When a bank abandons a compliance officer to the wolves in the hope of closing down a regulatory investigation quickly, legal privilege takes centre stage. The regulator, meanwhile, might call on expert witnesses for support.

The following interview was conducted a few weeks ago by Chris Hamblin and is presented in the form of questions and answers. Sara George, now at the City law firm of Stephenson Harwood, was a prosecutor at the Financial Services Authority (now the Financial Conduct Authority) for a time and has drawn considerably from her experience there.

Q: What broad assertions have you heard institutions making about their legal professional privilege? And I mean the assertions that don't wash, the assertions they make when they're trying it on. What do they say?

A: They were, a few years ago, making extremely broad assertions! Everything [in their eyes] was privileged, the entirety of the investigation was privileged. Claims being made now are much more modest for the simple reason that they know that the Serious Fraud Office does not accept those broad assertions, in particular in relation to the first account given by a witness.

Now there's a very good reason why that is. It's because, from a criminal litigation standpoint, the first account given by a key witness is often absolutely critical and it is imperative that a defendant is entitled to get that because otherwise there is a very good argument that they cannot have a fair trial. We are aware that assertions of privilege in relation to the first account given by a witness are now being actively challenged by the director of the Serious Fraud Office. In my view, the director is probably taking the right approach.

Whereas once I was told in interviews, often by the bank's lawyers, that this interview is privileged, the privilege belongs to the bank, you can't waive privilege, I am now being told “to the extent that privilege applies to this interview, it belongs to the bank.”

Q: Are legal advice privilege and legal professional privilege the same thing?

A: No. Legal professional privilege falls into two categories. The first category is legal advice privilege, the second category is litigation privilege. Litigation privilege is much, much harder to assert in the context of investigations because usually litigation isn't in contemplation. The reason for an investigation is to find out what your risks are and whether or not you have a reporting obligation. So it's not a case of defending or advancing litigation.

Legal advice, the other category, is much safer to rely on in these circumstances. Of course, compliance officers are seldom lawyers so they are not giving legal advice and this means the Bank cannot rely on legal professional privilege in relation to advice given by compliance officers.

Q: Are compliance officers, the ones that you have encountered, often accountants these days?

A: Not necessarily. There there certainly has been a development of a professional compliance officer, I think quite distinct from other professional qualifications. They are people who have backgrounds in and experience of the management of regulatory risk and compliance controls, quite aside from other duties that you'd learn as part of a professional body, so I think that it is a distinct profession now.

I think also that it's rather harder, because of this issue of legal professional privilege, to have a compliance officer who's also a lawyer. Which hat is he wearing [at any one time]? Is he giving legal advice or compliance advice? Is the bank (or the firm) in question entitled to withhold his advice by saying that it's legal professional privilege? Are individuals in the firm unable to mention it or refer to it because it's legal advice? It rather undermines the idea of a compliance officer as a person who is accountable to a regulator as well as to the regulated.

Q: That could be good, though, because compliance with regulations does not always save the bank from being hit with a writ for negligence. A compliance officer who could see that coming as well as bad regulation could be valuable in some circumstances!

A: I think part of the problem has been that 'compliance' has typically been seen as just a cost centre rather than as a necessary risk function. That, frankly, may have undermined compliance officers' ability to do very much, or even to control the excesses of some particularly lucrative teams.

Q: Does the regulator have good expert witnesses?

A: No. it finds it almost impossible to get excellent expert witnesses. Most experts would rather be on the defence side.

Q: So expert witnesses are not irrelevant to either side of the case.

A: No. There are some types of case that I don't think the FCA could prove without an expert, particularly on the market manipulation side [of things] and also [to do with] certain types of complex structured products and things like that.

Q: So when an expert witness appears, he's either talking about an instrument that only three people in the country understand or he's talking about profiles of people's behaviour.

A: The standard is, for example, what sort of standard would you expect of a senior manager in this position. The real difficulty, I think, is going to come up in the FX and Libor cases. The people who are the suspects are the experts. They're the only people who really knew what was going on. You're not going to be able to find someone who's going to be able to give evidence about what was meant or what was being done, because he wasn't in that market at that time. So experts are a problematic area for the FCA.

Q: What happens when you are on the other side? How do you make the compliance officer's life a misery when you are represent a trader?

A: Very often, there's no incentive to make the compliance officer's life a misery. It's very unlikely that he's ever going to give evidence that is favourable to your client and the more hostile you are the more attention you might draw to the shortcomings in your own case. So, very often, all you want to do is to show that somebody raised concerns or was seeking advice and no more than that. There is no advantage to creating a hostile relationship if you don't need to, so generally I don't.

Q: The by-product is misery, though, in the end.

A: Yes.

Q: Because the compliance officer then has to deal with the allegation that he's asked a straightforward question and didn't give a straightforward answer.

A: Yes. What you would be trying to show if you were a trader is that you were constantly raising and elevating concerns and matters and they weren't being addressed or that you were constantly being told to shut up and get on with it or nobody was taking you seriously. That's what you need to show – that you were constantly raising concerns and, basically, that the compliance function failed.

* Sara George can be reached on +44 20 7329 4422 or at Sara.George@shlegal.com