Sharing internal investigation reports with the FSA: new FSA guidance

Although the proposed wording is generally unsurprising for firms, it does contain some clarification in relation to contentious issues such as privilege in underlying materials and waiver.

The FSA Consultation Paper "Obtaining and using firm commissioned reports" highlights amendments to the Enforcement Guide designed to "provide firms with guidance on our approach to using firm commissioned reports in anticipation of possible enforcement action".

When internal investigation reports are appropriate

The FSA recognises that there are good reasons for firms commissioning internal reports from law or accountancy firms in response to supervisory concerns - for example, disciplinary purposes, general good management and operational and risk control. The FSA states that it "encourages such an approach".

When internal investigation reports are inappropriate

This is not always true of criminal investigations. For example, where the FSA suspects that individuals within financial institutions are involved in operating an insider dealing ring, it might notify the relevant firm but would not want the firm to embark on its own investigation, as that may alert those under investigation and prejudice on-going monitoring of the suspects and other action. In these situations, the firm should speak to the FSA before commissioning its own report.

Clarification about privilege in internal investigation reports

The Consultation Paper recognises that over the years several common issues have arisen in the context of enforcement investigations and the FSA feels that it would be helpful to clarify its expectations.

The Consultation Paper summarises the proposed amendments as offering the following clarification:

1. Firms are not under any obligation to share with the FSA the content of a report they are given or advice they receive where such a report or advice is protected by legal professional privilege.
2. In situations where a firm voluntarily decides to offer the FSA investigation reports, the FSA suggests that it considers discussing the scope and purpose of an internal investigations report with the FSA.
3. If a firm is willing to provide an internal investigation report to the FSA under a "limited waiver" of legal privilege, then it should be aware that the benefits from sharing the report will be diminished if it is not also willing to provide the FSA with the underlying documentation on which the report is based.
4. The amendments explain how the FSA will use internal investigation reports passed to them by firms and address potential issues that may arise in relation to onward disclosure of information, particularly to overseas regulators.

But difficult privilege issues remain: interview notes and waiver

Interview notes

A rightly sensitive issue for many firms is a request from the FSA for access to underlying evidence and information obtained or created by the firm when producing its internal report e.g. notes of interviews with employees. The FSA maintain that they should see such documents. The proposed new wording in the Enforcement Guide notes that "where a firm does conduct or commission an investigation, it is very helpful if the firm maintains a proper record of the enquiries made and interviews conducted". Further (and more direct): "if the FSA is to rely on a report as the basis for taking action, or not taking action, then it is important that the firm should be prepared to give the FSA underlying material on which the report is based as well as the report itself. This includes, for example, notes of interviews conducted by lawyers or accountants carrying out the investigation". A point to note here is that if, as is likely, litigation privilege (or its equivalent under s413 FSMA 2000) is unavailable at this stage, unless the investigation and interviews are being carried out by lawyers many of the documents that are created are unlikely to be privileged at all. Even where lawyers are involved, the FSA may seek to challenge a claim of privilege over notes of interviews with employees. It is clear from the draft guidance that the FSA wishes to avoid having to have that argument.

Although the FSA clearly would prefer to avoid the delay caused by arguments about whether certain documents attract privilege, the fact remains that the House of Lords has on many occasions accepted that privilege is "a fundamental condition on which the administration of justice as a whole rests" and “a fundamental human right long established in the common law.” In appropriate cases, firms should not be afraid to assert privilege where they feel it exists. The consequences of a firm stance here does, however, need to be recognised: there will now be a clear statement in the Enforcement Guide that: "reluctance to disclose the source materials may significantly devalue the report". In practice, it may also increase the likelihood of the FSA deciding to conduct its own investigation, rather than being willing to await the outcome of the firm's own review. The decision whether to disclose underlying material therefore needs to be carefully weighed.

Waiver

The proposed new Enforcement Guide wording states: "For reasons that the FSA can understand, firms may seek to restrict the use to which a report can be put, or assert that any legal privilege is waived only on a limited basis and that the firm retains its right to assert legal privilege as the basis for non-disclosure in civil proceedings against a private litigant". The FSA recognises that English law permits limited waiver, but says that the FSA cannot accept any condition or stipulation which would restrict the FSA's ability to use the information for its functions. The draft wording offers only that: "in circumstances where disclosure of information is permitted under the recognised "gateways", the FSA is mindful about the potential disclosure of firm-commissioned reports, and will take this into consideration when deciding whether information should be disclosed".

This assurance offers little certainty, so firms must be aware of the risks of providing privileged material to the FSA on a limited waiver basis, particularly where regulators in other jurisdictions are (or may become) involved. The FSA says that it will ordinarily give a firm an opportunity to make representations before it shares the firm's privileged material with other regulators, but it will not do so where disclosure "is urgently needed, where notification might prejudice an investigation or defeat the purpose for which the information had been requested, or where notification would be inconsistent with the FSA's international obligations". The FSA's suggestion that privileged material disclosed to the FSA on a limited waiver basis is not "unprotected" offers, therefore, only limited comfort.

What next?

The final version of the amended text of the Enforcement Guide, together with feedback on reponses to the proposal, will be published in April, but we do not anticipate much change in the proposed wording.

For further advice, please contact Calum Burnett: calum.burnett@allenovery.com , or tel +44 (0)20 3088 3736.