Hedge funds and banks have hit out at Andy Burnham’s plan to end the use of non-compete clauses in employment contracts, warning the proposal risks “throwing the baby out with the bathwater” and could disadvantage UK firms.
The prime minister said on Friday that the government would “legislate to make sure that non-compete clauses will no longer be a barrier to hiring for our most promising start-ups and scaling firms”.
Burnham’s plan to restrict non-compete clauses, which constrain a worker’s ability to work for a competitor for a period of time after leaving their current employer, has been welcomed by tech groups. But his promise triggered a swift backlash in the City of London.
“Our members are very disappointed by this proposal,” said John Godfrey, a managing director at TheCityUK, which represents some of the largest UK financial groups. “They feel it will potentially damage the competitiveness of UK financial and professional services.”
Many companies in the City, including hedge funds, investment banks and wealth managers, rely on non-compete agreements to try to stop their star traders, money managers and dealmakers being poached by rivals.
Burnham said the practice was “a drag on innovation”, adding: “We need our innovators to be able to move freely between companies and start their own without constraint.”
But supporters of non-compete clauses say they are needed to protect intellectual property, client relationships and investment in training and development of key staff.
“The UK government risks throwing the baby out with the bathwater in its efforts to support the tech sector,” said Jiří Król at the Alternative Investment Management Association, which represents hedge funds and private equity groups.
At top hedge funds, non-compete clauses often mean portfolio managers have to sit out of the market for as long as 18 months to two years before they can join a rival, while an analyst might have to wait a year.
Jillien Flores, at the Managed Funds Association, which represents most of the world’s biggest hedge funds, said: “Non-compete agreements are vital tools for protecting the proprietary investment strategies that underpin the alternative asset management industry.”
Godfrey at TheCityUK said companies could respond to a ban on non-compete clauses by making staff notice periods longer. He also warned that any changes should apply only to new contracts.
A review into non-competes was launched last year by then prime minister Sir Keir Starmer, setting out options ranging from an outright ban to placing a time limit — for example of three months — on the arrangements.
The founders of some leading UK tech start-ups last month called on ministers to limit the use of non-compete clauses and extended notice periods, arguing they hampered British businesses’ ability to compete with Silicon Valley.
Companies in California are banned from using non-compete clauses. The US Federal Trade Commission voted for a nationwide ban in 2024, but it backed down after the move was challenged by businesses in a Texas court.
The UK government said: “We want the UK to be the best place for firms to start, scale, list and stay, and ensuring non-compete clauses aren’t a barrier to hiring the best talent is a key way to make sure these innovative businesses aren’t held back.”
“Backing the financial sector will be equally critical for growth, which is why we’re already unlocking billions of pounds of private capital through landmark pension reforms and overhauling listing rules, all to make the sector as competitive and streamlined as possible,” it added.
Officials aim to set out more detail of the reform plans alongside this month’s Budget. They want to help fast-growing sectors such as AI recruit skilled people more easily, believing there are other ways companies can protect intellectual property, such as trade secrets laws and confidentiality clauses in contracts.
“Hiring faster means British start-ups and scale-ups can grow faster,” said Dom Hallas at the Startup Coalition. “By addressing these barriers the prime minister can materially impact the trajectory of the UK tech ecosystem and with it, UK growth.”
However, UK industry groups have warned it could create an unnecessary impediment for British companies to ban non-compete clauses, which are included in the contracts of about 5mn British employees — typically with a duration of about six months.
“Many businesses rely on non-competes to protect commercially sensitive information and support investment in people and new ideas,” said Matthew Percival, a director at the CBI business lobby group. “We have not seen compelling evidence that non-compete clauses are a drag on innovation or a material hindrance on labour market mobility.”