In a judgment handed down yesterday, the Court of Appeal found that an audit client could not be compelled to produce its privileged documents to its auditor’s regulator: Sports Direct International plc v The Financial Reporting Council  EWCA Civ 177.
The case concerned the construction of the Financial Reporting Council’s (“FRC“) information-gathering powers (specifically those set out in paragraph 1 of Schedule 2 to the Statutory Auditors and Third Country Auditors Regulations 2016 (“SATCAR“)). The FRC has the power under SATCAR to require both auditors and audit clients to provide it with information, with the carve out that it cannot compel the production of documents which the auditor or client could refuse to provide in High Court proceedings on the grounds of legal professional privilege.
As is explained in our litigation notes blog post on the first instance decision, the High Court had relied on Parry-Jones v Law Society  1 Ch 1 (and Lord Hoffmann’s comments on that decision in R(Morgan Grenfell & Co Ltd) v Special Commissioners of Income Tax  UKHL 21) and found that privilege belonging to the audit client (Sports Direct International, “SDI“) would not be infringed by requiring production of the privileged material to the FRC as the auditor’s regulator.
The Court of Appeal overturned the High Court’s decision and found that the “no infringement” principle arising from Parry-Jones had no relevance to the construction of the FRC’s information-gathering powers under SATCAR given the clear words of that statute. The effect was that neither SDI (nor, for that matter, its auditor) could be compelled to hand over privileged documents, regardless of whether the person entitled to the privilege is the auditor or audit client. Our Litigation Notes blog post sets out more detail on the judgment.
This decision has largely been welcomed by those who might be compelled to disclose documents to regulators on the basis that it reinforces the protection of privilege in a regulatory context. However it is not without its difficulties. In particular it may prejudice those under investigation if they (or their client) hold privileged documents which might help their defence as they will be unable to produce that material to their regulator (even on a confidential basis) without the consent of the privilege holder.