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The regulator and the right of reply: two recent cases involving the Financial Reporting Council

29 October 2018

The Financial Reporting Council (FRC) is the regulator for UK statutory audits. Its responsibilities include setting audit standards, as well as enforcing the quality of audit. It is the investigative and disciplinary body for UK accountants dealing with cases affecting the public interest. FRC investigations naturally focus on those under its jurisdiction, such as its member accountancy firms and individual auditors. Sometimes, however, the conduct of the audited company and its managers will also be relevant. Two recent cases have discussed the duties owed by the FRC to these entities. The cases will be relevant to other regulators.

Paul Lewin – judicial review

In R (Lewin) v The Financial Reporting Council Limited and others [2018] EWHC 446 (Admin), the FRC brought disciplinary proceedings against Deloitte and one of its partners, in relation to Deloitte’s audits of Aero Inventory plc. Paul Lewin was a director of Aero.

Before the FRC tribunal, Deloitte’s defence was that fraud by Aero and its directors excused the failure of the audit to uncover irregularities. The FRC accepted that Mr Lewin had acted dishonestly in certain respects, but did not accept that the nature and extent of the fraud excused Deloitte. Mr Lewin was aware of the FRC proceedings against Deloitte, but did not attend the hearing (which was in public) or make any representations. The FRC found Deloitte and the partner guilty of misconduct, and imposed severe penalties.

The FRC tribunal produced a report setting out its findings. It sent a copy to Mr Lewin “as a matter of courtesy” five days before publication. Mr Lewin issued a claim for judicial review of the FRC’s decision to publish.

The issues considered in Lewin
Mr Lewin alleged that the report contained unqualified criticism of him, stating that he was guilty of serious wrongdoing. This would be extremely harmful to his reputation. Mr Lewin challenged the decision to include unqualified findings about his conduct.

The judge considered whether the FRC tribunal, consistent with its duty to act fairly, and knowing of the findings it intended to make in respect of Mr Lewin, should have allowed him the opportunity to see the draft findings and make representations, or should have included a qualification that Mr Lewin had not been a party to the proceedings, had not given evidence and had been given no opportunity to comment on the findings.

Disclaimer required
Given the gravity of the findings as against Mr Lewin, the judge considered that the FRC should have included a disclaimer stating that: (a) Mr Lewin was not a party to the proceedings and was not invited to provide evidence; and (b) it would not be fair to treat the FRC tribunal’s findings as findings made against Mr Lewin, as he had not been represented at the hearing and had made no representations. She ordered that these qualifications should be included in the report as published.

The judge accepted that publication of the full report could cause Mr Lewin reputational damage, but considered that it would be open to him to explain or justify his conduct. Further, there was a public interest in publishing the full report of an independent regulatory tribunal. Overall, the Court did not consider that publication of the full report would be unfair or unlawful, and it dismissed Mr Lewin’s claim for judicial review.

The second case – Taveta
In Taveta v FRC [2018] EWHC 1662 (Admin), similar issues arose, this time in the context of a FRC investigation into PwC’s audit of BHS Limited. At that time, BHS was part of the Taveta group.

The investigation resulted in the FRC imposing fines of £10m on PwC and £500,000 on the PwC audit partner, and the partner being banned for 15 years from performing audit work, although the fines were reduced by 35% as PwC and the partner accepted responsibility for misconduct. A Settlement Agreement was concluded, which the FRC’s Conduct Committee was required to publish “as soon as practicable” and in such manner as it thought fit.

The FRC sent Taveta the Settlement Agreement, a press release and a “Particulars” document setting out agreed statements of facts (together, “the Sanction Documents”) three days before publication. Taveta claimed that the press release and Particulars contained statements that were “materially inaccurate”. It applied for judicial review and for interim relief to restrain publication of any part of the Sanction Documents that contained or referred to criticisms of Taveta, its directors or employees.

The hearing before Nicklin J related only to Taveta’s interim relief application. Accordingly, the Court’s task was to consider whether Taveta’s claim raised a serious issue to be tried.

The duty of fairness and the right to respond
The judge accepted that there was a significant public interest in authorities such as the FRC making public statements of the sanctions imposed on auditors and the reasons for those sanctions.

Taveta argued that the law required that a person should not be criticised in a public report without first having a fair opportunity to respond. The provision of that opportunity is often called “Maxwellisation”, after the 1970s litigation involving Robert Maxwell and the Board of Trade’s investigation into Pergamon Press (re Pergamon Press [1971] Ch 388] and Maxwell v Department of Trade and Industry [1974] QB 523).

The judge’s analysis was that the Maxwellisation principle was not limited to the subjects of an investigation. It was arguable that the FRC owed a duty of fairness to Taveta and its managers. The duty to act fairly arose from public law, and was triggered when a body decided to publish criticism of an individual. Prior to that, the body had to ask itself whether it was necessary to include the criticism. If it was, the next question was whether the individual’s interests could be protected by anonymising them in the report. If that was impossible or impractical, the duty of fairness would arise. The importance of the duty being observed was partly because once published, defamatory allegations contained in a report would be likely to be protected by qualified privilege, leaving the subject of the criticism with little remedy for the consequent damage to reputation.

The judge did not consider Lewin to be authority that the duty of fairness could in all cases be satisfied by publication of a disclaimer. He held that there was a serious issue to be tried as to whether the FRC owed Taveta a duty of fairness.

Threshold for injunctive relief not met
On the interim relief sought, Nicklin J noted that the FRC’s right to freedom of expression was engaged. If the applicable test was that under s. 12(3) Human Rights Act 1998 (which protected publication before trial unless the party seeking to restrain publication was likely to establish that publication should not be allowed), the judge said that he would have granted an injunction.

However, the test for granting injunctions in public law cases is higher than that in private law proceedings. The threshold for injunctions restraining publication of public authorities’ reports was “very high indeed”. Although the judge stated that he had reached his conclusion “not without hesitation”, he concluded that Taveta had not demonstrated that this was an exceptional case that permitted the grant of an interim injunction on publication.

Comment
These cases illustrate the competing interests that can arise when the regulator investigates. There is a strong public interest in open, prompt, regulatory investigations and in the identification of bad practice and wrongdoing. However, there are also the interests of those who are criticised in protecting their professional reputations, and who will want to consider the criticisms intimated against them. There is also a public interest in the publication by regulators of reports that are robust and authoritative, and Maxwellisation or, to use the alternative term, a Representation Process, may help to achieve that objective.

The law requires that a person should not be criticised in a public report without first having a fair opportunity to respond to that criticism. Taveta helpfully sets out the correct decision-making process where criticism is involved. The first question is whether criticism is necessary. If it is, anonymising the individual’s name should be considered. If for whatever reason that is not done, the duty of fairness arises. A disclaimer was sufficient in Lewin, but Taveta makes it clear that this will not always be the case.

In the wider context, the scope of Maxwellisation is a live issue in UK public life. The House of Commons Treasury Select Committee has an open inquiry on the subject, following the December 2015 FCA and Prudential Regulation Authority inquiry into the collapse of HBOS, in which the Representation Process took more than a year. Recent high profile insolvencies such as Carillion bring with them regulatory scrutiny. Given the diverse interests at stake, it is likely that issues similar to those aired in Lewin and Taveta will soon be tested again before the Courts.


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