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The UK Government is preparing significant reforms to the National Security and Investment Act 2021 (NSIA) which aim to streamline the foreign investment screening process. The changes, as outlined in the Government’s latest industrial strategy, are intended to reflect a broader effort to foster economic growth and reduce regulatory burdens on businesses.
Background
The NSIA established a standalone regime that empowers the UK Government to review and, if necessary, impose conditions on, or block, acquisitions that pose national security risks. The NSIA replaced much more limited powers under the Enterprise Act 2002, which had seen fewer than 20 interventions over two decades.
Amongst other things, the NSIA introduced a mandatory notification requirement for certain transactions in 17 high-risk sectors – such as artificial intelligence, defence, energy, and communications – where acquiring more than 25 per cent of shares or voting rights triggers a review.
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Subscribe nowSince its implementation, the NSIA regime has to-date resulted in over 2000 notifications; less than two per cent of the transactions have been blocked or had conditions imposed. The broad framing of the legislation has led to unnecessary burdens in the form of notifications and delays. 25 per cent of stakeholders also found aspects of the regime unclear – particularly in technical fields like advanced materials, synthetic biology, and AI. Academic research and development accounted for the highest number of voluntary notifications leading to call-ins, raising concerns about the regime’s impact on innovation and collaboration.
The proposed reform
The proposed updates introduce targeted exemptions, refine the definitions of sensitive sectors and provide clearer guidance.
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#1 |
Targeted exemptions |
The Government has indicated that it will introduce specific new exemptions to the mandatory notification regime under the NSIA. These are expected to apply to transactions that currently fall within the scope of the regime but are unlikely to pose any genuine national security risk because, for example, they do not involve a change in control. A key example includes intra-group reorganisations, where ownership remains within the same corporate group. |
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#2 |
Sector definitions |
The NSIA currently mandates notification for acquisitions in 17 sensitive sectors. The Government has acknowledged that the definitions of these sectors may be too broad, leading to over-reporting. A forthcoming consultation will propose amendments to these sector definitions to ensure they are “targeted and proportionate”. |
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#3 |
Transparency |
The Government plans to enhance transparency in how the NSIA is applied. This includes regular updates to guidance documents and clearer explanations of decision-making processes. The aim is to make the regime more predictable and user-friendly, especially for smaller businesses and foreign investors unfamiliar with UK regulatory frameworks. |
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#4 |
Growth policy |
The exemptions are part of a broader strategy to support high-growth sectors such as clean energy, life sciences, and advanced manufacturing. Many of these sectors overlap with the NSIA’s sensitive areas, so the government is keen to ensure that the regime does not inadvertently stifle investment in strategically important industries. |
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#5 |
Resources |
Only five final orders were issued in the last reporting year – down from 15 – suggesting that the Government is becoming more selective and efficient in its interventions. The proposed exemptions are expected to reinforce this trend by focusing scrutiny, and resources, where most needed. |
Our remarks
The proposed reforms reflect an attempt to align the NSIA more closely with the Government’s pro-growth agenda, particularly in what are perceived to be high-potential sectors such as clean energy, and life sciences.
Alongside the Competition and Markets Authority’s adoption of the 4Ps framework – pace, predictability, proportionality, and process – particularly in the context of digital markets regulation, the proposed NSIA reforms reflect a broader shift in the UK’s approach to foreign direct investment and transaction scrutiny in support of the Government’s pro-growth objectives.
The proposed changes could mark a pivotal shift in how the UK navigates the intersection of national security and economic policy.
If you would like to discuss any of the issues covered in this blog, please contact John Cassels, Asfand Gulzar or Andrea Carrera.
