Hedge Funds Get Jittery on Prospect of UK’s Noncompete Ban

The UK is reviving a plan to make it easier for employees to switch jobs, putting financial firms on edge, as some of the most controversial non-compete clauses in their hiring contracts come under scrutiny once again.

The government published a paper along with the budget last week, seeking industry feedback on overhauling employment agreements. Proposals include an outright ban on non-compete conditions — terms that prevent people from working for, or establishing a rival business for a set period of time after leaving a job. Other ideas being floated include capping the cooling-off time at three or six months, depending on the size of a company or the salary.

The concept isn’t new and was raised by the previous government in 2023 as well. While it isn’t clear in what form or how soon they will be implemented, employment lawyers and business lobby groups are already saying the measures could have far-reaching consequences for industries, especially financial firms. They argue they could stifle innovation and endanger intellectual property rights, ultimately denting the UK’s competitiveness.

“Strict time limits are too blunt a tool for such a complicated issue,” said Jack Inglis, chief executive officer of the Alternative Investment Management Association. “Firms need the flexibility to set non-compete periods that fit their business and reflect their individual sensitivities.”

Non-competes have become a crucial tool for hedge funds, banks and consultancies seeking to retain top talent and protect their intellectual property. Designed to stop employees from taking sensitive information to a rival as well as acting as a deterrent for rivals looking to poach staff, even the possibility of any changes tends to spook the finance industry. Restrictive clauses can span two years or more at some hedge funds.

Financial firms will be hoping the UK government takes a salary-based approach, focusing on reducing hurdles for lower paid workers. That would have less of an impact on hedge funds and banks, given their pay packages are generally high.

“We recognise the important role reforming non-compete clauses in employment contracts can have in supporting our ambitious plans to drive growth across the UK,” a spokesperson for the Department of Business and Trade said in an email. “That’s why we are seeking views on different options for reform, including whether restrictions on these clauses should be applied to wider workplace contracts.”

Non-competes have been contentious for decades and many regulators have found it challenging to manage. The US Federal Trade Commission approved a near-total ban on the practice, but a federal court blocked the move last year, saying the watchdog lacked the authority.

The use of restrictive job provisions vary across jurisdictions. For instance, in Florida, the clauses are less employee-friendly. The southern US state recently updated its rules to permit four-year non-compete clauses in contracts, a move that got the backing of billionaire Ken Griffin, the founder of hedge fund giant Citadel. Whereas in California, almost all such clauses have been banned.

Some quantitative trading firms are known to apply non-competes more aggressively as their trading secrets are more portable.

“If they can’t do that, then I think it would act as a disincentive to innovate and in some cases, may even reduce the attractiveness of the UK as somewhere to do business,” said Olly Jones, a partner at Simmons & Simmons.

Non-competes have also been a source of tension and the subject of a raft of lawsuits between rival firms as well as between employers and employees.

Macro trader Chris Rokos famously sued his former employer, Brevan Howard Asset Management, in 2014, seeking to void an agreement that restricted him from managing clients’ money until 2018. This year, Walleye Capital feuded with a former employee over a non-compete clause.

In 2023, quantitative trading firm, Jump Trading, took former London-based staffer Damien Couture to court to prevent him from joining rival firm Verition Fund Management too soon. That lawsuit underscored the clamor for talent when it comes to algorithmic trading where secrets are fiercely guarded and firms will go to extreme lengths to protect them.

The Big Four accountancy firms in the UK also make extensive use of gardening leave and non-compete clauses to try and hold onto their equity partners.

For example, KPMG puts some partners on 12 months of gardening leave — during which they are still paid by the firm, but not allowed to work — followed by at least six months of non-compete, people familiar with the situation said, asking not to be identified discussing confidential information.

The firm’s former UK corporate finance head Jonathan Boyers said KPMG was seeking to apply a non-compete clause to stop him from working in the UK after he left to join rival Alvarez & Marsal in 2024 following a 12-month gardening leave. He initially joined the US-founded firm in Dubai because of the restriction, he said in a LinkedIn post.

A representative for KPMG declined to comment.

Lawyers say that in the event the UK implements measures to check non-competes, firms will find workarounds such as increasing notice periods or garden leave, and extending non-dealing and non-solicitation agreements. Compensation deferrals are also already widely used as a tool to retain talent.

It’s also unclear if these rules would apply across all corporate structures, such as partnerships or shareholder agreements, which could exclude a large number of funds. There are also questions whether they will cover bonuses and equity.

“If they were to say this applies wider than an employment contract and it will apply to bonuses and equity, then that is huge for the finance industry,” said Anna Birtwistle, an employment partner at law firm Farrer & Co.

But with policymakers floating such proposals that cut across party lines, Simmons & Simmons’ Jones said firms will have to come to terms with a high probability of statutory change in some form.

“It’s another consultation on a subject that has been raised by successive governments — the direction of travel is clear,” he said.

Photograph: Commuters in the City of London; photo credit: Jason Alden/Bloomberg

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