Restrictive covenants – good paperwork is only part of the solution

It feels that the economic pie continues to shrink. And with that backdrop, most businesses are trying just to hold on to market share.

In client-focused business where there is a premium on personal relationships, such as the financial adviser industry, firms need to use all of the tools at their disposal to protect their goodwill and client relationships.

So it was no surprise recently to see Towry’s Chief Executive, Andrew Fisher, lament the wording of the post-termination restrictions in departing advisers’ contracts which led (in part) to the loss of a High Court claim earlier this year. The contracts prohibited soliciting (i.e. active enticement) of clients but did not prohibit dealing with clients who followed an adviser of their own accord. The Court found that the clients had simply followed the employees and therefore there was no breach.

Whatever the facts of this particular case, with a distinct lack of new work in many sectors, the value of “stolen” business has in many cases increased sharply relative to an employer’s remaining portfolio. Unsurprisingly, we are therefore seeing more of this kind of litigation.

Fisher is right, of course, that anyone in a relationship-driven business, whether financial advice to the ever-litigious world of inter-dealer broking, should check on a regular basis that their documentation is as watertight as it can be.

However, perfect documents can become an obsession. Good paperwork is only one part of an overall business protection strategy (and given the expense and uncertainty of litigation, probably not the most important part). A fuller strategy might include:

• IT, confidential information and data protection policies that are clear on what digital information can be sent outside the Firm’s systems
• Systems that can enforce and police them
• Managing hard copy risk by monitoring unusual patterns of printing
• Clear policies on what information can be taken outside the office in hard or digital form
• Watching out for unusual meetings behind closed doors or unusual working hours
• Incentivise employees to stay through effective and competitive reward and challenge
• Deferred compensation can lock employees in (and make it more expensive for competitors to buy them out)
• Spread risk by running client facing teams of a number of individuals where realistic
• Rotating advisers may also be an option, though this may be a double-edged sword in that it could simply create more poachers
• …and, of course, have up-to-date and effective garden leave, notice period and post-termination restrictions in contracts

The key to effective protection is to have many lines of defence.