A judgment handed down yesterday by the Court of Appeal considering the question of privilege in a regulatory context represents good news for financial institutions: Sports Direct International plc v The Financial Reporting Council  EWCA Civ 177.
The Court of Appeal considered the situation where a regulated person was being investigated by its regulator and held its own client’s privileged documents (i.e. privilege belonged to the client, not the regulated person). In a decision which caused some concern for the financial services industry (and other regulated sectors), the High Court had held that the production of the client’s privileged documents to the regulator would not infringe the legal professional privilege belonging to the client: The Financial Reporting Council Ltd v Sports Direct International plc  EWHC 2284 (Ch) (see our litigation blog post on the first instance decision). Happily, the Court of Appeal has now overturned that decision.
The primary concern for financial institutions arising from the High Court’s decision was the very real possibility of a single regulator (such as the FCA) in relation to both parties. Take, for example, the case of an FCA investigation into the issue of securities by a listed financial institution which has been advised by an investment bank. The effect of the first instance decision was that the investment bank’s privileged documents may have been disclosable to the FCA (either by the issuer or directly from the bank) if it is the issuer which is the target of the investigation, even though the FCA is also the investment bank’s own regulator, on the basis that the investment bank’s privilege would not have been infringed by such disclosure. The High Court did not consider any specific safeguards for where both adviser and client were regulated by a single regulator and implicitly expected that the regulator would simply be able to compartmentalise its knowledge in such a scenario. Furthermore, even putting to one side whether such compartmentalisation was realistic, it appeared to overlook the impact such a loss of confidentiality (particularly if the documents were subsequently referred to in any regulatory notice) would have on privilege (either in the UK or in other jurisdictions).
Taking this example of the FCA as the single regulator, whilst there could have been arguments that the privileged documents were “protected items” under s.413 of the Financial Services and Markets Act 2000 (FSMA) , the High Court’s reasoning in FRC v Sports Direct was that the equivalent privilege carve-out was only relevant if the privilege would be infringed, and it held that there was no infringement where the privilege belonged to the client rather than the regulated person. Accordingly, s.413 FSMA could effectively be bypassed. In any event, the High Court was prepared to give the equivalent carve-out for privileged documents a much more restricted application than it appeared to have on its face. The High Court decision therefore represented a very real erosion of privilege.
The Court of Appeal’s decision to overturn the High Court’s judgment in this case will therefore be welcomed by financial institutions. The decision is helpful in reinforcing the protection of privilege in the regulatory context, whether the privilege belongs to the person who is subject to a regulatory investigation or a client of that person. In either case, privilege will be a defence to a notice requiring production of documents under a regulator’s statutory powers, unless the statute overrides privilege either expressly or by necessary implication.
The decision also confirms that privilege cannot be claimed for non-privileged documents merely because they are attached to privileged communications. The court rejected an attempt to distinguish between a non-privileged attachment itself and the communication of that attachment between lawyer and client.
For further detail on this decision, see the Litigation Notes blog post.