knowledge 26 September 2018 |

Audit Client could not Resist Disclosure to Regulator on Privilege Grounds

In this case,¹  the Financial Reporting Council (“FRC”) was conducting a regulatory investigation of a particular audit firm focussing on its 2016 audit of its client Sports Direct International plc (“SDI”). As part of that investigation, the FRC issued a statutory notice to the client SDI seeking the production of certain documents. SDI resisted, claiming these were privileged. It was accepted that if privileged applied, the relevant legislation would permit SDI to withhold the documents. The issues for the court were:

• whether legal advice privilege applied to documents purely by virtue of those documents having been attached to emails passing between SDI and its legal advisors (“the communication issue”);
• whether SDI’s waiver of that privilege in sending copies of the documents to the audit firm under investigation for the purposes of the 2016 audit extended to the FRC (“the waiver issue”); and
• whether production of the documents to the FRC would infringe SDI’s privilege (“the infringement issue”).

On the communication issue, the court reiterated that legal advice privilege does not apply to documents which are not themselves privileged simply because they are attached to emails sent by a client to its legal advisor. This is also the position in Ireland.

On the waiver issue, the court was satisfied that SDI’s sending of its privileged documents to the audit firm for the purposes of the 2016 audit did not amount to a wider waiver in respect of the regulator as “the regulatory process was entirely distinct from the process of audit.” It is likely that the Irish court would take a similar view based on the decision in Fyffes plc v DCC plc²  as long as confidentiality was sought to be preserved and subject to an overriding test of fairness.

The infringement issue was the most problematic for the court. Here the FRC argued that the documents should be produced as such production simply would not infringe SDI’s privilege. The court agreed. Arnold J reviewed the relevant authorities. He said these established that if the audit firm itself had been asked to produce the documents to the FRC, solely for the purposes of a confidential investigation by the FRC into that audit firm’s conduct, this would not have infringed any legal professional privilege of their client SDI in respect of those documents. That being so, the same must be true of the direct production of those documents to the FRC by that client SDI. 

Arnold J concluded “with some hesitation” that if he was wrong and there was a “technical infringement” of SDI’s privilege here, this was authorised by the relevant legislation. 

Comment

While this judgment will be of interest to Irish regulated entities providing professional services, as well as their clients, it is likely a different approach would be taken in Ireland where it would be recognised that the regulated entity or the client would be entitled to assert privilege in the context of a regulatory investigation but a regulator might seek to agree a limited waiver.