FAAA warns scrapping non-compete clauses could deter firms from hiring PYs

Initially announced in Labour’s pre-election budget in March, Treasury has released a consultation paper – Reform to non-compete clauses and other restraints on workers – which could see non-complete clauses abolished for workers earning under $175,000 starting from 2027.

In its submission to Treasury, Financial Advice Association Australia (FAAA) said that while it supports the implementation of existing common law into legislative measures to restrict the use of non-compete clauses to circumstances where it is reasonable, there are cases in financial advice where these clauses are necessary.

“Employers’ practices of intimidating employees by including unenforceable clauses in employment contracts, and/or overly complex and ambiguous ‘cascading clauses’, should be curbed to promote greater efficiency in the Australian labour market,” the submission said.

“However, employees’ interests must be balanced against employers’ business interests.”

Specifically, the association said there are two matters that need to be taken into consideration, including:

• Protections for an employer’s investment in a professional year candidate.

   

   

• Sensible client non-solicitation clauses that reflect the explicit business value of financial advice client relationships.

With regard to the professional year (PY), the FAAA argued that this stage of training new entrants has become a “bottleneck”, suggesting that the removal of non-compete clauses would only further exacerbate the issue.

As the PY requires aspiring advisers to complete 1,600 hours of training with a senior adviser, during which time the PY is contributing little to the business in ways of financial benefit while also putting a strain on their supervising adviser’s time, employing a PY is an “investment by the business in this person”.

Because of this, the FAAA said smaller businesses in particular are already hesitant to invest in PYs “given the increased uncertainty that they will be poached after they conclude training”.

“Other businesses could easily offer them a pay increase to encourage them to move as a means of avoiding the cost of employing them during the professional year”.

Backing up this concern, Adviser Ratings’ 2025 Australian Financial Advice Landscape report found that advisers who first hit the Financial Advisers Register from 1 January 2019 onward only spend an average of 18 months with a practice or licensee, and 30 per cent have switched at least once in the past six years.

“In the context of the significant decline in financial adviser numbers since 2019, and the importance of rebuilding the profession, this has become an important issue,” the submission said.

“We believe that in this case, there is a justified case for enabling these employers to apply a non-compete clause for a certain period after the new financial adviser completes the professional year. This could be a clause to prevent them working for a competitor in the same broad area for a period of up to two years.”

Protecting client non-solicitation clauses

When it comes to clients, the FAAA argued that safeguards should remain in place to prevent client poaching and “preserve the value” of advice businesses.

“The core value of most financial advice businesses is the ongoing relationships with clients and the ongoing revenue generated from these clients. These relationships are a key determinant of the value of the business,” the submission said.

As it stands, employee and client book sale contracts typically include a non-solicitation clause to prevent an adviser from recruiting former clients, should they leave the business.

While clients are free under the law to terminate their ongoing fee arrangement at any time and move to another adviser, the FAAA said the non-solicitation clauses serve to “prevent their former adviser trying to solicit them to go to an alternative business”.

On top of this, the association argued that the removal of such clauses could also significantly impact the valuation of advice client books.

“To have confidence to purchase a book of clients, the purchaser needs certainty that they can employ someone in the business without the risk that they will seek to solicit those clients to go elsewhere.

“In undertaking this purchase of a book of clients, they will also seek contractual certainty from the seller, that they will not try to solicit the clients to return to them.”

In consideration of this, the FAAA stated it is “appropriate and necessary” to permit such clauses in employment agreements, allowing employers to enforce a 12 month non-solicitation period to “ensure that strong relationships have been formed with a new adviser”.

Speaking on this in March, Halsey Legal Services director Fiona Halsey said the removal of non-compete clauses could significantly reduce what firms are willing to pay for a client book.

“If buyers cannot be confident that they can protect the client list they are buying, they are logically likely to reduce the purchase price. Given that many purchases occur with staggered payments, another likely outcome would be to reduce the upfront payments, and have a greater proportion paid in later years,” Halsey said.

When it comes to advisers exiting a firm, Halsey said that the lack of protective measures in place can prove damaging as clients will typically only develop a bond with their specific adviser.

“That means it is virtually impossible to conserve the client if an ex-employee tries to take the client, unless there is a well-drafted restraint of trade clause. The damage to the ex-employer can often be in the hundreds of thousands of dollars,” she said.