5 November 2015
In a series of High Court judgments (8 June and 5 November), the interaction between the law of privilege, civil disclosure and FCA investigations has been developed. These will be of significant interest to Firms under investigation and to those looking to negotiate with the FCA or PRA.
By way of background, Property Alliance Group Limited ("PAG") alleged in civil proceedings against RBS that RBS induced it to enter into various rate hedging products. Separately, on 6 February 2013, a Final Notice was published in which RBS was fined £87.5m in relation to manipulation of certain LIBOR submissions. These did not include submissions relating to GBP LIBOR. By contrast, the products that PAG entered into were all linked to 3 month GBP LIBOR. PAG alleged that, in proposing the products, RBS implicitly misrepresented that it was not manipulating LIBOR. Whilst the substantive allegations in the case are yet to be tested, the High Court made various orders for how disclosure in the litigation was to be dealt with. Two themes are of particular interest.
The first relates to the cloak of privilege for investigations. The application of the well-established principles of legal advice privilege to the particular documents in questionwas largely unsurprising, and the ambit of legal advice privilege in the context of regulatory investigations was given a broad and sympathetic interpretation by the Court, to the detriment of PAG. However, what was of more interest were the policy comments given by the Court. The Court stated that, as a matter of policy, there was a public interest in regulatory investigations being conducted efficiently and in accordance with the law, and that this militated in favour of allowing lawyers and clients being able to candidly discuss facts, and for legal advice to be given under the cloak of privilege. These comments were particularly noteworthy as they stand in some tension with those of an FCA Enforcement Director Jamie Symington given on the very same day in November (see further below and elsewhere in this issue).
The second relates to the somewhat novel point regarding disclosure to civil litigants of "without prejudice" correspondence between the Bank and the (then) FSA relating to the terms of a negotiated Final Notice. It is common for the FCA to seek to negotiate the terms of a Final Notice with a Firm subject to investigation and for those communications to be marked as "without prejudice". Such "without prejudice" communications may of course contain admissions by the Firm and material prejudicial to it. In Court proceedings, such documents would not be discloseable either in the litigation in which the communications were made or in any other litigation involving a third party covering the same subject matter. In the circumstances, the Bank and the FCA urged the Court to extend this rule of so-called "without prejudice" privilege to cover "without prejudice" dialogue with the FCA, on the basis that there was a clear policy interest in encouraging candour in settlement discussions with the FCA. The Court agreed with the Bank and the FCA. It determined that the rule of "without prejudice" privilege should apply to "without prejudice" dialogue between RBS and the FCA regarding the terms of a Final Notice. However, importantly, the Court also determined that RBS were not entitled to the protection of the privilege on the facts of the PAG case. This was because RBS had brought the terms of the "without prejudice" communications into issue in its Defence, which actively denied that RBS had manipulated GBP LIBOR, relying on the absence of any regulatory findings to the contrary in the Final Notice. In the Court's view, there was a risk that this part of the Bank's defence would remain untested if disclosure was not given of "without prejudice" communications, which might well include allegations and admissions relating to GBP LIBOR.
You can read the judgments here: 8 June 2015, 5 November 2015.
The FCA will not welcome these judgments.
As we cover elsewhere in this issue (Internal Investigations: The FCA Makes Its Position Clear) Jamie Symington (Director of Enforcement (Wholesale, Unauthorised Business and Intelligence) recently gave a speech on how internal investigations should interact with the FCA's own investigative and enforcement activities. In that context, he urged Firms to ensure that claims to legal professional privilege (legitimate or otherwise) arising from internal investigations do not interfere with the need to deal with the FCA on an open and transparent basis. By contrast, the Court expressed the desirability of allowing lawyers and clients to talk candidly, cloaked by privilege, as a necessary adjunct to investigations being conducted and settled efficiently. Whilst the material over which RBS sought to assert privilege was generated in the context of regulatory investigations in the UK and elsewhere, not an internal investigation, the Court's comments will apply equally to the assertion of privilege generated in the context of an internal investigation. Accordingly, the FCA may well regard such judicial comments as unhelpful to the position they are looking to achieve in relation to internal investigations.
The decision of the Court in relation to "without prejudice" privilege is also at odds with the FCA's interest. It is true to say that the Court recognised that the "without prejudice" privilege applied to settlement communications between a Firm and the FCA, and this may well be seen as of some comfort by the FCA and the PRA. However, what will trouble them is how, on the facts of the case, the Court ordered disclosure. It may mean that Firms are rather more hesitant in future in how they engage with the FCA and the PRA in settlement discussions for fear of disclosure of such documents in any subsequent litigation. If so, that will damage the regulators' interest in encouraging candour of Firms in "without prejudice" dialogue, which may in turn harm the prospects of settlements more generally.