In a decision earlier this week, the High Court held that a defendant bank had waived both legal professional privilege and without prejudice protection in communications with regulators, because of the bank’s reliance on the subsequent regulatory decisions: Property Alliance Group Limited v The Royal Bank of Scotland PLC [2015] EWHC 1557 (Ch).

The decision helpfully confirms a number of points regarding the application of privilege to communications with regulators, on which there does not appear to be previous English authority. In particular:

  • It confirms that privileged material may be disclosed to a regulator, on terms that confidentiality and privilege are maintained, without losing privilege more widely.
  • In other words, the English law principle of limited waiver can apply where privileged documents are provided to a regulator, despite the existence of “carve-outs” allowing the regulator to share the material with other third parties or to make it public. It confirms that, in principle, a right analogous to without prejudice protection applies to communications that are part of genuine settlement discussions with the Financial Conduct Authority (FCA), and therefore presumably also to similar communications with other regulators.

The decision is however less helpful on the question of waiver as a result of the bank’s reliance on the regulatory decisions. In essence, the court held that the bank could not rely on a lack of criticism in those decisions, while at the same time seeking to maintain privilege in what it had put to the regulators. This applied equally to negotiations with the regulators which would otherwise be protected by the without prejudice rule (or something akin to it) and privileged documents provided to the regulators which would otherwise remain privileged due to application of the principle of limited waiver.

In relation to without prejudice, it has long been recognised that the protection of the rule is not absolute and that it may be lost in certain circumstances, for example where a party puts in issue the reasonableness of a settlement it has reached with a third party (as established in Muller v Linsley & Mortimer [1994] EWCA Civ 39). Legal professional privilege, however, is an absolute right and cannot normally be overridden regardless of what matters are put in issue in the case. This aspect of the decision may therefore be seen as surprising.

Background

The underlying claim alleges that by proposing LIBOR as a reference rate in the swaps the defendant bank sold to the claimant, the bank represented that it was not manipulating the rate.

In its defence the bank denies that it manipulated GBP LIBOR, which is the relevant currency for the swaps, and refers to the fact that there have been no regulatory findings of misconduct in relation to GBP LIBOR (only in relation to other currencies).

The court had to consider the scope of disclosure to be undertaken by the bank, given that a full scale standard disclosure exercise would involve a need to review about 25 million documents in the bank’s possession. As an initial step, the bank was to disclose “high level documents” comprising internal reports, reviews and summaries relating to the allegations of LIBOR misconduct. The parties and the court could then direct a more focussed disclosure exercise in light of the information revealed in them.

The bank conducted the necessary review and served a disclosure list. However, it objected to inspection of various categories of documents on grounds of legal professional or without prejudice privilege. The claimant challenged the claims to privilege.

Decision

Without prejudice

The bank claimed without prejudice protection in its communications with the Financial Services Authority (FSA, the predecessor to the FCA) comprising negotiations prior to the FSA issuing its Final Notice which imposed a penalty on the bank in connection with LIBOR manipulation.

This claim was rejected. Although the court (Birss J) accepted that, in principle, a right analogous to without prejudice protection applied to the communications, it held that in this case the protection had been waived because the bank’s defence positively relied on the lack of any regulatory finding of misconduct in relation to GBP LIBOR. In summary, the court concluded:

  • The subject of an FCA investigation has the right to withhold inspection of communications that are part of genuine settlement discussions with the FCA.
  • The fact that a Final Notice has been issued does not mean the right is lost.
  • The right arises by analogy with the without prejudice rule, but it is not identical to the normal rule in civil ligation.
  • The right does not prevent the FCA from acting on information received in those discussions, for example by following up new issues which come to light.
  • The right cannot be maintained in civil proceedings if the basis on which a Final Notice was decided is itself put in issue in the proceedings. In such a case, justice demands that the communications which led to the Final Notice be disclosed and admitted in evidence.

The court therefore ordered inspection, but subject to a four week grace period at the FCA’s request.

Limited waiver

The documents over which the bank asserted legal professional privilege included six documents which had been either shown to regulators or handed over to regulators.

The court accepted that the disclosure to regulators did not, in itself, result in a waiver of privilege because the documents had been disclosed on the basis that confidentiality and privilege would be preserved against third parties, and that they were being provided for the limited purpose of the ongoing investigations.

The court rejected the claimant’s argument that the limited waiver principle could not apply because the agreements with the regulators contained “carve-outs” allowing them to share the material with other third parties (such as other governmental or regulatory agencies) or to make it public or to disclose it further. Applying existing English law and supported by decisions in Ireland and Hong Kong, the court concluded that the limited waiver principle applied despite the existence of the carve-outs.

However, the court held that privilege had been waived as a result of the bank’s reliance on the regulatory decisions. The judge said that the same logic which applied in relation to the without prejudice rule applied here too. The bank could not have it both ways; it could not “on the one hand rely on absences from the regulators’ findings as indicating the limits of its misconduct and yet on the other hand seek to maintain as privileged what it put to them”.

The court therefore ordered inspection, subject to a four week grace period.

Legal advice privilege

The bank asserted privilege in various categories of documents prepared by its legal advisors relating to meetings of the bank’s Executive Steering Group (ESG), which was a special committee formed by the bank and which was at the centre of the bank’s investigations into the extent of its own LIBOR misconduct. The claimant challenged the claims for privilege.

The court was not satisfied that the claim to privilege was correctly made. The bank had not provided sufficient information to allow the court to understand the basis for it; for example, the precise nature of the ESG and the role undertaken by it was not sufficiently clear.

The judge noted, for example, that the categories for which privilege was claimed included memoranda prepared by the bank’s legal advisors on the progress and outcome of reviews, investigations and findings. The judge said that if part of the ESG’s role included the task of overseeing investigations and reporting to the bank then he could not see how such documents would be privileged. Any legal advice contained in the documents would no doubt be privileged but, he said, “it does not follow from this that any factual summary in the document is privileged”.

Although the court described it as a “solution of last resort”, the court said the practical approach was to order the bank to produce the documents to the court for inspection.