High Court rejects privilege claim in regulator request for documents

Sports Direct had claimed that the documents need not be handed over as they were protected by legal professional privilege. However, the High Court has now ruled that the production of documents to a regulator solely for the purposes of a confidential investigation by the regulator into conduct of a regulated person does not infringe privilege.

The judgment (24-page / 446KB PDF) comes shortly after a significant Court of Appeal ruling on legal professional privilege. The Court of Appeal ruled that internal documents generated by mining company ENRC in connection with a Serious Fraud Office (SFO) investigation into allegations of fraud, bribery and corruption were privileged, overturning a High Court finding that criminal proceedings were not "reasonably in contemplation" at the time when the documents were created.

"The ENRC judgment refers to the fact that privilege is absolute and cannot be overridden by some countervailing rule or public policy - however, this is not completely correct," said investigations expert Alan Sheeley of Pinsent Masons, the law firm behind Out-Law.com. "This case identifies that there are circumstances where third parties can see and use privileged material – in particular, professional regulators, such as in this case the FRC which amongst other things has responsibility for the regulation of statutory auditors and audit work."

"The judge in this case sets out very clearly the history of claims to override a client's privilege by those regulating professionals. In essence, this decision emphasises the importance of the quality of professionals and ensuring that, ultimately, businesses and individuals are protected against professional misconduct in one form or another," he said.

The FRC is currently investigating Sports Direct's auditor, Grant Thornton LLP, over its handling of Sports Direct's 2016 financial statements and accounts. This investigation arose out of reports that a Sports Direct subsidiary had engaged Barlin Delivery Ltd, which was owned by the brother of Sports Direct's founder and majority shareholder Mike Ashley, to provide delivery services to its customers.

As part of its investigation, the FRC requested a number of documents from Sports Direct, including correspondence in which Sports Direct provided Grant Thornton with information about the nature of its arrangement with Barlin, which it had entered into following legal advice. Sports Direct claimed that the documents were protected by privilege and that it therefore could not be compelled to hand them over.

In his judgment, Mr Justice Arnold agreed with Sports Direct that it had not waived privilege against the FRC when it sent the documents to Grant Thornton. However, he noted that there was "a line of cases in which it has been held that privilege cannot be relied upon as an objection to the production of documents to the regulatory body for solicitors … by solicitors or to the tax authority … by taxpayers or regulators of advocacy services by advocates".

"[T]he 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 legal professional privilege of clients of the regulated person in respect of those documents," he said. "That being so, in my judgment the same must be true of the production of documents to the regulator by a client."

Sheeley said that while the court's decision appeared to be a sensible one, clients of regulated firms, and regulated firms themselves, that might find themselves in situations where a regulator is seeking to override client privilege should proceed with caution.

"Professionals should not just hand over files following this decision," he said. "Professionals must keep in mind their obligation to their client; they must make sure that any request by a regulator is a valid request and should question and refine any request to only that which is completely necessary for the regulator's intervention. Further, it is also important that the relevant reassurances are obtained from the regulators as to how they will hold the privileged information and what use they will make of it."

"Clearly, at the stage of a regulator request, there could easily be a conflict of interest between the client and his adviser. Therefore, any individual or business being asked by their professional adviser to provide documents to regulators should obtain independent legal advice from legal advisers that are experts in the field of privilege, which is an extremely hot topic at this moment in time," he said.