November 30, 2020

Volume X, Number 335

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November 30, 2020

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Regulatory investigations: High Court confirms auditors should decide whether client documents are privileged

In the recent decision of A v B and another [2020] EWHC 1491, the High Court decided that where an auditor is required to provide documents to a regulator, and the auditor’s client asserts privilege over such documents, it is for the auditor to decide whether the documents are in fact privileged and therefore should not be disclosed to the regulator.

Background

The Financial Reporting Council (“FRC“) conducted an investigation into the audit of financial statements of a retailer (“A“) by A’s former auditor. The FRC sought disclosure from the auditor of documents in its audit file belonging to A.

A claimed privilege over the documents and stated that they were only in the auditor’s possession because they had been provided on a limited waiver basis for the audit. However, the auditor considered that the documents were not privileged and could therefore be provided to the FRC.

The FRC argued that the auditor would commit an offence if it failed to provide documents which it did not believe to be privileged, but over which A had asserted privilege.

The auditor considered that it should take its own view on whether or not the documents were privileged, because it was the auditor who was obliged to give disclosure to the FRC. A objected to this on the grounds that it was the person to whom privilege belonged and production should be withheld on the basis of A’s assertion of privilege. If the FRC wished to challenge A’s assertion of privilege it should require production of the documents from A. The auditor’s role should therefore be neutral, not that of a decision maker.

A sought a declaration from the Court to this effect

Judgment

The Court held that it would be inappropriate for it to make the declaration sought by A as the question of whether the documents were in fact privileged would be determined by a counterclaim issued by the auditor.

Nevertheless, the Court found that as the obligation to disclose the documents to the FRC was on the auditor, it was for the auditor to form its own view and decide whether the documents were in fact privileged and could be withheld. Therefore, a regulated person cannot refuse to produce documents to a regulator on the grounds that a claim to privilege has merely been asserted by a client.

The Court also reaffirmed the decision in Sports Direct International Plc v Financial Reporting Council [2020] EWCA Civ 177 (which we reported on here) which determined that disclosure of privileged documents is an infringement of a client’s right to privilege and there can be no argument that such privilege has been lost by providing those documents to the regulated entity.

Comment

This judgment provides clarification regarding an auditor’s obligations where it is required to provide documents to a regulator and its client asserts the documents are privileged. The decision will no doubt be of wider interest, for example, to firms regulated by the FCA, as it may indicate the Court’s approach where a client asserts that documents sought by the FCA are ‘protected items’ under the Financial Services and Markets Act 2000.

 

© Copyright 2020 Squire Patton Boggs (US) LLPNational Law Review, Volume X, Number 202
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About this Author

Garon Anthony Litigation Attorney Squire Patton Boggs Birmingham, UK
Partner

Garon is a partner in the Litigation Practice Group. He advises clients across the full range of commercial dispute issues, including cyber liability/data breach, professional negligence, banking, pensions and insurance.

Garon regularly acts for clients who are subject to investigations or disciplinary proceedings by national and international regulators, including most recently the Financial Conduct Authority, the Financial Reporting Council and the Dubai Financial Services Authority.

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Sarah Neill Associate   Birmingham Commercial Litigation
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Sarah Neill qualified into the Commercial Litigation team in September 2019 after completing her training contract with the firm. During her time in the team, Sarah has assisted on a wide variety of disputes, including breach of warranty, product liability, debt recovery and breach of contract. Sarah acts for a diverse client base, from individuals to PLCs.

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