The FSA has recently consulted on changes to its Enforcement Guide aimed at clarifying its approach to internal investigation reports that firms commission in anticipation of possible FSA enforcement action.1
Gaining an understanding of a fi rm’s control environment can be far from straightforward. In the same way as the FSA might, fi rms may need to consider documents and interview staff in order to understand how the fi rm organises itself. The internal investigation tends to focus on actual ‘on the ground’ practices as well as on what the fi rm’s internal procedures designate should be happening. Internal investigations (the term is used to contrast investigations conducted by the FSA) involve particular skills and careful judgement. Often the work of conducting the internal investigation is outsourced, either in whole or in part, to external advisors such as lawyers or accountants. The issues covered by the consultation paper are far from straightforward: what use can and should the FSA make of such reports; what happens when fi rms claim legal professional privilege (LPP); how can the internal investigation interfere with a subsequent FSA investigation.
Generally the consultation paper is positive about fi rm commissioned reports. The FSA proposes to say in its Enforcement Guide: “Such reports can be very helpful for the FSA in circumstances where enforcement action is anticipated or underway.” This is a pragmatic approach. The FSA’s Enforcement Division does not have the resources to investigate all matters that other areas of the FSA, such as Supervision and Market Conduct, might wish to refer to Enforcement. Making use of the factual fi ndings in internal reports, and perhaps even noting and being guided by the opinions set out in them, will allow the FSA to spread its enforcement resources further. However, there is a potential confl ict here. The fi rm’s lawyers and accountants will tend to gloss their report in a manner that is sympathetic to the fi rm’s position. The FSA will be alive to this and inevitably the reliance the FSA places will depend on how open the fi rm is being about the aims of its investigation and the methodology to be employed. It will often be sensible to discuss these matters with the FSA at the outset.
Under FSMA 2000 communications which are properly characterised as legal professional privilege can be withheld from the FSA. LPP attaches to communications between lawyers and their client which are concerned with giving and receiving legal advice and litigation privilege attaches to communications between any two persons (ie a lawyer need not be involved) provided litigation is in prospect and the dominant purpose of the communication is its use in litigation. This rule explains why lawyers are often preferred for internal investigations: for an accountant’s work to benefi t from privilege litigation must be in prospect and use in that litigation must be the dominant objective of the work. This can cause diffi culties where the firm’s aim is to settle with the FSA or where the report is mainly concerned with remediation rather than the nature of and responsibility for historic actions. The FSA accepts that LPP might be asserted over reports in which case (obviously) the FSA cannot make use of them because they will not be aware of their content. However, if reports are disclosed the FSA will also expect disclosure of underlying material such as notes of interviews.
The consultation paper sounds a note of caution though where the FSA is conducting criminal investigations. An investigation in these circumstances might alert suspects or prejudice on-going monitoring operations. This is a diffi cult area. In market abuse cases the FSA’s investigation will begin on a dual criminal/civil basis. How is the fi rm to know whether monitoring (which may be covert) is being conducted by the FSA? While the FSA may be prepared to discuss this with the fi rm it will not want to do so in cases where (as the consultation paper envisages) senior individuals may be abusing positions of trust within financial institutions.
Particular care is needed when agreeing the scope and nature of an internal investigation with the FSA. Out of a desire to appear co-operative the fi rm might agree that the report will be disclosed to the FSA and that no privilege will be asserted. Assume that the investigation reveals real concerns. It may be diffi cult at that later stage to assert privilege. The FSA may contend that the report, as against them, lacks confi dential status and so cannot be privileged, although the report might be privileged as against others. Even if the report tended to incriminate, the FSA might still be able to compel its production on the basis that the privilege does not extend to pre-existing documents. This serves to highlight an important point. Internal investigations may reveal unexpected and very unwelcome facts and circumstances.
The airing of these issues is to be welcomed but the paper highlights the need for great care when contemplating any type of investigative work when an FSA investigation is either proceeding or is contemplated.