Claiming privilege in FCA investigations and subsequent civil litigation

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

The judgment of Mr Justice Birss in Property Alliance Group Limited v The Royal Bank of Scotland Plc [2015] EWHC 1557 (Ch) (8 June 2015) provides a helpful overview of the key rules governing privilege that apply as between FCA investigations and subsequent civil litigation.

Regulated firms have tended to make use of rules governing legal privilege when handling regulatory investigations. For example:

• external law firms are often engaged to carry out internal investigations and report back to an internal committee with the expectation that such reports will be covered by legal advice privilege; and
• negotiations with regulators aimed at settling regulatory investigations are usually headed “without prejudice” in the expectation that without prejudice privilege will apply.

Accordingly, firms have historically expected that such material will be privileged against inspection by a claimant in future civil litigation relating to the same subject matter of the regulatory investigation. The latest interim decision in the context of LIBOR-related litigation shows that this will not always be the case.

Background

The background to the case was the LIBOR scandal. On 6 February 2013, the FSA (as it then was) issued a final notice fining RBS £87.5m (discounted for early settlement). RBS also reached settlements with the US DoJ and CFTC (Commodity Futures Trading Commission). RBS admitted misconduct to the regulators regarding both Japanese Yen and Swiss Franc LIBOR but positively pleaded in its defence, “there have been no regulatory findings of misconduct on the part of RBS in connection with GBP LIBOR”.

Property Alliance Group Limited (PAG) is a property developer that entered into four interest rate swaps with RBS between 2004 and 2008. Each swap employed three-month GBP LIBOR as a reference rate.

Adopting a similar approach to earlier cases (for example, Graiseley Properties Ltd v Barclays Bank), PAG alleged that RBS had made misrepresentations about LIBOR which induced PAG to enter into the swaps. Essentially, PAG's case is that by proposing LIBOR as a reference rate in the swaps, RBS represented that it was not rigging the rates for its own end. PAG pleaded its case on a wide basis such that RBS’s disclosure obligations covered all LIBOR currencies and tenors (not just three-month GBP LIBOR or GBP LIBOR generally). However, the estimated number of documents for review ran to about 25m. The parties and the court were therefore concerned with exploring more efficient and proportionate ways to give disclosure. As the first step, it was agreed that RBS would disclose internal “high level documents” containing internal reports, reviews and summaries relating to the allegations of LIBOR misconduct. This would allow the parties and the court to direct a more focused disclosure exercise. RBS undertook a search and provided a disclosure list of “high level documents”. However, no disclosable documents contained a summary of internal findings regarding the nature and extent of any manipulation of LIBOR – which had been the intended purpose of the exercise. RBS objected to inspection of any “high level documents” containing such summaries on the basis that they were privileged (being covered by legal advice privilege, litigation privilege, or without prejudice privilege). PAG sought to challenge RBS’s assertions that privilege applied.

(a) Legal advice privilege

The first category of documents that the court considered were documents from the records of a special RBS committee known as the Executive Steering Group (ESG), said to be covered by legal advice privilege. These included:

• advice notes on regulatory investigations;
• memoranda and summaries advising on periodic progress of the reviews and findings into RBS’s setting of LIBOR;
• memoranda advising on the production of documents and information to certain regulators;
• documents advising in relation to meetings with certain regulators; and
• memoranda and advice notes prepared on:

RBS had set up the ESG in 2011 and it was at the centre of RBS’s investigations regarding LIBOR misconduct and worked closely with RBS's external advisors (Clifford Chance).

There was no dispute between the parties as to the scope of legal advice privilege. It would cover confidential communications between a lawyer and client for the purposes of giving or receiving legal advice.

Ordinarily, it would be rare for the court to second-guess evidence submitted on behalf of RBS that the documents in question were privileged. However, the court found that RBS’s evidence in this regard was not as specific or consistent as it might have been and this opened the door for the court to go behind RBS’s conclusions on the status of the documents.

The court had doubts as to whether the following sub-categories in the RBS list were likely to be privileged: “(ii) memoranda and summaries advising on periodic progress of the reviews and findings into RBS’s setting of LIBOR” and “(v) memoranda and advice notes prepared on (a) the outcome of investigations and findings”.

The court confirmed that a key issue was to establish the precise role undertaken by the ESG:

• If the ESG’s role was solely to receive legal advice, the ESG documents would in all probability be privileged.
• However, if part of the ESG’s role included overseeing investigations and reporting to the wider bank, it was more likely that the documents would contain legal advice (which would be privileged) and factual summaries (which were potentially disclosable).

Taking everything in the round, the court was not satisfied with RBS’s explanations and therefore the court ordered disclosure of the ESG documents for the court to take its own view on the contents. The likely outcomes being in relation to each such document:

• the court decides all of the document in question is subject to legal advice privilege;
• the court decides none of the document is subject to legal advice privilege and it should therefore be disclosed in full; or
• the court decides part of the document contains factual summaries (which should be disclosed) and part of the document contains legal advice (which is privileged and should be redacted).

(b) Litigation privilege

In relation to another category of documents, RBS claimed to be entitled to withhold inspection of the documents on the grounds of litigation privilege as they were brought into existence for the dominant purpose of actual or contemplated litigation. The litigation in question was:

• civil proceedings brought by the US CFTC;
• criminal proceedings brought by the US DoJ;
• civil and/or criminal proceedings brought by the Attorney General of various US states; and
• civil proceedings brought by third parties (such as RBS customers) in England and the US.

PAG argued that litigation privilege did not apply as at the time the documents were created there was no actual or contemplated litigation. At most, the regulatory bodies were in the process of conducting an inquiry to get to the bottom of the facts and so there were no “adversarial” proceedings entitling a claim to litigation privilege.

However, in addition to claiming litigation privilege over these documents, RBS also claimed legal advice privilege and PAG were not expressly contesting that legal advice privilege applied. PAG did question whether a party could properly claim litigation privilege and legal advice privilege at the same time, although the judge decided that it was not unreasonable for RBS to assert that the two sets of privilege overlapped. Accordingly, any challenge to the litigation privilege was a moot point in circumstances where legal advice privilege would apply in any event. Therefore, unfortunately, the court did not offer any further guidance as to when the regulatory investigations would be considered “adversarial” and therefore potentially trigger litigation privilege.

(c) "Without prejudice” communications

RBS claimed the right to withhold communications marked “without prejudice” passing between RBS and the FSA between December 2012 and January 2013 relating to negotiations regarding the terms of the FSA's final notice.

PAG argued that “without prejudice” privilege should not apply as that was only concerned with settling civil litigation and here the communications arose in the context of regulatory investigations resulting in an administrative finding of misconduct and the imposition of a penalty. Whilst the FCA did not formally intervene in the proceedings, it confirmed that it supported RBS’s position that the correspondence around the terms of the final notice was privileged.

The judge noted that neither the FCA’s DEPP (Decision Procedure and Penalties Manual) nor the Enforcement Guide mentioned the words “without prejudice” expressly. However, paragraph 5.9 of the Enforcement Guide confirmed that “the FCA would expect to hold any settlement discussions on the basis that neither FCA staff nor the person concerned would seek to rely against the other on any admissions or statements made if the matter is considered subsequently by the RDC or the Tribunal”.

Therefore, although the Enforcement Guide does not use the words "without prejudice" in the context of settlement discussions, the FCA does mark communications that way and accepts communications marked that way from a firm.

The FCA confirmed its ability to conduct settlement negotiations on a “without prejudice” basis was “vitally important” to the success of the negotiations. In particular, there were public policy reasons for encouraging parties to engage in settlement discussions and the early settlement of cases helped the FCA achieve its statutory objectives.

The court decided that a firm that was the subject of an FCA investigation has the right to withhold inspection of communications which were part of genuine settlement discussions between the firm and the FCA. That right applies before the FCA, the Upper Tribunal and in civil litigation with third parties. The fact that a final notice is issued does not mean that the right is lost. The right arises by analogy with the “without prejudice” rule in civil litigation. However, it is not identical to the without prejudice rule, for example, the right does not prevent the FCA from acting on information received in those exchanges to follow up on new issues that come to light.

Therefore, in principle, the communications between RBS and the FSA headed “without prejudice” were privileged from the inspection.

However, in the present case, RBS positively pleaded in its defence “there have been no regulatory findings of misconduct on the part of RBS in connection with GBP LIBOR”. As a result, RBS itself put in issue the basis on which the regulatory findings were made. The judge noted: "if the communications on which the final notice was based were false, then to allow RBS to rely on what is absent from the final notice but at the same time to withhold inspection of those communications would compound the falsehood. That will not do."

Accordingly, as RBS put in issue before the court the basis on which the final notice was produced, justice demanded the "without prejudice" communications which led to the final notice being disclosed. Inspection of these documents was ordered subject to a four-week grace period for the FCA to intervene.

(d) Waiver of privilege due to disclosure to regulators

In relation to six specific documents, PAG argued that any legal advice/litigation privilege that applied had been waived on the basis that such documents had either been shown to or handed over to regulators. RBS disputed any waiver of privilege on the basis that the disclosures to regulators had taken place on a confidential non-waiver basis with express non-waiver agreements in place for all but one regulator. PAG noted the non-waiver agreements but argued that as each agreement gave the relevant regulator the right to share documents with other third parties (for example, other governmental or regulatory agencies) and/or to make that material public, RBS had relinquished control over the documents and thereby waived privilege.

Having considered the (limited) English case law in this area and authorities from Ireland and Hong Kong, the court decided that RBS was entitled to maintain the claim to privilege where documents were only shown to or provided to regulators on a limited basis and despite the existence of legal rights or duties on the part of the regulators to use, act on or even publish the documents pursuant to their regulatory powers. If the regulators in fact went on to publish information from the documents, this could lead to confidentiality and privilege being lost but until they did so the disclosure on a limited waiver basis meant privilege generally was preserved.

However, as RBS had put in issue the scope of the final notice, any privilege applying to these six documents had been waived, and therefore disclosure of the six documents was ordered (subject to a four-week grace period).

Commentary

This is an interesting and important decision and it remains to be seen whether RBS appeals and/or whether the FCA intervenes.

It is important to bear in mind the context of the judgment. The parties and the court were engaged in trying to find a way to approach disclosure in a reasonable and proportionate way. PAG had pleaded its case on a wide basis (which it was entitled to do) but according to RBS this gave rise to a potential search of 25m documents which was clearly undesirable. Undertaking such a large-scale review was particularly undesirable in circumstances where RBS had already conducted its own internal reviews of LIBOR-related documents and would have packaged its key findings in summary reports and related documents. These summary reports must exist given the extensive engagement with regulators and the parties and the court had agreed to use the summary findings as a starting point for agreeing on a more streamlined disclosure review.

The effect of RBS asserting privilege over all documents containing the summary information was to take the parties and court back to square one in terms of considering a narrower disclosure review.

Of course that, of itself, is no good reason to order disclosure of privileged information. However, it does go some way to explain why the court may have been looking particularly hard for grounds on which to order disclosure of at least some of the documents in question.

Whilst the orders were made by reference to the facts and circumstances of the specific case, the general principles arising from the judgment potentially extend much further. The key lessons to be learned from the judgment are as follows:

1. Asserting a blanket claim to legal advice privilege over all parts of documents created in the context of internal investigations remains a minefield. Very careful thought needs to be given at the outset as to who is “the client” and to what extent “the client” committee is solely instructing or receiving legal advice or performing a wider role (for example, overseeing fact finding investigations and reporting back more widely to the organisation generally). Any factual summaries (as opposed to legal advice) in reports and memoranda prepared by external counsel could be vulnerable to an order for disclosure. There is no suggestion in this decision that the court would order disclosure of privileged legal advice outside of a waiver situation (discussed below). However, the court was keen to explore for itself whether the broad assertion of legal advice privilege was appropriate and whether there were documents or parts of documents containing factual summaries that might properly be disclosed.
2. Any party defending an application for disclosure on the basis of privilege must file an affidavit that is as specific as possible as to the grounds for claiming privilege without making disclosure of the very matters that the claim for privilege was designed to protect (West London Pipeline v Total [2008]). In the present case, RBS suffered as its evidence was not as specific or consistent as it might have been.
3. It was not necessary for the court to decide when litigation privilege might be claimed in the context of an FCA investigation, i.e. when those proceedings become “adversarial”. There are likely to be good arguments in favour of an FCA investigation being considered “adversarial” from the start. However, the law in this area remains somewhat grey and firms and advisors need to think carefully about whether they will be trying to assert legal advice privilege and/or litigation privilege and structure teams and reporting lines accordingly.
4. Communications between a firm and the FCA aimed at negotiating a final notice will, in principle, be capable of being privileged (on the basis that any such negotiations are equivalent to “without prejudice” negotiations in civil litigation). However, that privilege will be waived if the firm then expressly puts in issue the scope of findings in the final notice in a future civil claim. It remains to be seen if creative claimants can create a “hook” for requesting disclosure of without prejudice material themselves by putting in issue the scope of the final notice in their own pleadings.
5. Showing or disclosing privileged documents to regulators on an express “non-waiver” basis will, in principle, usually mean that there has been no wider waiver to the outside world in general. However, providing such information or documents to regulators even on a non-waiver basis means that control over such information and documents is lost and if the regulators thereafter make wider disclosure of privileged material then it is quite possible that privilege will have been waived at that stage.