New international benchmarking research by TheCityUK and Freshfields on foreign direct investment and national security screening regimes has identified key reforms the UK government should pursue. These reforms aim to encourage more inward investment, while also continuing to protect national security.
The report, ‘Foreign direct investment and national security regimes: A path to best practice in the UK’, highlights that while the UK’s National Security & Investment Act (NS&I Act) provides investors with a comparatively predictable regime, it casts a very wide net over investment activity compared to screening regimes in other jurisdictions that are competing for investment.
Review of the data available for FY2023-24 shows that 906 notifications were submitted under the UK’s NS&I Act. This number is three times higher than those filed in similarly sized European countries, such as Germany and France (300 each). All notifications submitted were subject to a review of at least one month by the Cabinet Office’s Investment Security Unit, with 95.6% cleared without need for a further in-depth review.
By capturing so many transactions which do not raise any national security issues, the regime has become an additional cost of doing business in the UK. The report calls for the UK regime be re-examined to ensure that regulatory policies aimed at protecting national security do not disproportionately disincentivise much needed investment and better support the government’s growth ambitions.
Miles Celic OBE, Chief Executive Officer, TheCityUK, said, “The government has rightly recognised that increasing investment is essential for the UK to realise its growth priorities. While it is vital to ensure that our national security is protected, we also need to ensure that the system is focused and unnecessary regulatory hurdles to investing in Britain are removed. The NS&I regime should be proportionate and targeted to ensure that it isn’t a drag on growth and supports the attractiveness of the UK as a place to invest and do business.”
Martin McElwee, Partner, Freshfields, said, “Although there have been some incremental improvements in the UK’s NS&I Act regime since it was adopted, our research clearly sets out steps that the government can take to further refine it, while also retaining its important focus on national security. By drawing on insights of best practice from investment screening regimes across a range of key jurisdictions, our policy recommendations will not only help to boost the appeal of doing business in the UK but will serve to limit the administrative burden on investors and reduce government spend, thus saving time and money.”
The report sets out a series of policy recommendations to ensure that the regime under the NS&I Act can be more proportionate and targeted. These include:
Increasing transparency and dialogue so that fewer transactions enter the system
- Define strategic sectors more precisely and improve definitions to reduce unnecessary transaction notifications.
- Improve transparency over decision making process by publishing non-confidential decisions and providing comprehensive guidance on what is likely to be in and out of scope.
- Introduce earlier engagement between parties and the government to facilitate pre-notification processes for efficient resolution of issues.
Limiting the scope of transactions covered
- Exclude internal reorganisations and implement exemptions similar to other jurisdictions.
- Limit transactions to those impacting UK entities by ensuring 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 and 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).
Introducing 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.
Amending 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.
NOTES FOR EDITORS:
- 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. Key aspects of the NS&I Act include the requirement to make mandatory notifications for investments in entities active in one of 17 prescribed sectors and suspend closing transactions until government clearance is received.
- TheCityUK and Freshfields LLP have undertaken an analysis of FDI regimes across the UK and ten other jurisdictions (Australia, Austria, Canada, China, France, Germany, Italy, Romania, Spain, and the United States) to identify how the UK government can improve its regime under the NS&I Act by drawing upon best practice from other regimes.