Government sets out next steps for the UK investment screening regime

The Cabinet Office has published a response to its call for evidence (launched in November 2023) on the impact, scope and operation of the National Security and Investment Act 2021 (NSIA). The call for evidence sought views on how the regime could be more business friendly and simultaneously continue to maintain and protect national security.

To date, the Government has reviewed more than 1700 notifications and made 20 final orders. It believes the NSIA is working well but is mindful of (i) the burden placed on businesses to comply with the legislation and (ii) ensuring the UK remains an attractive place to invest. Further, the Government appreciates the regime must evolve to ensure it is ahead of the national security risks facing the UK and can adapt to the changing nature of the UK economy. It has, therefore, committed to focusing on five areas of development between now and Autumn 2024.

1. Publishing an updated NSIA section 3 statement in May 2024
   
   

The section 3 statement sets out how the Secretary of State expects to exercise the call-in power. The market has called for more transparency around where the Government sees risk and requested further clarity on the areas of the economy that it considers to be most sensitive. Some responses also called for the Government to implement a fast-track review process for certain types of acquirers. However, whilst the Government wants to ensure transactions that are unlikely to represent national security concerns are dealt with quickly and efficiently, it is not considering a fast-track process. Instead, it believes that revising the section 3 statement and publishing further guidance will help improve understanding of when and why the Government may intervene in a transaction. 

2. Publishing updated market guidance in May 2024
   
   

The Government will publish additional guidance to address some of the specific concerns raised by the market in response to the call for evidence, including the application of the NSIA to academia and Outward Direct Investments. In addition, whilst the Government doesn’t expect to exempt transfers of control under automatic enforcement provisions in secured lending agreements, it will consider where further guidance can be provided to assist analysis of the application of the mandatory notification regime in this context.

3. Consulting on updating the mandatory areas by Summer 2024
   
   

The Government will launch a formal public consultation on updating the mandatory area definitions for the 17 sensitive areas (those that trigger the mandatory notification regime) by the summer. The response is light on detail around the potential amendments that may be made as these will be published in due course in the consultation, but the Government has commented that there will be specific proposals for a standalone semiconductor area and a critical minerals area. It has also indicated that water may be added to the list of utilities subject to the mandatory notification regime.

4. Considering technical exemptions to the mandatory notification requirement
   
   

Market feedback has called for the creation of targeted exemptions to the mandatory notification regime, such as for internal company reorganisations or other types of transaction that confer minimal levels of control. The Government has now committed to bring forwards secondary legislation to carve-out the appointment of liquidators, official receivers, or special administrators. However, it is mindful of extending the exemptions beyond these limited carve-outs and instead the Investment Security Unit will undertake a national security risk assessment and audit to consider the feasibility and design of introducing additional exemptions to ensure they do not compromise the NSIA’s integrity.

5. Improving the operation of the NSIA system
   
   

Broadly speaking, the market believes the digital notification process works well. In its response, the Government sets out the progress already made operationally such as the opportunity to arrange calls at key stages in the process and the opportunity to engage with senior officials post call-in. However, a number of functional improvements to the portal have been identified and the Investment Security Unit will assess the technical feasibility to incorporate these suggested modifications.

Next steps

We will continue to monitor developments in this area and provide further updates when the additional materials are published.

For an overview of the NSIA, please see here.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, April 2024