Less box ticking, more explaining – the FRC publishes its Annual Review Report
The High Court made an order on 11 September 2018 which compelled Sports Direct to disclose certain documents to the FRC. In a judgement dated 18 February 2020 (issued this week), the Court of Appeal has overturned that decision: we examine the background to the disclosure; the arguments made by Sports Direct and the FRC in support of their respective positions; the Court of Appeal’s judgement; and the impact this judgement will have on regulators and those who are regulated.
The FRC is currently undertaking an investigation into the conduct of Sports Direct’s former auditors and an individual at that firm. That investigation mainly concerned the audit of the financial statements of Sports Direct and its subsidiaries for the year ending 24 April 2016 and, in particular, the engagement of a subsidiary of Sports Direct of an entity to provide delivery services to the subsidiary’s customers. The FRC was interested in this relationship as it was not disclosed in the group’s accounts.
As part of that investigation, the FRC sought to use its powers under the Statutory Auditors and Third Country Auditors Regulations 2016 (“SATCAR”). Part of those powers allows the FRC to require “any public interest entity” (which in this case includes Sports Direct) to provide it with information relating to the statutory audit of the annual accounts or the consolidated accounts of any such entity. The FRC’s notice issued under SATCAR required disclosure by Sports Direct of all emails and attachments relating to the audit of its 2016 financial statements which were held by specified custodians; fell within a specified date range; and were responsive to one or more of 27 different specified search terms. Sports Direct provided some 2000 documents to the FRC but claimed that it was entitled to withhold 40 documents on the grounds that they were covered by legal professional privilege (LPP). Those documents were emails and attachments sent to or by Sports Direct’s internal and external legal advisers. In doing so, Sports Direct relied on the exemption from disclosure specified at paragraph 1(8) of Schedule 2 to SATCAR, which states:
A notice under sub-paragraph (1) or (3) does not require a person to provide any information or create any documents which the person would be entitled to refuse to provide or produce-
In proceedings in the High Court on the grounds of legal professional privilege; or
In proceedings in the Court of Session on the grounds of confidentiality of communications.”
Communications are also defined as meaning:
“Communications between a professional legal adviser and his client; or
Communications made in connection with or in contemplation of legal proceedings or for the purposes of those proceedings.”
The FRC did not accept that Sports Direct was entitled to withhold the 40 documents; the crux of its argument was that although the emails would ordinarily be regarded as privileged, they fell within a narrow exception in the case law which would mean that Sports Direct’s privilege would not be infringed if the emails were handed over; or, that the infringement would be a technical infringement only and would be authorised by the SATCAR regime (‘the infringement issue’). As a secondary point, the FRC argued that even if the emails themselves were protected by LPP, certain of the attached documents to those emails were pre-existing documents, and therefore should not be protected by LPP simply by reason of them being attached to a privileged email (“the Communication issue”).
The High Court upheld the FRC’s argument; Sports Direct thereafter appealed to the Court of Appeal.
LPP was notably described by Lord Taylor in R v Derby Magistrates’ Court  AC 487 as “a fundamental condition on which the administration of justice as a whole rests” because unless clients can speak in confidence with their lawyer they might “hold back half the truth”. In simple terms, it means that information and advice passed between a client and their lawyer is confidential and not (generally) discloseable. There are two exceptions to this: the first is the iniquity principle, i.e. that privilege does not arise from a communication between a client and his solicitor for a criminal purpose. The second is where LPP has been modified or abrogated by statute, as long as a subject’s human rights are not infringed.
In this case the SATCAR contains a clear limitation on the regulator’s power to call for documents; the FRC therefore faced a difficult task in seeking to overcome its specific terms.
The FRC argued that its request for disclosure, despite the clear terms of SATCAR, was justified in seeking privileged information due to an obiter observation in a speech made by Lord Hoffman in the case of R v (Morgan Grenfell & Co Ltd) v Special Commissioner of Income Tax and another  UKHL 21). In that speech, Lord Hoffman commented on the rationale adopted in the previous Court of Appeal case of Parry Jones v The Law Society and ors . Parry-Jones decided that a solicitor being investigated by the Law Society could not refuse to hand over documents requested pursuant to powers under the Solicitors Act 1957 on the grounds that those documents were privileged for the benefit of his former clients. This was relevant in Morgan Grenfell as it was argued that the outcome of Parry-Jones meant that a request under the Taxes Management Act would have the same effect.
Lord Hoffman raised doubts about the reasoning in Parry-Jones, as he felt it suggested that any statutory duty to disclose documents would be construed as overriding the duty of confidence that a solicitor owed to his client. He sought to distinguish the facts by stating that the true justification for the decision was not that Parry-Jones’ clients had no LPP, or that it had been overridden by the statutory regime in place, but instead that the Law Society could only use the information disclosed by the solicitor for its investigation. It was his view that the limited disclosure did not breach the clients’ LPP, or to the extent that it “technically did”, it was authorised to do so by the Law Society’s statutory powers.
Based upon this obiter comment, the FRC advanced an argument that Lord Hoffman had recognised an additional exception to LPP. It argued that in circumstances where a regulator such as the Law Society or the FRC has a statutory power to request documents then either (i) there is no infringement of LPP when the documents requested are handed over in response to a request made under a regulator’s statutory power (the no infringement exception); or (ii) any infringement of LPP is technical only and can be regarded as authorised by the relevant statutory provisions (the technical infringement exception).
The FRC maintained that the material would be kept confidential and would not be publicly available, and thus any infringement would be ‘technical’, and would thus fall into one of the categories described by Lord Hoffman. It accepted that the holder of the privilege must be someone other than the person who is at risk of an adverse finding at the hands of the regulator; on that basis, it argued that it was entitled to compel the disclosure of privileged documents from Sports Direct, but not from the auditor, because Sports Direct was not the target of the investigation under SATCAR.
The Court of Appeal rejected the FRC’s position stating that the obiter comments of Lord Hoffman in Morgan Grenfell did not create a further exception to LPP and the sole task of the court was to establish whether Parliament had intended to override privilege. The Court held at paragraph 44 that Parliament had expressly conferred LPP protection in paragraph 1(8) of Schedule 2 and had Parliament intended to preserve an exception to it, it would not have been drafted in the way it is. In conclusion Lady Justice Rose stated:
The scope of LPP protection conferred is expressly aligned with the scope arising “in proceedings in the High Court on the grounds of legal professional privilege”. The context in which Lord Hoffman was discussing the potential no infringement exception was specifically outside the context of court proceedings
The Court also rejected the FRC’s argument that an override ought to be implied for technical infringements, holding that the task of the Court was to determine where Parliament had struck the balance between imperatives of the FRC’s regulation of auditors and the fundamental rights of those auditors and their clients to protect their privileged material. The Court concluded that paragraph 1(8) shows where Parliament decided that balance should be struck. The judgement therefore unequivocally ruled in Sports Direct’s favour on this issue, in stating that the exceptions to disclosure as set out in SATCAR are clear.
The Court then turned to the ‘Communication issue’. This ground of appeal concerned 19 emails which had 21 attachments. Some of those attachments were pre-existing documents and Sports Direct conceded that when looked at by themselves they would not be protected by LPP. However, Sports Direct argued that they ought not to be disclosed because of the fact that advice had been sought on them, as set out in the email to which they were attached, and this made them fall under the category of a ‘privileged communication’. It also argued that the FRC’s disclosure notice did not ask for free standing documents, but only emails.
The Court of Appeal ruled that Sports Direct’s approach to the Notice was “an overly technical approach to that wording to interpret it as requesting “all emails which meet the four criteria and all documents which were attached to those emails provided that the documents also separately meet the four criteria”, instead of simply concluding that the emails that meet the criteria and their attachments should be disclosed (emphasis added). Lady Justice Rose concluded that the distinction drawn by Sports Direct could not survive the authority of Ventouris v Mountain  1 WLR 607 and “privilege does not protect either the document itself or the fact that it was sent to a legal adviser under cover of a privileged communication”.
It was therefore ruled that a document which would not attract LPP if taken in isolation is not privileged purely because it is attached to an email which is privileged. Those documents were discloseable.
Although Sports Direct won the main issue in the case and emails covered by LPP were not required to be disclosed to the FRC, it lost the appeal in relation to pre-existing attachments to emails that were not themselves privileged.
This decision will be reassuring for many, as the High Court’s previous decision that communications sent to legal advisers could be required to be disclosed under SATCAR, was one that seemed inconsistent with other recent appellate court decisions which extended the scope of privilege. The main reason why this decision was so interesting was the prospect that regulators could override protections for privileged documentation which are clearly and unambiguously drafted into statutory provisions. This could have created an anxiety that privileged information can be compelled and could escape into the public domain if the case against an adviser reaches a stage where proceedings become public.
To that extent, the Court of Appeal decision has authoritatively confirmed that there are only two exceptions to LPP, limiting the scope for eroding such a fundamental principle which clients and lawyers alike hold dear. PIE’s and other third parties who can be the subject of a Notice under SATCAR or other similar regimes, can now be more confident that they can rely on any statutory provision that limits disclosure of privileged material. It will also allay concerns that regulators will exercise disclosure powers more readily and that those seeking advice could lose control over privileged documents.
Other regulators with similar powers to compel disclosure of documents will need to take heed and carefully consider their statutory powers and the extent to which LPP is expressly preserved, or indeed whether the wording allows any limitation.
Julie Matheson is a Partner in the Regulatory team, specialising in defending professionals in the financial and legal fields. She has particular expertise in defending accountants and accountancy firms in regulatory proceedings brought by the FRC, ICAEW and ACCA. She also regularly provides advice on FCA conduct issues, particularly under the Senior Managers and Certification Schemes.
Sian Jones is an Associate in the Regulatory team. She specialises in defending professionals across a number of different sectors. In the finance sector she advises accountants on regulatory matters such as reporting obligations and defends them in regulatory proceedings brought by the FRC, CIPFA, ICAEW and ACCA. Sian also advises professionals such as lawyers, doctors, surveyors and talking therapists.
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