'Financial' professional privilege, more EU clouds and another FATCA turn

Financial services sector head John Salmon and the Pinsent Masons financial services sector team bring you insight and analysis on what really matters in the world of financial services.

A ruling by the UK Supreme Court on the possibility of professional privilege extending to client communications with financial advisers; criticism of the European Commission's cloud strategy by an EU scrutinising committee, and guidance on the US's Foreign Account Tax Compliance Act (FATCA) published by HM Revenue & Customs (HMRC) are some of the developments keeping us interested this week.     

Financial adviser professional privilege?

A ruling by the Supreme Court last week has restricted the application of the rule of 'privilege' to legal advisers. This has the potential to have far reaching implications for other advisers.  

The professional privilege that applies to lawyer-client communications is an essential element of the justice system. Clients must be able to trust that anything they say to their lawyers will not ultimately bring about their own downfall through disclosure to third parties, including courts, tribunals and regulatory bodies. But as a colleague of mine, James Bullock pointed out last week it is important to remember that it is "about the rights of litigants, not, as some have sought to portray it, about professionals lining their pockets".

Should a rule that protects communications between clients and lawyers also protect those between clients and accountants and other financial advisers? Many, I would think, would say yes. While a lawyer may be given details of a client's finances, it may be that it was an accountant who had masterminded those affairs.

The judgment however is clear confirmation that businesses must not fall into the trap of assuming that any advice given or reports prepared by non-legal advisers will be subject to the same confidentiality rules that apply to legal advisers in terms of potential court proceedings or other circumstances in which disclosure can otherwise be compelled by law.

For insurers this raises the question of how to manage claims and reports that form part of investigatory activities being undertaken. If reports are not managed through legal advisors, they will not have the benefit of privilege. Insurers therefore need to be clear on the difference between obligations of confidentiality that can attach to the activities of forensic accountants and claims consultants and legal professional privilege which can only attach to communications with legal advisors.  

Clouds over the EU II

It was some months ago now that we discussed the European Commission's attempt to provide a cloud computing strategy. While the general theme was a positive move toward more acceptance of cloud technologies as a means through which European businesses can become more efficient and less reliant upon costly IT infrastructure, we were highly critical of the Commission's proposed timetable. The Commission had suggested that it would wait until 2014 to provide any guidance on how businesses could cut through the 'jungle' of IT governance and security standards and purchase cloud services in compliance with regulatory requirements.

The European Economic and Social Committee (EESC) has now published its opinion on the Commission's strategy and criticised it for other reasons. In its opinion the EESC highlights the perennial digital issue of trust. It has said that the level of trust in cloud services could be substantially improved if the Commission focused on devising a plan to help EU cloud providers compete with, and perhaps even achieve, the "same level of global visibility and influence" as Amazon, Microsoft and Google.

While we question whether this is an economically viable proposal, it is further encouragement to both EU and UK regulators to look for ways to make Europe more 'cloud-active'. As we have previously suggested, one way may be for regulators to agree to take the view that wording of EU legislation which requires auditors of financial institutions to be given 'effective access to data and premises' need not in all circumstances be interpreted as meaning that the institution must be able to permit 'on-premises' inspections.

A preferable and technologically neutral view may be that secure remote access to data is just as 'effective'. It has to be said, though,a that there has been no indication so far that either the EU regulators or the UK's Financial Services Authority are willing to take this approach.

FATCA

The US' Foreign Account Tax Compliance Act (FATCA) moved one step further towards becoming a concerning reality for financial institutions this week with HM Revenue & Customs (HMRC) publishing new guidance on data protection and compliance. The guidance highlighted risks UK financial institutions will face if they provide US tax authorities with poor quality data. Inaccuracies in data provided to US authorities could result in multiple claims from customers who are US nationals where they suffer loss as a result of the inaccuracies passed on.    

The guidance serves as a timely reminder to financial institutions to ensure that appropriate controls and processes are in place in respect of data quality management. This means encouraging the business and the IT department to speak the same language and review whether the quality of data maintained, particularly in legacy systems developed without data quality management programs in place, meets the of what is a highly sensitive regulatory requirement – the provision of access to foreign regulators of customer financial data.