Privilege in the context of an FRC investigation - A v B and The FRC [2020] EWHC 1491 (Ch)

Overview

In this judgment, the court clarified the process that a professional services provider should follow when faced with a regulatory request for client documents, in circumstances where a party contends that all or a portion of those documents are privileged.

Background

The Part 8 proceedings arose out of an investigation by the Financial Reporting Council Limited ("the FRC") into the audit of the 2018 financial statements of a company carrying on business as a retailer, referred to as party A (as the result of an order earlier in the proceedings directing that the parties be anonymised). In the course of the FRC's investigation into party B, it issued notices requiring the provision of certain documents pursuant to its powers under paragraph 1(1) of Schedule 2 of the Statutory Auditors and Third Country Auditors Regulations 2016 ("SATCAR") and Rule 9 of its powers under the FRC's Audit Enforcement Procedure. Pursuant to the FRC's powers, it is entitled to issue a statutory notice "for any purpose related to inspecting or investigating statutory audit work". The FRC made clear that it did not require B to provide it with material which is subject to legal professional privilege. Party A asserted that some of the documents sought by the FRC from party B are protected from disclosure on the grounds of privilege and they were only in the possession of B because they had been provided on a limited waiver basis for the purpose of its 2018 audit.

When the investigation began, party B's solicitors informed party A's solicitors that B was required to provide the FRC with a copy of the audit file in relation to the 2018 audit of A's financial statements. A's solicitors confirmed that A did not consent to the disclosure of any of its materials that were subject to legal professional privilege.

 

The legal issue

The question the court was asked to determine was as follows:

In circumstances where the FRC requests and/or issues a statutory notice requiring the production by B of documents or communications over which A has asserted legal professional privilege, whether in whole or in part:

(a) Is B obliged to withhold production to the FRC of such documents or communications (or parts of documents or communications) on the grounds of A's assertion of its privilege? Or

(b) Is B obliged and/or entitled to make its own assessment as to whether A's claim for privilege is valid and therefore to withhold from production to the FRC only those documents or communications (or parts of documents or communications) which B considers are subject to a valid claim for legal professional privilege on the part of A?

A submitted that if a document is privileged: (i) party B had no right to disclose it to any third party (including the FRC) without party A's consent; (ii) party A has an exclusive interest in arguing for the existence of privilege; (iii) party B has no interest in party A's right to the privilege; (iv) party B's only role is to report to the FRC the fact of A's claim to privilege and to thereafter adopt a neutral stance; and (v) if the FRC wishes to challenge party A's assertion of the privilege, it can do so by issuing a statutory notice for production under SATCAR against A, or an application against B to which A could be joined as a party. B's role would then be simply "ministerial", being restricted to passing on to the FRC the claim to privilege made by A. A sought a declaration as to whether B is entitled to form its own view on privilege.

 

Outcome

The Court ruled that:

  • It was not appropriate to make the declaration sought by party A because that relief would not resolve the dispute. Indeed, there was no dispute as to party B's obligation to maintain the privilege (if the documents in question were in fact privileged).

  • The Court also ruled that party B should determine whether the documents in question were privileged because it is the entity by whom the duty to disclose on service of a statutory notice is imposed. If party B makes the wrong decision in relation to privilege, it would then be liable to party A if it failed to maintain a privilege it was under a duty to maintain.

  • It disagreed with party A that it would be appropriate for the FRC to seek a copy of the same document directly from party A because (i) party A may no longer have the relevant document; and (ii) the FRC will often wish to look at the document as it appears on the audit file, given it is party B's audit of party A which was the focus of the investigation, in respect of which the statutory power of inspection arises.

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