In the latest instalment of the LIBOR swaps proceedings in Property Alliance Group Ltd v The Royal Bank of Scotland plc, the court has held for the first time that 'without prejudice' communications with a regulator can be withheld in civil proceedings. However, in this case, the bank lost the right to do so, by putting the terms of the negotiated regulatory settlement in issue. The court also confirmed that privileged documents could be disclosed to regulators on a limited waiver basis without thereby losing privilege as against third parties.
This case report first appeared on Practical Law and is reproduced with the permission of the publishers.
Since the wave of regulatory decisions regarding the manipulation of the London Interbank Offer Rate (LIBOR) and other benchmark rates, a number of civil claims have been made against the banks involved. In this case, Property Alliance Group Ltd (PAG) entered into four interest rate swaps between 2004 and 2008 with The Royal Bank of Scotland plc (RBS), referenced to 3 month British sterling LIBOR. PAG alleges that, by proposing LIBOR as a reference rate, RBS represented that it was not rigging the rates for its own ends.
In an earlier interlocutory judgment, the court had held that there should be standard disclosure in relation to sterling LIBOR, but that RBS should disclose "high level" internal reports, reviews and summaries in relation to the allegations of LIBOR misconduct. These were intended to guide a more focused disclosure exercise in relation to LIBOR for currencies other than sterling.
Claims to privilege
In the event, none of the documents produced by RBS as a result contained a summary of the nature and extent of any manipulation of LIBOR. Any documents which might have contained such a summary were withheld from inspection on various heads of privilege. In particular, RBS argued that:
- its communications with the Financial Services Authority (now the Financial Conduct Authority) (FSA/FCA) for the purposes of a regulatory settlement in relation to LIBOR misconduct attracted without prejudice privilege. The outcome had been a discounted penalty of £87.5m and a Final Notice against RBS setting out findings of misconduct in relation to Swiss franc and Japanese yen (but not British sterling) LIBOR;
- privilege documents which had been provided or shown to various US regulators and authorities and the Japanese regulator for a limited purpose on the basis of an express non-waiver agreements (or an equivalent basis) remained privileged against PAG; and
- documents associated with an internal RBS commitee called the Executive Steering Group (ESG), and prepared by RBS' solicitors, Clifford Chance, attracted legal advice privilege. Although there was some ambiguity as to the ESG's role and relationship to other parts of RBS' management structure, it seems clear that the ESG had been created to be the client to whom legal advice would be given in relation to the LIBOR investigations (no doubt mindful of the restricted definition of 'client' by the Court of Appeal in Three Rivers No 5).
PAG challenged each of these claims.
Did without prejudice privilege apply to communications with the FSA?
PAG argued that without prejudice privilege related to the settlement of civil litigation and could not apply, as a matter of principle, to communications arising in the context of a regulatory investigation.
The court disagreed. While FCA investigations and administrative penalties were not the same as civil claims, they can lead to civil proceedings in the Upper Tribunal. Further, there is a public benefit to the settlement of an FCA investigation: time and costs were saved for both the public regulator and the private firm, affected customers might receive compensation more quickly and messages might be given to the wider market more quickly. On this basis, the court held that the public policy rationale for the without prejudice rule also extended to the settlement of FCA investigations.
The without prejudice rule may also be seen as an implied contract between the negotiating parties. In the case of the FCA, the basis of that agreement is set out in its Enforcement Guide (paragraph 5.9). It provides that any admissions or statements made in the course of negotiations will not be relied upon before the Regulatory Decisions Committee or the Tribunal. In support of this, the FCA and firms mark settlement communications 'without prejudice' by way of shorthand. The court accepted that there were some differences with the without prejudice rule in civil proceedings; for example, the FCA reserves the right to follow up on any new issues of regulatory concern by other means. However, the court did not think they were sufficient to prevent a similar principle applying. Accordingly, as a matter of principle, RBS was entitled to withhold its communications with the FSA in relation to negotiating the settlement and Final Notice.
However, in its Defence, RBS had made a point of saying that there had been no regulatory finding of misconduct in relation to sterling LIBOR. RBS argued that this was a mere reference to a statement of fact. The court was not persuaded. It took RBS' Defence to advance a positive statement that there had been no misconduct, which otherwise would have appeared in the Final Notice. As a result, the court held that RBS had put in issue what was not in the Final Notice, to which the "without prejudice" communications with the FSA. This was akin to waiving privilege. As a result, RBS could not in practice withhold those documents.
Did limited waiver agreements with regulators preserve privilege against third parties?
PAG argued that because the limited waiver agreements did not prevent further disclosure by the regulators, including making the material public, the agreements could not preserve privilege as against PAG. RBS took the view that those carve-outs were to preserve the rights of the regulators to fulfil their statutory duties and did not undermine the express agreement that privilege was not waived as against third parties.
As there was no direct English authority on the point, the court analysed case law from Ireland, Australia and Hong Kong and came to the conclusion that the carve-outs did not prevent privilege as against third parties being preserved, unless and until the material is in fact published by the regulators. Until that point, confidentiality (a pre-requisite for any claim to privilege) and the right to assert privilege against third parties was maintained.
Decision: legal advice privilege
The court accepted that RBS' evidence as to the claim to privilege in documents associated with ESG was conclusive, unless it was reasonably certain from other evidence that the claim was materially incorrect or complete (following West London Pipeline v Total  EWHC 1729). However, on the evidence before it, the court was not satisfied that the claim had been correctly made. It seemed to the court inherently unlikely that some documents over which privilege was claimed, such as memoranda prepared by RBS' lawyers on the progress and outcome of reviews and investigations, would not contain at least some non-privileged information, such as factual summaries. That material could be disclosed, even if legal advice in the same document was redacted. Nothing in RBS' evidence was sufficiently specific to explain how privilege could arise in the entirety of these documents.
RBS had had at least two opportunities to substantiate the claim to privilege and the court was not minded to give it another opportunity. The court noted, nevertheless, that RBS' evidence was that each document had been assessed individually to determine the claim to privilege. On that basis, the court refused to order disclosure of the documents to PAG, but decided that the documents should be reviewed by the court to determine whether the claim to privilege in each document had been made out.
This case is a reminder that privilege is always an area fraught with difficulties and judgment calls. On the one hand, the decision is helpful in confirming for the first time that without prejudice privilege effectively applies to communications with a regulator about a settlement of an investigation, even if care must then be exercised in later deploying any facts published by the regulator. This should bring comfort to those negotiating such a settlement that they do not need to be on their guard for what potential third parties in subsequent civil proceedings will make of the communications.
It is a pity, however, that the court did not decide at what point an FCA investigation becomes 'adversarial' and so litigation (as opposed to legal advice) privilege applies. The implication of the judgment on without prejudice privilege is that an FCA investigation may be considered 'adversarial' from the start, and so litigation privilege can be invoked as soon as the FCA's fact-finding begins. However, the court declined to make an express finding on this point. Lawyers advising on when the wider concept of litigation privilege may apply should continue to be cautious.
The decision that privileged documents may be disclosed to regulators on a limited waiver basis without losing privilege generally is also helpful. However, arguments may remain on this head. The regulators to whom RBS had disclosed privileged documents were primarily US regulators. The US has historically had a much less favourable approach to the concept of a limited waiver and no US decisions were referred to in this judgment. If a future litigant could show that a litigant in similar proceedings in the US would be able to obtain the documents, the English court might be less sympathetic to upholding the limited waiver.
Finally, the court's decision to review the documents associated with the ESG to determine whether, and to what extent, legal advice privilege applied provides a warning against making too broad and general a claim to privilege. The ESG was clearly set up with a view to maximising the chances of claiming privilege over its communications and it may be that the court will review the documents and conclude that they are all privileged. However, the court was clearly doubtful that the ESG could operate almost entirely on the basis of privileged documents. Those conducting investigations should continue to be wary of the extent to which communications can be privileged and those conducting litigation should be as specific as possible in asserting the basis on which privilege can be claimed.