Partially overturning a decision of the High Court, the Court of Appeal held on 18 February 2020 that a company is able to withhold privileged material when responding to a notice from the Financial Reporting Council (the “FRC”) requiring the production of documents in connection with an FRC investigation. The decision has broad implications for the ambit of privilege during regulatory investigations.
The FRC (the UK regulator for auditors, accountants and actuaries) is currently conducting an investigation into Grant Thornton and one of its employees, in relation to its audit of Sports Direct International Plc (“Sports Direct”) for the year ending April 2016. In April 2017, the FRC (pursuant to its powers under the Statutory Auditors and Third Country Auditors Regulations 2016 (“SATCAR”)) notified Sports Direct that it was required to disclose emails and their attachments which: (i) relate to the audit, (ii) are held by one or more of five identified custodians, (iii) are dated within certain specified date ranges, and (iv) are responsive to one or more of 27 different specified search terms. Sports Direct provided approximately 2,000 documents to the FRC in response, but withheld 40 documents on the grounds of privilege (these documents were emails and attachments sent to or by Sports Direct’s legal advisers, either internal or external). The FRC applied to Court to force disclosure of the withheld documents.
The FRC argued that, where a regulator has a statutory power to request documents: (i) there is no infringement of privilege when documents are handed over in response to a request made under that power (the “No Infringement Exception”), or alternatively (ii) any infringement of privilege resulting from the disclosure would only be technical and is authorised by the relevant statutory provisions (the “Technical Infringement Exception”). The FRC accepted that, for either exception to apply, the regulator must be bound by duties of confidentiality in its use of the information received and the holder of the privilege must be someone other than the person who is at risk of an adverse finding as a result of the use of the information by the regulator (together, the “Conditions”). On this basis, the FRC conceded that it could not require the disclosure of documents in which Grant Thornton is entitled to claim privilege, but claimed it could compel the disclosure of documents in which Sports Direct claims privilege, because Sports Direct is not the target of its investigation. At first instance the High Court accepted the No Infringement Exception applied and ordered that Sports Direct must provide the withheld emails and their attachments to the FRC.
The Court of Appeal found there was no justification for either the No Infringement Exception or the Technical Infringement Exception. It emphasised the general principle that privilege is a “fundamental condition on which the administration of justice as a whole rests”, and that in the absence of express language or necessary implication to the contrary, the Courts presume that even the most general words in legislation are subject to the basic rights of the individual. The Court found it was clear from the wording of SATCAR that the recipient of a FRC notice is not required to hand over privileged documents (irrespective of whether the privilege belongs to the entity under investigation or that entity’s client). That right is not qualified anywhere in the legislation, nor can a qualification be implied. If Parliament had intended to preserve some general exception to privilege applicable where documents are sought pursuant to regulatory powers, the wording of SATCAR would have addressed this. The Court also found that the Conditions were neither principled nor clear, meaning the exceptions to privilege proposed by the FRC risked eroding clients’ confidence in the non-disclosure of their legal communications which “is essential if the privilege is to achieve its raison d’etre”.
Sports Direct also challenged the High Court’s decision to order the disclosure of certain attachments to the emails it withheld. The High Court made this determination on the basis the attachments were pre-existing and non-privileged documents (regardless of whether or not they were attached to a privileged email). The Court of Appeal rejected Sports Direct’s contention that a distinction should be drawn between whether a particular document was privileged (an attachment itself) and whether a particular communication was privileged (the communication in this case being of the fact the attachment was sent to a legal adviser for advice). The Court held that Sports Direct’s argument could not overcome the firmly established principle that pre-existing documents laid before a company’s solicitor for advice are not covered by privilege. Additionally, it commented that there may be instances where an attachment viewed as a separate document may not be responsive itself, but becomes significant to an investigation because it is attached to an email that is within scope.
The Court of Appeal decision reins in the exceptions to privilege in a regulatory context established by the High Court judgment, and confirms that regulators requests for documents cannot override privilege (subject to any statutory authority to the contrary). Following this judgment the two exceptions to privilege continue to be: (i) the iniquity exception (i.e. privilege does not arise from a communication between a client and his lawyer for a criminal purpose), and (ii) the modification or abrogation of privilege by statute. Both parties are currently seeking permission to appeal from the Supreme Court.
 Sports Direct International plc v The Financial Reporting Council  EWCA Civ 177.