Financial Reporting Council Ltd v Sports Direct International Plc  EWHC 2284 (Ch).
In a widely reported judgment, the High Court allowed the UK's audit regulator to access privileged client materials in order to carry out an investigation into the conduct of the client's auditor. The case is a timely reminder that privilege cannot necessarily be relied on as an objection to the production of documents to regulatory bodies.
This case involved an application by the Financial Reporting Council for Court Order requiring disclosure of certain material from Sports Direct International plc ("SDI"). The FRC was investigating the conduct of Grant Thornton in relation to its audit of SDI and as part of this investigation had requested disclosure of material from SDI. SDI had refused to provide certain documents on the grounds of legal advice privilege, which the FRC disputed. The court considered the scope of legal advice privilege in deciding whether to grant an order requiring SDI to disclose the documentation.
The court reached conclusions on three key points:
- Legal advice privilege did not attach to documents purely by virtue of those documents having been attached to emails passing between SDI and its lawyers. This is an unsurprising conclusion in line with other recent cases that have considered similar issues;
- That where SDI had made a limited waiver of privilege by sending copies of documents to Grant Thornton for the purposes of the audit, this limited waiver did not extend to the FRC as the regulator of the auditor. In reaching this decision the court considered whether or not the regulatory process of investigating the auditor's conduct during an audit was part of the same process as the audit itself. The Court concluded that they were fundamentally separate functions, entirely distinct from each other. Therefore any waiver of privilege made to the regulated entity did not extend to the regulator.
- That the production of documents to a regulator by a regulated person solely for the purposes of a confidential investigation by the regulator into the conduct of the regulated person is not an infringement of any LPP of clients of the regulated person in respect of those documents. The same is true of the production of documents to the regulator by a client. Therefore disclosure of the documents to the FRC would not infringe any privilege of SDI (and was consistent with previous authorities such as Parry-Jones v Law Society and R (Morgan Grenfell & Co Ltd) v Special Commissioner of Income Tax). It should be noted that this conclusion was only reached for documents where the privilege belonged to a client of the regulated person, not where the regulated person was claiming their own privilege over material.
This final point in particular has potentially significant implications for regulators, those subject to regulation and their clients. It may discourage clients from disclosing privileged material to regulated persons in case they should subsequently be required to disclose the material to their regulator. It also raises unanswered questions about the extent to which the regulator would be entitled to use the privileged material that is disclosed. The reasoning in the judgment was clear that the documents could only be used for the purposes of the investigation for which they were being sought. However this does raise the question of how these documents would be dealt with where any investigation should lead to a public hearing which might require consideration of the material or where the regulator itself was subject to an order requiring it to disclose material onwards, for example if related criminal investigations were being conducted.
The Court granted permission for SDI to appeal its decision on the third point - that appeal is outstanding.