Confidentiality and privilege in a regulatory context

Published: 16/6/2015

An interlocutory judgement relating to disclosure and privilege handed down by the High Court last week is the first of its kind in providing some much needed clarity on the confidentiality of negotiations between financial institutions and their regulators.

On Monday 8 June 2015, Birss J held that defendant bank RBS had waived legal advice privilege and without prejudice protection in its communications and negotiations with regulators by relying on those regulatory findings to defend a £30 million LIBOR misconduct claim brought against the bank by property developer Property Alliance Group ('PAG').

The background facts

The claim, which is scheduled to go to trial in May 2016, relates to four interest rate derivatives or swaps entered into between PAG and RBS between 2004 and 2008 in which LIBOR was used as a reference. PAG alleges that RBS had been involved in the manipulation and inter-bank coordination of 3-month GBP LIBOR. RBS, which has formally admitted misconduct in relation to Japanese Yen and Swiss Franc LIBOR, and has reached settlements with a number of regulators and prosecuting authorities including the US Department of Justice and the UK Financial Services Authority ('FSA'), denies any other LIBOR misconduct including in the setting of GBP LIBOR. In defending PAG’s claim, RBS argued that the absence of regulatory findings relating to GBP LIBOR was illustrative of the limits of the bank’s misconduct relating to GBP LIBOR and, more specifically, 3-month GBP LIBOR.     

During a CMC in November 2014, the Court ordered RBS to disclose “high level documents” not limited to 3-month LIBOR or GBP LIBOR generally. Although RBS carried out searches for these documents, it sought to withhold inspection of certain categories of documents on the grounds of without prejudice privilege, as well as litigation and legal advice privilege.

The bank’s claims to privilege and without prejudice protection

The bank objected to inspection of three different categories of documents:

  1. communications and negotiations with regulators: Its communications and negotiations with the FSA (as it was then named) preceding the publication of an FSA Final Notice which found that RBS had undermined the integrity of Swiss Franc and Japanese Yen LIBOR and imposed a penalty of £87.5 million on the bank. The bank argued these communications, which had been marked “without prejudice”, were subject to without prejudice protection and claimed the right to withhold inspection of them.
  2. documents shown or handed over to regulators: Documents that RBS argued were subject to legal advice privilege (and in some cases litigation privilege), notwithstanding the fact they had been shown or provided to regulators in the US and Japan. RBS argued privilege had not been waived because each document was handed over with a “carve out” that it was done so on a confidential “non-waiver” basis.
  3. reviews and findings of the bank’s internal and external legal advisers: Documents relating to work of the bank’s rate-setting investigation steering group (the “ESG documents”) over which the bank asserted legal advice and litigation privilege. These included documents created by the group’s internal and external legal advisers such as summaries on reviews and findings into the defendant’s setting of LIBOR; advice notes on the regulatory investigations; documents advising on the bank’s meetings with regulators; discussions with regulators; and the outcome of regulatory investigations and findings. RBS argued these documents were created “for the purpose of taking and receiving legal advice” and formed “to oversee the investigations and potential litigation concerning LIBOR”.
The ruling

Birss J ordered inspection of all three categories of documents but, in relation to the ESG documents, for inspection by the Court to assess the bank’s entitlement to claim privilege:

  1. communications and negotiations with regulators:  The Court held a right akin to the without prejudice rule in civil litigation can apply to communications between an institution and a regulator where those communications are made as part of genuine settlement discussions. The issuance of a Final Notice by the FSA did not in itself result in the loss of this protection. Birss J was persuaded by arguments that the ability to conduct settlement negotiations on a without prejudice basis is vitally important to the success of FSA settlement discussions and that firms may choose not to enter into negotiations with their regulators where there is a risk that admissions made in those discussions might be disclosed in separate proceedings. Birss J commented that “the public policy on which the without prejudice rule is based is also capable of applying to promote the settlement of FCA investigations.” Notwithstanding this protection, in its Defence RBS had sought to rely on the FSA’s regulatory findings and in doing so had put in issue the basis on which those findings were made and the Final Notice published. Birss J held that “justice demands that the communications which led to the publication of the FSA Final Notice be disclosed.”
  2. documents shown or handed over to regulators:  The Judge ruled that privilege could also be asserted over documents shown to or handed over to regulators. That “carve outs” might recognise a regulator’s right or obligation to share or publish information in a document makes no difference to a claim to privilege; until the information is shared or disclosed by the regulator, confidentiality and privilege will be preserved. However, RBS had waived privilege in those documents by relying on regulatory findings in its Defence. The Judge commented that RBS “cannot on the one hand rely on absences from the regulator’s findings ... and yet on the other hand seek to maintain as privilege what it put to them.”
  3. reviews and findings created by internal and external legal advisers:  Birss J held the defendant bank had not been able to provide sufficient information to satisfy the Court that its claims to legal professional privilege over the ESG documents were correct and ordered inspection by the Court to determine whether RBS was entitled to withhold inspection. Although RBS had claimed that the purpose of the ESG meetings was to receive legal advice from its external legal advisers on the regulatory investigations, the Court needed to adequately understand the basis on which the claims for privilege were being made. Although a document might contain legal advice (and that legal advice might mean that all or part of the document is privileged), it does not follow that any factual summary in the document will also be privileged.

The decision, understood to be the first authority on whether communications with a regulator can be subject to without prejudice privilege, is helpful in confirming that, in principle at least, a financial institution subject to an FCA investigation can withhold inspection of communications provided they are made as part of genuine settlement negotiations. The same principle will presumably also apply to communications with regulators other than the FCA.

The decision will likely be of interest to other claimants pursuing LIBOR manipulation claims, or claims made in the context of regulatory investigations, where there is so frequently an obvious and significant imbalance between the information available to the claimant as compared to the bank or financial institution. It should also serve as a reminder that institutions should take care not to waive their without prejudice protection and privilege over communications and negotiations with their regulators, or documents provided to regulators, by seeking to rely on regulatory findings in separate proceedings.

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