Menu
Search What are you looking for?
Menu

FRC investigations: navigating a safe course in protecting legal professional privilege

  • Legal Development 18 June 2020 18 June 2020
  • UK & Europe

  • Insurance & Reinsurance

A common theme of FRC investigations is the requirement to produce documents under Rule 9 of the Audit Enforcement Procedure ("AEP").

FRC investigations: navigating a safe course in protecting legal professional privilege

Documents maybe withheld where they are the subject to a claim for legal professional privilege.[1] It is not uncommon for audit files either to evidence privileged legal advice or to contain material subject to litigation privilege. Commonly such documents will have been provided to the auditor pursuant to a limited waiver of privilege. Privilege will properly belong to the audit client and the obligation to protect any such privilege can require the audit firm to engage in protracted redaction exercises prior to provision of its files to the FRC.

The very real practical challenges faced by audit firms in relation to these issues are compounded in circumstances where there is a dispute between the audit client and the auditor as to whether documents are, in fact, privileged. This conundrum was the subject of the judgment given earlier this month in A v B and FRC [2020] EWHC 1491 (Ch), and the case considers in particular the correct mechanism for resolving such disputes. 

What was in dispute?

In this case, the audit client ("A") was claiming that six documents were subject to legal professional privilege and should not be provided to the FRC by the audit firm ("B"). A sought a declaration to the effect that B was obliged to withhold production of documents to the FRC where A asserted those documents to be privileged, and rejected the notion that B (or its lawyers) should be able to act as arbiters on the issue of whether those documents were privileged. Rather, it argued that if the FRC wished to challenge its assertion of privilege it should do so by either issuing a notice against A for production under SATCAR, or issuing an application against B to which A could be joined as a party.

B disagreed that it was obliged to protect, in the context of the FRC's document request, every claim to privilege that A sought to advance, no matter how ill-founded such a claim might be. It (along with the FRC) also argued that it was not appropriate for the court to make a declaration, as this was both unnecessary and incapable of resolving the substantive dispute, namely whether the six documents in question were privileged. Alternatively B argued that, if a declaration was to be made, it should be in an alternative form, stipulating that in the context of the FRC's request for documents B was entitled to make its own assessment as to whether A's assertion of privilege was valid and to withhold from the FRC only those documents which it considered were subject to a valid claim for legal professional privilege.

Did the High Court make a declaration?

Mr Justice Trower refused to grant declaratory relief, on the basis that "the declarations sought neither deal with the dispute as to the existence and extent of the legal right between the parties in the most effective way, nor declare the true position as a matter of law".

Of considerable relevance was the fact that B had brought a counterclaim (to which the FRC was not a party) for the court to determine whether the six documents in dispute were subject to privilege and thus should be provided to the FRC. This counterclaim was subject to a separate, partially confidential judgment handed down on the same day[2] in which Mr Justice Trower made a ruling in relation to each of the disputed documents, thus resolving the substantive issue.

The court also considered that the declaration sought by the A would be inconsistent with the nature of the obligations imposed by the SATCAR regime and did not accurately reflect the relevant legal relationships between the parties. In particular it emphasised that B's entitlement to withhold documents sought by the FRC on grounds of privilege derived from "the privileged nature of the information or document as a matter of fact and law" rather than from A's assertions with respect to whether those documents were privileged.

Does the audit firm or the audit client determine whether privilege applies?

The court held that, in the context of FRC document requests faced by an audit firm, it is for the audit firm to determine, with deference to their obligations under SATCAR, whether they are entitled to withhold a particular document from disclosure to the FRC on grounds of privilege, because they are the entity with the duty to disclose imposed on them by service of a statutory notice.

What if the audit client disagrees?

The court held that any dispute as to whether a document is privileged should be determined as between the audit firm and the audit client, mindful of the fact that: a) the dispute would be based on the relationship between the audit client and the audit firm and not on any relationship between the audit client and the FRC; and b) because they (and not the FRC) would have had sight of the disputed document and therefore be best placed to argue the point.

The court envisaged that the mechanism for such disputes to be determined would be by way of an application for either an injunction by the audit client, or a declaration by the audit firm.

The court also dismissed A's concern that an audit client might not be made aware of an intention to disclose such documents, with Mr Justice Trower expressing that view that it was unrealistic to think that an auditor would not engage in sufficient detail with their client in this context, enabling that client to apply for an injunction if it wished to do so. However, if the FRC determines that its investigation is confidential and does not permit the audit firm to contact its client then one can foresee issues with navigating this process.

What if the audit firm gets it wrong?

If an audit firm makes the wrong decision and discloses a privileged document to the FRC, it may be liable to its clients.

The judgment given on the counterclaim is a reminder that an assessment of privilege requires real care and attention to detail, with the court in this instance evidently influenced in its determination by what the documents' metadata revealed about the likely level of input from legal advisors.

Other Points of interest

The arguments before the court in A v B & FRC and their determination provide useful insight on practical considerations for audit firms and their advisors when considering privilege issues in responding to document requests by the FRC.

There was no dispute as to an audit firm's obligation to maintain privilege if the documents are in fact privileged; the issue was whether or not the documents were privileged.

The court rejected the assertion that an audit firm was "simply exercising a ministerial function" when determining how to respond to a statutory notice seeking the production of documents, acknowledging that it might well not be neutral on the question of privilege and have its own interests to protect (for instance in circumstances where the documents in question amounted to exculpatory evidence justifying a particular approach taken in the audit).

From a practical perspective it is also noteworthy that in this case, in an effort to achieve a resolution of the substantive dispute (which had not been addressed in A's application for a declaration) the Master directed at an initial hearing that A was to provide B with a list of the documents over which it asserted there was an obligation on the part of B to withhold production on the grounds of legal professional privilege, and B was granted permission to counterclaim for a declaration as to the privileged status of those documents.

Commentary

The decision shines a light on an audit firm's obligations when served with a Rule 9 Notice from the FRC, and is useful a reminder that audit firms have an entitlement under SATCAR not to provide documents to the FRC which a person would not be required to produce in High Court proceedings on the grounds of legal professional privilege.

Audit firms have a statutory duty to produce documents in accordance with the FRC's requests unless a document is, in fact, privileged; that duty is not waived if the firm merely believes that a document is privileged or the client asserts that it is. If clients take a different view on whether a document is privileged, the issue may have to be determined by the courts before the FRC request can be complied with.

The assessment of whether a document is privileged is one of fact and law and does not derive from the mere assertion of privilege by a client, or by the firm's assessment of the validity of the client assertion.  However, in this context it is for the audit firm to adopt a stance in relation to whether a document can be withheld, and it seems that if that stance is disputed by the audit client, the issue must be resolved between those parties, rather than between the audit client and the FRC, notwithstanding that the audit firm may in some circumstances be neutral as to the ultimate determination made on privilege.

As a matter of practice, audit firms and their advisors should consider if more detailed and pro-active communication with clients on privilege issues is required (and indeed whether it is permitted in light of any confidentiality obligations imposed by the FRC).

The consideration by Mr Justice Trower on the specifics of the disputed documents is also illustrative of the care that is required when assessing privilege, not least because of the extent to which an analysis of the metadata of particular documents appears to have influenced the court's determination.

 

[1] Paragraph 1(8) of Schedule 2 to the Statutory Auditors and Third Country Auditors Regulations 2016 SI 2017/516 ("SATCAR") and the Court of Appeal decision in Sports Direct International plc v. The Financial Reporting Council [2020] EWCA Civ 177 at [44]

[2] A v B and another [2020] EWHC 1492 (Ch)

End

Stay up to date with Clyde & Co

Sign up to receive email updates straight to your inbox!