Changes to the SRA’s Reporting Obligation
Whilst many people might be relieved not to be the subject to the scrutiny of a regulatory investigation, imagine the horror when a regulator publishes a written decision which makes criticisms of you in circumstances where you have not been given an opportunity to defend yourself?
This occurs frequently in regulatory proceedings because many regulatory schemes do not require third parties to be given any notice of the proceedings or be invited to attend and make representations. Sometimes these findings can include conclusions that the individual who is not the subject of proceedings, has been dishonest which can severely affect professional or commercial reputations and carries the risks of adverse media and public attention.
This can seem unfair given that these findings are untested by any meaningful adversarial process so far as the criticised individual is concerned. Even worse is the prospect that others are likely to regard regulatory findings as authoritative. The argument that there is no public interest in the publication of false allegations is a compelling one. In these situations, the public and the criticised individual loses, particularly as the newspapers may republish the same findings under the protection of privilege. Whilst a paper can subsequently publish a statement correcting errors, this is unlikely to be a satisfactory remedy, given that it might not be read by all of those who read the original report.
In recent months, two cases have dealt with the situation where a regulator made findings which were adverse to third parties who were not a party to the proceedings, and they are outlined below.
In R (Lewin) v Financial Reporting Council and others  EWHC 446 an accountancy firm and one of its partners were under investigation for misconduct when conducting a company’s statutory audit in failing to prevent or detect serious wrongdoing on the part of the company. When the regulator, the Financial Reporting Council (FRC), made its decision, it made some serious criticisms of the company, and one of its directors (the Claimant), which included allegations of fraud.
The firm and partner under investigation claimed the nature and extent of the company fraud excused their failure to uncover irregularities in the audit. The FRC agreed that in certain respects, the Claimant had acted dishonestly but not that it amounted to a defence as suggested by the accountants.
The Claimant was not given the opportunity to defend himself at the hearing because the regulatory scheme does not provide for this as he was not a member of the accountancy profession and was not a party to the proceedings. However, the regulator did provide the director with a copy of its decision before publication, and this afforded him an opportunity to make representations. Based on the Claimant’s submissions, attempts were made to redact the report. However, the regulator decided to publish the report in its entirety because the findings and sanctions against the firm and partner could not be fairly or properly understood in the absence of the detail of the evidence and the factual findings of the Tribunal.
The director brought a judicial review against the regulator’s decision to make and publish the findings on the basis that it would cause serious damage his and the Company’s reputation and it would be unfair and unlawful to do so given that he had no opportunity to make representations and influence the findings.
In the High Court, Davies J concluded that it was necessary for the Tribunal to grapple with the company fraud; it needed to investigate the nature and extent of the fraud in order to determine whether there was any culpability on the part of the accountancy firm and partner under investigation. The Claimant’s conduct “fell squarely within the four corners of the case to be investigated”.
Davies J concluded that there was no mechanism in the relevant regulatory scheme to enable third parties affected by decisions to make representations in the proceedings or comment on proposed findings. However, it did confirm that consideration should have been given to including a disclaimer in the decision to make it clear that the Claimant did not have an opportunity to influence the findings. Davies J held:
Consistent with its duty of fairness, I believe the Tribunal should have sent out at the commencement or conclusion of the Report a disclaimer stating that: (a) the claimant (and any other relevant person) was not a party to the proceedings and was not invited to provide evidence; (b) it would not be fair to treat any part of the Tribunal’s findings as findings made against him/them as he/they were not represented at the Tribunal hearing and had made no representations about the matters in question”.
There has been a lot of publicity about this case in recent weeks. Taveta is the investment company that sold BHS for £1 in 2015. The company was audited by PWC in 2014 and given a clean bill of health in the lead up to the sale. In 2016 the retail chain entered administration and all of its stores closed resulting in a loss of 11,000 jobs and a £571 million deficit in its pension scheme. PWC and one of its partners, Steve Denison, were investigated by the FRC and both admitted misconduct in relation to various concerns about the audit undertaken. The FRC fined the firm a record £6.5m and the partner agreed to a 15-year ban on working as an auditor and a fine of £350,000. Both sums had been reduced substantially due to early settlement.
In R (Taveta Investments Ltd) v FRC  EWHC 1662 (Admin) the court refused to grant interim relief restricting publication of a settlement agreement which included a description of the facts of the misconduct. Similar to Lewin, Taveta were sent a copy of the material the FRC proposed to publish in advance of publication. Taveta then sought an injunction against the regulator to prevent it from publishing the particulars, which it argued included criticisms of its directors and employers. The substance of Taveta’s claim is that Taveta had not been given a fair opportunity to make submissions as to the alleged criticisms and influence the findings.
Nicklin J confirmed that the test for the purposes of seeking injunctive relief against a public authority is stricter than a private body and therefore the relevant threshold was not met in this case. Nicklin J made no decision on the issue on the fairness and lawfulness of making and publishing such findings because that issue will be decided at the substantive hearing, if the case is not settled beforehand. However, Nicklin J did suggest when that there is a world of difference between a Tribunal including criticisms that are necessary in order to understand the findings and those which are not, especially given the implications of adverse findings being included in decisions, the undesirability of defamation litigation and inadequacy of some of the remedies available to third parties.
Both cases remind Tribunals that they owe a duty of fairness where imputations or findings made against third parties are of such gravity to cause serious damage to reputations. That a Tribunal has to make some adverse finding might be unavoidable if the third party conduct is an integral part of the evidence. In those situations, the decision in Lewin makes it clear that the use of a disclaimer may be sufficient to mitigate the damage caused to third parties. Although the Taveta decision did not decide the substantive issue, the indication from the High Court appears to be that regulators should take care before including these criticisms and that the Lewin decision is not a licence for regulators to publish criticisms of third parties in its decisions providing that it includes a disclaimer. Further guidance on this is eagerly awaited from the High Court when the substantive issue in Taveta is heard, assuming it does not settle beforehand. Where a third party is put on notice of proceedings that may call their conduct into question, they should seek legal advice with a view to engaging in the proceedings as an interested party, if that is possible.
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