Foreign direct investment and national security regimes

Comparing the key features of the National Security & Investment Act to other FDI regimes

The financial and related professional services industry understands the vital need to protect the UK’s national security, particularly in the current geopolitical environment. In turn, the government understands the need to drive growth and reduce regulatory hurdles to investment in the UK. For the UK’s growth ambitions to be realised, it is essential that the various arms of government are all pulling in the same direction and thorough consideration is given to how the UK’s national security policies around investment are targeted.

Re-examination of the UK’s investment screening regime under the National Security & Investment Act, 2021 (the NS&I Act) is both timely and appropriate. The government’s industrial strategy has the promotion of investment at its heart and many of the government’s target sectors for investment are also identified as key sectors for screening under the NS&I Act.

International benchmarking of foreign direct investment and national security screening regimes (FDI regimes) across various jurisdictions underlines that while the NS&I Act provides investors with a comparatively predictable regime, it casts a very wide net over investment activity compared to other geographies that are competing for investment. It is viewed by international investors as an additional cost of doing business in the UK, which can seem at odds with the pursuit of growth.

It is in this context that TheCityUK and Freshfields LLP have undertaken an analysis of FDI regimes across the UK and ten other jurisdictions to identify how the UK government can improve its regime under the NS&I Act by drawing upon best practice from other regimes.

About the National Security & Investment Act

The NS&I Act covers investments from both foreign and domestic investors in UK businesses as well as certain businesses outside the UK. It also covers a broad spectrum of sectors and is administered by the Investment Security Unit (the ISU) within the Cabinet Office.

There are three key aspects of the NS&I Act:

The requirement to make mandatory notifications for investments in entities active in one of 17 prescribed sectors and suspend closing until clearance is received.
The government’s ability to call in non-notified transactions for up to five years after closing (or six months from the Secretary of State becoming aware of the transaction).
The option to submit voluntary notifications for transactions that are not subject to mandatory notification but may still be called in for review under the government’s call-in powers.

Jurisdictions and metrics assessed

Jurisdictions	Metrics
Australia	Definitional triggers – protecting national security vs protecting other interests
Austria	Transaction types and exceptions
Canada	Economic activity and sectors covered
China	Treatment of foreign investors
France	Timelines
Germany	Discretion afforded to the decision maker
Italy	Consequences of non-compliance (penalties and transaction effects)
Romania	Transparency
Spain
United States

Our comparative assessment of FDI regimes underlines that there are many areas in which the NS&I regime is functioning well. While there have been some incremental improvements in its operation since adoption, there are best practice features of other regimes that could be harnessed to improve investors’ experience of, and confidence in, the UK’s regime. Given the government’s growth priority, a re-examination of the regime is appropriate in order to ensure that regulatory policies aimed at protecting national security do not disproportionality disincentivise much needed investment.

Our key policy recommendations are as follows:

Increase transparency and dialogue so that fewer notifications enter the system

Define strategic sectors more precisely – improve definitions to reduce unnecessary notifications.
More transparency over decision making process – publish non-confidential decisions and provide comprehensive guidance on what is likely to be in and out of scope.
Earlier engagement between parties and the government – facilitate pre-notification processes for efficient resolution of issues.

Limit the scope of transactions covered

Exclusion of internal reorganisations – implement exemptions similar to other jurisdictions.
Limit to transactions impacting UK entities – ensure the regime only applies to transactions with a significant UK presence (e.g. entities which are governed by UK law, registered in the UK, or have subsidiaries in the UK).
Introduce a de minimis threshold – exclude small investments with minimal impact on national security (e.g. investments in entities with an annual turnover less than £5m or a purchase price less than £5m which operate in sectors other than those that are the most sensitive).

Introduce fast-track or post-closing procedures to streamline the system

Establish a fast-track or post-closing process for investments in sectors other than those that are the most sensitive to improve efficiency without compromising national security.

Amend non-compliance effects to improve regulatory predictability

Make transactions voidable rather than automatically void if implemented without prior approval, aligning with UK courts and international practices.
Remove criminal sanctions for non-compliance.