May 2024
Non-Competes Banned on Wall Street: Will the UK Soon Follow?
In March, we published an article on the prickly subject of the non-disclosure agreement, how it is used, both rightly and wrongly, and what the regulatory future of the NDA looked like.
Last week, the US Federal Trade Commission dropped a bombshell on Wall Street, and the wider markets, with a slim 3-2 vote in favour of a total ban on non-compete agreements at financial institutions.
The parallels between the non-disclosure agreement and the non-compete agreement are clear. Whilst one seeks to restrict what someone can say, whilst the other seeks to restrict what they can do, they are essentially the same in their overarching purpose – the prevention of harm being done to the institution in question.
As with non-disclosure agreements, the goal behind most non-compete agreements is a valid one. In our day-to-day, we work with transactional documents which, more often than not, contain restrictive covenants as to what a seller of a business, or a departing employee, can do following completion of the transaction.
Typically, there will be some wrangling over the duration and scope of such restrictions but rarely are they thrown out altogether. Such is the nature of the business. It is widely accepted that such restrictions are necessary in at least some form. Of course, if you bought a business, only for the seller to immediately set up a new business, around the corner, in competition with yours, you would rightly feel aggrieved.
For financial institutions, and those working within them, the concerns are greater, and the water murkier. On the trading floors of multinational investment banks and hedge funds, there are traders with loyal stables of clients doing business with them on a daily basis. Some of these clients trust the institution itself whilst others still, trust the individual on the other end. The one who always picks up the phone and answers emails within minutes, no matter the hour.
A trader like that can be worth tens of millions to the institution they work for, but they know their own value more than anyone. The world of financial services is fraught with mercenary culture. Employees will often hop from institution to institution, elevating their remuneration packages as they go and, often, taking millions of pounds worth of clients with them.
The fears of the banks are obvious and evident in their liberal use of non-compete agreements. In some cases, their business models are heavily reliant on the retention, or restriction, of key talent. If they cannot have them, no one can – at least not for a couple of years.
Though the decision has been challenged by the US Chamber of Commerce, and will no doubt be fought hard against by the institutions themselves that will bear the brunt of the decision, as it stands, the decision marks a sea change for the movement of talent across the sector.
“Businesses are going to get built and destroyed because of this rule. This is the beginning of real change.”, commented Laura Pollock of Third Street Partners, which specialises in the recruitment of investment managers.
It is hard to argue. The ruling will see the pendulum of power swing dramatically in the favour of the employees, with the institutions themselves left in disarray as to how they will go about protecting their business and confidential information going forward.
For the time being, the impact that this will have on the UK markets is unclear. So often, where the US leads, the UK follows and, with the depth of intertwinement between New York and London as financial hubs, it is very possible that a similar move is on the horizon on this side of the Atlantic. As recently as May 2023, the Department for Business and Trade outlined measures to restrict non-compete restrictions, in respect of financial institutions, to just three months – considerably less than we are used to seeing on transactions outside of the financial services sector. Though the proposal has not yet been implemented and, with an election on the horizon, who knows if it ever will be, the fact that it is being considered at all suggests a great deal of alignment between the US and UK governments on the subject.
It will be very interesting indeed to see how the space develops and whether such legislation crystallises here in the UK.
Here at Cook Corporate Solicitors, we have worked on innumerable transactions containing restrictive covenants and are extremely experienced in negotiating on these points, be it from the perspective of the buyer or the seller.
If you have any concerns in respect of non-compete restrictions, either in place already or yet to be agreed, please do not hesitate to contact us.