Reforms to the UK’s investment screening are on the horizon: will the regime be primed for economic growth?

While the new UK Government has been very vocal about the perceived role of regulation in stifling economic growth – and the CMA has become a particular lightning rod for criticism - there has been relatively little focus to date on the National Security and Investment Act (NSIA). 

Our earlier blog posts discussed the Conservative Government’s call for evidence launched at the end of 2023 (and our responses to it) and the Government’s response in April 2024. However, there had been scant indication of the approach that the Labour Government would take until last week.

This has all changed with the UK Government’s modern industrial strategy policy paper. Amidst a record-low number of new FDI projects in the UK in the financial year ending this March, the industrial strategy policy paper sets out the Government’s ambition to create a “predictable, proportionate, and transparent investment screening framework”. 

The key steps in this direction are: 

• (another) consultation on “key” sectors: The Government has indicated it will launch a 12-week consultation to update the definitions for the 17 sensitive areas of the economy subject to mandatory notification. The goal is a “targeted and proportionate” regime that continues to safeguard national security whilst giving investors greater certainty. In its April 2024 response to the call for evidence, the previous Government singled out advanced materials, artificial intelligence, defence, and critical suppliers to Government as potential areas for further clarification. In parallel, new additions to the sector list were being considered, such as semiconductors, critical minerals, and water. The policy paper does not provide any further indication as to whether new sectors will be added or existing definitions will be clarified/narrowed. 

• more guidance for parties to transactions: the policy paper also signals that the Government will continue to update guidance to provide clarity for investors on how the NSIA works, including its decision-making processes. Since the inception of the regime, the Government has been providing regular market updates and guidance covering a range of topics and addressing feedback from stakeholders. More detail here will no doubt be welcomed, in particular on decision-making processes (which, as noted below, have been somewhat opaque).
• new exemptions on the horizon: the policy paper’s most significant signal is that the UK Government is preparing to announce specific new exemptions from the mandatory regime. There has been consistent feedback from a range of stakeholders that certain types of transactions should be exempt from notification (notably internal restructurings) or fast-tracked for low-risk acquirers. The former Government’s response in April 2024 made it clear that such changes were not being considered at that time. The new Government’s announcement is a positive signal that it may be willing to consider these issues, albeit there is no detail published on the exemptions under consideration. 
• further transparency: finally, the policy paper indicates that the Government “will explore opportunities” to bring greater transparency to the NSIA process. This is, again, an area of recurring feedback from stakeholders, who have found that the regime lacks transparency in certain important respects, with the lack of a dedicated case team, limited interaction with the ISU, and limited disclosure contributing to the sense of a “black box”. 

Major reform or tweaks under the bonnet?

While growth may be the overriding objective for the current Government, it is equally keen to burnish its credentials as a responsible national security screening authority against a backdrop of heightened geopolitical tensions. This may lead to tinkering round the edges, rather than major surgery to significantly reduce Government powers of intervention. 

The geopolitical realities were underscored by the National Security Strategy, also published last week, which notes significant challenges “in an era of radical uncertainty” and sets out an ambitious and expansive strategic framework that ties directly into mandatory NSIA sectors. Its core themes include the pivotal role of science and technology, particularly in quantum computing, engineering biology and AI, as pillars of international competition. There is a clear focus on energy security and strengthening UK sovereignty, with commitments to rebuild the “core defence industrial base” (backed by significant MoD investment) and maintain “independent nuclear deterrent”. 

Similarly, the Foreign Secretary’s statement to the House of Commons last week on the Government’s approach to China following the cross-Whitehall audit notes “a full spectrum of threats” from China and draws a direct link to the forthcoming consultation on NSIA sector definitions. However, the statement simultaneously underlines the aim of delivering “secure growth” from the UK-China relationship.

It is also notable that the policy paper does not mention cooperation with international partners (notably the Five Eyes partners) in relation to investment screening. This is noteworthy given the US-UK commitment in their recent trade deal pact to “cooperate on the effective use of investment security measures, export controls, and ICT vendor security.” 

Next stop for the NSIA drive?

While the policy paper sets out a fresh ambition to refine the NSIA regime, promising sharper definitions, more guidance, new exemptions and greater transparency, it does not signal a radical overhaul. The much-anticipated consultation is, for now, without a firm timetable. 

A major recast of the regime’s scope and focus seems unlikely. Instead, meaningful but incremental changes appear a more probable outcome: clearer guidance, updated sector definitions, possible new sectors added and targeted exemptions for lower-risk transactions or acquirers.

The core challenge for policymakers remains unchanged. They must find a workable balance between attracting investment, safeguarding national interests and maintaining close alignment with key international partners. This balancing act will ultimately define the scope and the limits of what comes next – stay tuned.