A recent High Court decision illustrates the vexed question of the application of legal professional privilege in the context on internal investigations. In this case, attention was focused on whether an internal investigation report could attract litigation privilege. In a post ENRC world, it is clear that the question of whether litigation was in 'reasonable contemplation' at the time a document was created is likely to turn on nuanced questions of perceptions expressed within, and even the general tone of, contemporaneous communications.
The decision demonstrates the importance of all the criteria that must be satisfied for litigation privilege to apply. Much of the focus in recent case law has been on the question of when adversarial legal proceedings can be said to have been in "reasonable contemplation", yet it is equally important to demonstrate that defending or bringing legal proceedings was the 'dominant purpose' for the creation of the document in question.
The leak of a sensitive presentation, followed by the regulatory and civil fallout
A presentation was leaked which purported to be authored by a former employee of Banque Havilland (the "Bank") and to refer to certain strategies to damage the economy of State of Qatar ("Qatar"). Following this leak, the Bank commissioned an internal investigation, and an accounting firm was engaged to conduct a forensic investigation and produce a report. The Bank notified its lead regulator - the Commission de Surveillance du Secteur Financier ("CSSF") - and the Financial Conduct Authority ("FCA") of the investigation. The Bank disclosed the investigation report to the CSSF, which forwarded it to the FCA under mutual assistance provisions.
In Qatar's subsequent civil proceedings against the Bank, Qatar sought production and inspection of the report, drafts of the report and documents prepared in connection with it.
The Court decided on points related to the Disclosure Pilot which we won't deal with here. What's most relevant in a financial services regulatory context is the way the Court decided (a) whether litigation privilege applied (the Court said no); and (b) whether any privilege had been waived by giving the report to the CSSF (the Court said no - assuming, against the Court's decision, that the report had been privileged in the first place).
Adversarial proceedings weren't in reasonable contemplation
In assessing litigation privilege, the Court focused on the Bank’s interactions with the CSSF; the FCA was only peripherally involved.
Litigation privilege requires "litigation" (defined broadly enough to include formal adversarial regulatory proceedings, but not an investigative or inquisitorial procedure) to be in progress or at least in reasonable contemplation at the time the document was created.
The Court did note that an investigative process may become adversarial over time. Something "more concrete" is required than a mere possibility of future adversarial proceedings if this reasonable contemplation test is to be satisfied, although the prospect of litigation did not need to be more than 50%.
In this case the Court found that the CSSF's enquiries had not progressed past an investigative stage and at the time the Bank did not regard adversarial regulatory proceedings as reasonably in contemplation. CSSF's questions were not hostile and their communications did not suggest an adversarial posture; contemporaneous Bank communications referred to the "fairly positive" tone of a discussion with the CSSF, that "adverse developments" were "not expected" and that the CSSF were "reassured about the events" and "convinced that the Bank was not involved".
Similarly the fact that the FCA was keen to see the findings of the forensic investigation fell “far short” of an anticipation of adversarial proceedings.
Lastly, Qatar’s lawyers did not contact the Bank until a month after the accounting firm was first instructed, with no further correspondence until June 2018.
The report wasn't prepared for the dominant purpose of conducting adversarial proceedings
Even assuming the reasonable contemplation of adversarial proceedings at the time the investigation report was commissioned, the Court found that the two most prominent, and dominant, purposes for commissioning the report were to establish the facts (including as to the source of the leak) and assist the Bank to satisfy the CSSF and respond to the CSSF's requests for information.
Here, the Court cited contemporaneous Bank communications about the purpose of the investigation i.e. to ascertain how the presentation came to be circulated outside the bank, prompted also by requests from the CSSF for the Bank to investigate. It noted also that the investigators' terms of engagement and other contemporaneous documents did not provide support for contemplated adversarial proceedings being the sole or dominant purpose of the instruction.
Solid support for the concept of limited waiver
The report was held not to be privileged so the Court did not need to decide the limited waiver point. It said that, had it needed to, it would have required "a good deal of persuading" that there was general rather than just a limited waiver where the report had been shared with the CSSF and FCA. The report was given to the CSSF at its request "subject to professional secrecy restrictions" and the CSSF gave a copy of the report to the FCA under mutual assistance provisions subject to the same restrictions. Whilst this is of comfort to firms, best practice remains to expressly agree and record the terms of any limited waiver basis at the time of production.
The decision does not establish any new principles, but is a reminder of the challenges that firms will face in providing that investigative materials were prepared for the dominant purpose of litigation, where there are other (perhaps more pressing) factors at play – e.g. establishing the facts to enable a board or senior management to assess adherence to regulatory requirements, or to assist the firm in responding to regulatory enquiries.
Whether adversarial regulatory proceedings are reasonably in contemplation will ultimately be a question of fact, dependent on a detailed evaluation of the contemporaneous circumstances. This case and earlier decisions confirm that the mere fact that the FCA, PRA or another regulator has made enquiries or even started an investigation does not necessarily mean that adversarial proceedings are reasonably in contemplation.
- The FCA’s Enforcement approach document and investigation opening criteria confirm that investigations are used to "find out whether serious misconduct has occurred" so that the FCA can decide "whether to take action".
- But it is also correct that most FCA/PRA investigations are commenced because the regulator has identified facts or circumstances suggesting that a regulatory breach may have occurred, and that adversarial regulatory proceedings can reasonably be contemplated before the regulator communicates an intention to issue a disciplinary notice.
- Similarly, and particularly relevant in the context of the FCA's drive to take more formal preventative supervisory measures earlier and more aggressively, it is clear that even some interactions with FCA Supervision can lead to adversarial regulatory proceedings being reasonably contemplated (e.g. if a contested imposition of requirements on a firm’s permissions is reasonably contemplated).
In this case, the decision turned upon the Court's impression of the terms of the investigators' appointment and contemporaneous internal communications. Where firms do genuinely contemplate litigation (including adversarial regulatory proceedings), even at an early stage, it is important to record the reasons for this in contemporaneous notes, correspondence and any terms of engagement when commissioning the investigation. Underplaying risk, regulatory or otherwise, is likely to be counter-productive in this context.
... there is little in the evidence to suggest that the CSSF's position was, or was regarded by the Bank as, hostile ...