knowledge | 20 February 2020 |

Privileged material not compellable by regulator

The Court of Appeal in England & Wales has found that an audit client may refuse to disclose documents to its auditor’s regulator on the ground of legal professional privilege.The judgment, delivered on 18 February 2020, overturns a previous High Court judgment and will be a welcome comfort to entities providing professional services and their clients.

Background

The UK’s Financial Reporting Council (the “FRC”) began an investigation into an auditor concerning its audit of Sports Direct International plc (“SDI”). The FRC used its information-gathering powers to order SDI as the audit client to disclose certain documents, some of which were privileged. SDI refused to disclose the privileged documents and the FRC applied to the High Court to compel disclosure. 

The High Court found that privilege was not infringed by the FRC requiring disclosure of the documents from SDI directly. The High Court’s rationale was that, if the auditor itself had been asked to disclose the documents to the FRC, SDI’s privilege would not have been infringed. Accordingly, the High Court ordered SDI to disclose the documents to the FRC.  (The High Court made other less controversial findings which are discussed at our briefing here.)

SDI appealed. 

Appeal

The Court of Appeal found that neither SDI nor its auditor could be compelled to disclose privileged documents and that the High Court had erred in arriving at the opposition conclusion. 

Like the High Court, the Court of Appeal considered an English case (Parry-Jones v Law Society [1969] 1 Ch 1), in which the Court of Appeal found that a solicitor under investigation by the Law Society could not refuse to disclose his client’s privileged documents compelled pursuant to the Law Society’s statutory powers because his client’s privilege was not being infringed. Lord Hoffmann subsequently elaborated upon the Parry-Jones “non-infringement principle” by explaining that this limited and confidential disclosure either did not breach the client’s privilege or, to the extent that it did, the disclosure was authorised by the Law Society’s overriding statutory powers (Morgan Grenfell [2002] UKHL 21).

The FRC had successfully argued in the High Court that Lord Hoffmann’s explanation recognised an exception to privilege such that, where a regulator exercises statutory powers to compel documents, any privilege in those documents is not infringed because they are being compelled under statutory powers.

The Court of Appeal, however, rejected those arguments and found that Lord Hoffmann’s explanation did not provide authority for a general “non-infringement” exception to the protection offered by the law of privilege, which is a fundamental human right. The High Court therefore erred in ordering disclosure and the Court of Appeal vacated the High Court’s order to that effect.

Comment

This judgment provides helpful clarity on the extent of the important protection offered by legal professional privilege to clients in the context of regulatory investigations and will be welcomed by those concerned by the High Court’s previous ruling. The legal position in England & Wales is now consistent with the probable approach of the Irish courts, which would likely recognise that any clients or regulated entities, if subject to investigation by a regulator with statutory powers to compel documents, are entitled to assert privilege and refuse disclosure where appropriate. In our practice, we see a marked increase in the use of so-called ‘limited waiver’ or ‘Fyffes’ agreements in the course of regulatory investigations. These agreements allow regulators and regulated entities to negotiate the terms on which privileged material will be shared voluntarily, without waiver against the world at large, but such agreements must be carefully framed in order to protect privilege attaching to particular documents or communications, which can easily be destroyed in the process.

Contributed by Glen Rogers


  1. Sports Direct International plc v Financial Reporting Council [2020] EWCA Civ 177 (Rose LJ).

This briefing is for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.

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