Client Alert

Legal Privilege in Regulatory Audit Investigations

A long-running High Court battle over legal privilege in regulatory audit investigations has ended in success for the Financial Reporting Council and provides further clarity on the application of Litigation Privilege to advice from accountants.

09 Oct 2020

The relationship between a business and its auditor often requires privileged material to be passed to the auditor to enable it to properly understand the financial risks to the business of existing and potential litigation. There is nothing new in that. However, the increased activity of the audit regulator, the Financial Reporting Council (“the FRC”), and new powers given to the FRC in 2016 has led to the High Court giving guidance on the procedure to be adopted when there is a dispute over a claim of privilege by the audit client in an audit investigation by the FRC.


The case of The Financial Reporting Council Ltd v Frasers Group plc (formerly Sports Direct International plc) [2020] EWHC 2607 (Ch) stems from an ongoing investigation by the FRC into the conduct of Grant Thornton in relation to the financial statements of Sports Direct International plc (“SDI”) (now called Frasers Group plc), which was founded and is majority‑owned by Mike Ashley. As part of its audit, SDI provided certain legally privileged documents to Grant Thornton on a limited waiver basis.

SDI’s subsidiary, Retail Ltd (“SDR”), engaged Barlin Delivery Ltd (“Barlin”), a company owned and run by Mike Ashley’s brother John Ashley, to provide delivery services to SDR’s customers. SDR engaged Barlin on the advice of its tax advisers (“Deloitte”) as part of a structure to ensure that SDR paid Value Added Tax (“VAT”) on its sales to EU customers in the UK rather than in the country of each relevant EU customer. The FRC’s investigation centred on the issue of related party transactions in the financial statements of SDI, and it sought disclosure of Deloitte’s VAT tax advice, which was relevant to this issue.

The FRC exercised its power under Schedule 2 of the Statutory Auditors and Third Country Auditors Regulations 2016 (“SATCAR”) and rule 10(b) of its Audit Enforcement Procedure (“AEP”) to issue notices to SDI requiring the disclosure of certain documents that would provide information as to the auditor’s understanding of the tax advice SDI received. In response to this request, SDI provided around 2,000 documents to the FRC but withheld 40 documents on the grounds that they were protected by legal professional privilege. These comprised emails and attachments to emails sent to or by SDI’s legal advisers, both internal and external, as well as three documents containing advice provided by Deloitte in connection with the tax structure referred to above (the “Deloitte Advice”).

The Previous Rulings

The FRC used powers under its AEP to seek a ruling from the High Court[1] on the assertion of legal professional privilege. The High Court ordered SDI to produce the 40 additional documents to the FRC on the basis that doing so solely for the special purpose of a confidential investigation by the regulator into the conduct of a regulated person would not be an infringement of any legal professional privilege. The court also ruled that attachments to legally privileged emails would not attract privilege.

SDI successfully appealed that decision in the Court of Appeal[2], which held that the FRC’s right as a regulator to seek disclosure under Schedule 2 of SATCAR could not override an assertion of legal professional privilege. The Court also considered the issue of attachments to emails and whether privilege attached to those documents. It held that “If the email is itself privileged, that does not confer privilege on the pre-existing document because . . . privilege does not protect either the document itself or the fact that it was sent to a legal adviser under cover of a privilege communication.”[3]

The High Court’s Ruling on Litigation Privilege

SDI also asserted that the Deloitte Advice was covered by Litigation Privilege (following the Prudential[4] case, tax advice given by accountants is not protected by legal advice privilege). Following the Court of Appeal’s decision, this issue was referred back to the High Court for determination. The Court had to consider whether the Deloitte Advice was produced for the sole or dominant purpose of litigation then in contemplation.

Nugee LJ reiterated the applicable legal principles for litigation privilege, as previously set out in the leading case of Three Rivers (No. 6)[5]:

  • Litigation must be in progress or in contemplation;
  • The communications must have been made for the sole or dominant purpose of conducting that litigation; and
  • The litigation must be adversarial, not investigative or inquisitorial.

Having received written evidence from the parties, Nugee LJ concluded that while SDR may have bona fide expected there to be litigation over its distance selling arrangements, either in France or in one or more other EU Member States, that did not establish that the Deloitte Advice was prepared for use in that litigation. He made it clear that even if tax advice was given that may, at some future time, be used to justify the structure in the event of a challenge by the tax authorities, that did not alter the fact that it was put in place at that time because the relevant entity wanted the structure. This, he said, was not a litigation purpose:

I think that that falls outside the requirements for litigation privilege which, as it was put by the Court of Appeal in West Ham [i.e. WH Holding Ltd v E20 Stadium LLP][6], is where one seeks information or advice to inform you as to your prospects in litigation, or evidence for use in litigation. They were not taking advice from Deloitte to inform them as to their prospects in litigation, or to be deployed as evidence in litigation; they were taking advice as to how to arrange their affairs to avoid the prospects of unsuccessful litigation. That seems to me to be a quite different thing.”[7]

In a separate recent case, the High Court considered similar issues relating to claims of legal privilege in an FRC investigation under the AEP. Trower J, giving judgment in A v B [2020] EWHC 1491 (Ch), stated “If B [the auditor] . . . decides that it will withhold the document on the grounds of A’s [the audit client] legal professional privilege, it is always open to the FRC to challenge that decision, which it will presumably do by an application to court under paragraph 2 of Schedule 2 to SATCAR.”[8] This clarified the procedure to follow when there is a dispute as to whether certain documents are privileged – it is now clear that it will ultimately be for the court to determine such matters of legal professional privilege in the event of a dispute.

This procedure will apply regardless of which party to an FRC AEP investigation wishes to raise the point – be it the audit client with a claim of privilege, the auditor with obligations under SATCAR to provide the material to the FRC, or, ultimately, the FRC itself.


These authorities have rehearsed again the features needed for a successful claim of litigation privilege. The point taken successfully by the FRC at first instance in the SDI authorities and overturned on appeal may be of limited interest and importance in the practical sense, but the guidance on how to deal with disagreement over a claim of privilege in an FRC audit investigation will be very important and may lead to earlier settlement of these disputes, avoiding the need for rulings in the High Court. The SDI case was the first investigation under the AEP and it has now taken three years to resolve the privilege dispute.

The courts’ decisions may also lead to corporate entities entering into more explicit limited waiver agreements with their auditors over important legally privileged material that they would not want to end up being used as evidence before a public FRC Tribunal.

It is important to note that the FRC has powers to require a corporate entity – as audit client – to provide any material relevant to its investigation. If the FRC does undertake an AEP investigation, it may be that a pragmatic course can be agreed whereby a corporate entity enters into a limited waiver agreement with the FRC to provide legally privileged material to the FRC for the purposes of its investigation but not in a public hearing except, perhaps, with appropriate redaction. Entering into such a limited waiver agreement may be a faster and more cost-effective solution than waiting for a judicial determination as to the applicability of legal professional privilege.

[1] Financial Reporting Council Ltd v Sports Direct International plc [2018] EWHC 2284 (Ch).

[2] The Financial Reporting Council v Sports Direct International plc [2020] EWCA Civ 177.

[3] The Financial Reporting Council v Sports Direct International plc [2020] EWCA Civ 177 – see Rose LJ at para. 61.

[4] R (on the application of Prudential plc and another) v Special Commissioner of Income Tax and another [2013] 2 AC 185.

[5] Three Rivers DC v Bank of England (No. 6) [2004] UKHL 48.

[6] WH Holding Ltd v E20 Stadium LLP [2018] EWCA Civ 2652.

[7] The Financial Reporting Council Ltd v Frasers Group plc (formerly Sports Direct International plc) [2020] EWHC 2607 (Ch) – see Nugee LJ at para. 37.

[8] A v B [2020] EWHC 1491 (Ch) – see Trower J at para. 73.



Unsolicited e-mails and information sent to Morrison & Foerster will not be considered confidential, may be disclosed to others pursuant to our Privacy Policy, may not receive a response, and do not create an attorney-client relationship with Morrison & Foerster. If you are not already a client of Morrison & Foerster, do not include any confidential information in this message. Also, please note that our attorneys do not seek to practice law in any jurisdiction in which they are not properly authorized to do so.