Hedge funds, investment banks and other financial services groups have criticised government plans to restrict non-compete clauses in employment contracts, warning that the changes could undermine the competitiveness of the UK’s financial and professional services industries, according to a report by the FT.

Andy Burnham said the government would legislate to ensure non-compete provisions no longer prevent promising start-ups and growing businesses from recruiting the talent they need. The proposal has received support from technology groups, which argue that such restrictions make it harder for British companies to compete with rivals in Silicon Valley.

However, the plan has prompted concern among financial firms that use non-compete agreements to prevent traders, portfolio managers, dealmakers and other senior employees from immediately joining competitors.

The report cites John Godfrey, a managing director at TheCityUK, which represents major UK financial institutions, as saying that the organisation's members are 'very disappointed' by the proposal, warning that the proposed changes could damage the competitiveness of the country’s financial and professional services sectors.

Burnham has described non-compete clauses as a barrier to innovation, arguing that employees should be able to move between companies and establish their own businesses without unnecessary restrictions.

Industry representatives counter that the agreements help protect intellectual property, client relationships and the investment firms make in developing key employees. Jiří Król of the Alternative Investment Management Association, which represents hedge funds and private equity firms, said the government risked “throwing the baby out with the bathwater” in its efforts to support the technology sector.

At some leading hedge funds, portfolio managers can be required to remain out of the market for between 18 months and two years before joining a rival, while analysts may face restrictions lasting around a year.