UK government to ‘fine-tune’ NSI regime following consultation

Next steps for the government are included in a proposed plan of action, published in response to last year’s call for evidence on how the National Security and Investment Act (NSI) regime works. Deputy prime minister Oliver Dowden, who administers the NSI regime in his Cabinet secretary role, also shared broader concerns about national security risk in an accompanying speech.

Dowden warned that the UK is facing cyber and economic challenges, with a need to boost the country’s defences against threats to the economy. These threats include outward direct investment (ODI) that may be fuelling “technological advances that enhance the military and intelligence of countries of concern”, he said.

The government is aiming to make changes to refine the NSI regime and how it operates between May and the end of autumn 2024. It intends to publish an updated ‘section 3’ statement on how the secretary of state expects to exercise his NSI call-in power when identifying national security concerns; and to publish updated market guidance to provide clarification on the application of the regime on specific scenarios. Further planned changes include consulting on updated mandatory area definitions and considering certain technical exemptions to the NSI mandatory notification requirement through legislative change if parliamentary time allows; as well as making further practical improvements to how the NSI system operates.

The NSI call-in power allows the secretary of state to intervene in certain transactions if there is reasonable suspicion that they pose risk to national security. The government intends to publish its updated section 3 statement on the use of this power later this month. According to the response, it does not propose to introduce a “fast track” process for lower-risk transactions, meaning it will retain the ability to assess possible national security issues in every case.

An update to the NSI regime “market guidance” is also expected this month, which will cover potential national security risks from ODI - where a UK-based business expands its operations to a foreign country. Other clarifications may include the risk factors the government considers in its NSI assessment, further guidance for research sectors, and how statutory time limits are calculated, according to the response. These changes are aimed at providing further clarity for businesses and investors. The government has also announced plans to launch a consultation this summer regarding guidance for the academic sector and possible measures to protect the sector from national security risk.

The government plans to consult by this summer on updating the mandatory notification definitions, which cover sensitive industry sectors that are subject to mandatory prior notification under the NSI rules. This will likely include two new sensitive sector definitions for “critical minerals” and “semiconductors”, and refinements to some existing definitions such as “artificial intelligence”, “advanced materials”, “defence”, and “critical suppliers to government”, according to the response. Water could also be added to the list of areas subject to NSI mandatory notification. Changes to the Notifiable Acquisition Regulations will be required to give effect to the outcome of the consultation.

It also plans to consider certain narrow, technical exemptions to the NSI mandatory notification requirement, to ensure businesses and investors are only required to inform the government of deals that genuinely warrant consideration on national security grounds. Any changes would be included in legislation to be laid in Autumn 2024, subject to parliamentary time.

Activities including the appointment of liquidators, official receivers and special administrators would become exempt under the proposals, according to the consultation response. However, further work by the government would be required to consider the feasibility and potential national security impact of other exemptions stakeholders have called for in the consultation, including exempting certain internal reorganisations, Scots law share pledges, and deals involving public bodies.

Further improvements to how the NSI system operates, including the NSI Notification Service - an online portal used for NSI filings - will be made by the Investment Security Unit (ISU). This includes how the ISU engages with transaction parties, and technical improvements to the online portal. Notably, over 50% of stakeholders who responded to the consultation opposed changes to the current NSI notification forms that would require frontloading yet more information, and the government said it will take this into consideration. These proposed improvements are intended to make it easier for businesses and investors, and their advisors, to notify deals and engage with government under the NSI regime.

Alongside these announcements, the government also responded to various points raised by the parliamentary Business and Trade Committee (BTC) in its submission to the NSI call for evidence.

Despite concerns raised, the government does not plan to define “national security” within the NSI regime. This is because “providing a definition could itself result in risks being missed”, according to the government response. Additionally, the government said that it is not minded to carry out an annual review of sectors subject to mandatory notification, something highlighted in the BTC submission, explaining that this would introduce the risk of uncertainty and even instability into the system.

Further, the government has now dedicated a team, the Research Collaboration Advice Team, to assists researchers and higher education institutes in keeping their work safe in terms of national security, while keeping the UK research sector open and secure.

The Department of Business and Trade will also separately launch a review team to better understand potential risks from ODI in sensitive industry sectors. Its work will, in turn, likely feed into the government’s future NSI assessments.