilege given same level of protection irrespective of whose privilege it is

Arnold J's alternative finding – that disclosure of privileged material to the FRC was allowed as any infringement, if there was one, was only of a technical nature – was also overruled.  This was both because there was no support for this in case law, and, perhaps more significantly, because of important policy reasons.  It would, if correct (which it was not) involve the application of a lower standard allowing for the statutory exception to be overridden for mere technical infringements.

Rose LJ concluded that the threshold is not any lower, when considering whether privilege is infringed, where the infringement is said to only be technical.  That the FRC's investigation in this case was into Grant Thornton, rather than Sports Direct, did not alter the protection that should be afforded to the privilege.

Rose LJ re-affirmed the central importance of privilege from a public policy perspective: that a client must be able to speak freely and securely with its legal adviser.  The fact that the client (and only the client) has a choice over whether to waive the resulting privilege if requested by a regulator, is a satisfactory reason as to why there should only be a single standard applied, meaning it does not matter whose privilege is engaged by the request.

Rose LJ emphasised that privilege is fundamental in all but two circumstances: (i) where the iniquity exception applies; and (ii) where it has been modified or repealed by Parliament through statute (subject only to objection on human rights grounds).

Non-privileged documents attached to privileged communications are disclosable

Sports Direct also appealed the first instance decision that attaching pre-existing, non-privileged documents to privileged communications does not make those documents privileged.  As expected, Rose LJ rejected this ground of appeal and confirmed that a non-privileged attachment must be disclosed  notwithstanding that it may have been attached to a privileged email.  Although this means there is little scope to withhold from disclosure a non-privileged document attached to a privileged communication, in practice, an assessment of an attachment's relevance to a request will still need to be considered in light of the specific wording of the request, as well as in the wider context of its status as an attachment to a separate communication.  

This is also clear from the Court of Appeal's recent judgment in The Civil Aviation Authority v Jet2.Com Ltd [2020] EWCA Civ 35, which dealt with a similar issue of whether it was necessary to assess privilege as between an email and its attachment separately.  In that case, Hickinbottom LJ stated that when giving disclosure of documents, "separate consideration of substantive documents and attachments" will need to be undertaken.

Comments

This decision reinforces the fundamental protections that should be granted to clients seeking confidential legal advice.  It closes down a potential avenue for regulators to obtain privileged material through the back-door, meaning a company can take greater comfort that, when faced with a request for documents from a regulator, it has a right to assert privilege where it has a credible claim to it.  A company may therefore be emboldened to refuse to accede to these types of requests, which could serve as useful leverage in any ongoing dialogue with regulators.  This will be the case regardless of whether it is the company or a third-party that is the focus of a regulator's scrutiny.

As always, a company will need to pay particular attention to the legal basis on which a request for disclosure is made.  The same can be said of the disclosure request itself.  In both cases, it will be important to carefully consider the specific language used to ensure that the company is aware of, and confident in exercising, its rights.

This ruling is timely given that we are seeing increased scrutiny of auditors and financial reporting generally. The FRC announced last month reforms of its oversight and supervisory functions to speed up enforcement investigations, as well as broadening its stated purpose to serve the public interest by setting high standards of corporate governance, reporting and audit and by "holding to account those responsible for meeting them".

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  If you wish to receive this publication, please contact Amy Edwards, amy.edwards@allenovery.com