Legal privilege | When do you need to hand over a third party’s documents to the regulator?

Written on 17 Jun 2020

A recent privilege case provides guidance to companies served with a regulator's statutory notice relating to documents that have been provided by a third party.

When a regulator carries out an investigation, it has the power to issue statutory notices, requiring the provision of documents to help its investigation. Non-compliance with the statutory notice may amount to an offence. However, most regulations allow the entity served with a notice to withhold privileged documents.

Where the statutory notice is issued to the company under investigation, it can be placed in a difficult position. That's because it may hold documents supplied to it by a third party (subject to a requirement to keep the documents confidential) which it considers do not fall within the privilege exception, but the third party does not. A similar quandary may exist where the statutory notice is issued to a third party requiring the disclosure of documents provided to it by the company under investigation, which the company considers are privileged, but the third party does not.

This dilemma was considered in the recent case of A v B.

The Financial Reporting Council (FRC) served a statutory notice on an auditor it was investigating. The auditor was holding documents previously supplied to it by a client in order to audit its accounts. The client considered those documents to be privileged (and had supplied them to the auditor on that basis), but the auditor disagreed and intended to supply them to the FRC.

The client sought a declaration obliging the auditor to withhold production of the documents to the FRC. That application has now been rejected.

In so doing, the judge held that it was not enough that the client wished to assert privilege over the documents. The auditor was only obliged to maintain privilege if the documents provided to it were, in fact, privileged (and the court would decide that issue if there is a dispute about it).

Where did that leave the auditor?

If the auditor believes that documents it holds (but which belong to its client) are not privileged, it will need to supply them to the FRC in order to comply with the statutory notice, irrespective of the views of its client. This decision could, therefore, be seen as being helpful to a company which is the subject of a regulatory investigation and which faces competing demands from the regulator and its clients.

Where does that leave the client?

If the auditor's decision on privilege is, objectively, right, that will be the end of the matter.

But if the auditor gets the decision wrong, the client will be in the invidious position that, through no fault of its own, its privileged material has been disclosed to the regulator.  This may not matter if it is the auditor that is the subject of the regulatory investigation, but may be crucial if it is the client that is the subject of the regulatory investigation and the auditor had been the recipient of the disclosure notice as a third party.  Whilst, the judge said that, in those circumstances, the auditor will be liable to its client for failing to maintain privilege, that may give the client little comfort: it may be hard to evaluate any claim for damages arising out of the breach of confidentiality. in other words, what loss will the client have sustained as a result of the breach?

Accordingly, this decision could  put fear in the hearts of companies that are the subject of a regulatory investigation and that have waived privilege on a limited waiver basis to third parties, such as their auditor.

However, the judge did suggest that the auditor was "likely" to have been under a duty to tell the client when it has received a statutory notice and that the client would then be able to seek an injunction to prevent disclosure in advance of documents being supplied to the regulator.  That is helpful.  However, the tentative nature of that suggested duty makes it absolutely vital that, when potentially privileged documents are disclosed to third parties, the owner of that potential privilege makes that disclosure contractually subject to the obligation on the third party to maintain a claim to privilege on the say-so of the client and (if challenged) to give them the ability to seek an appropriate injunction before disclosure takes place.