Growth ambitions meet security realities

Almost four years after the NSIA came into force, the government is re-examining how to balance openness with protection. On 21 October, UK Chancellor Rachel Reeves announced plans to get rid of “needless form filling” to boost growth and attract foreign investment. Her statement follows June’s Modern Industrial Strategy when the government pledged to cut the administrative costs of regulation for business by 25%. Yet the Modern Industrial Strategy also stresses the need to protect the UK from “new threats” to security.

Caught between a complex global environment and an ambition to make the UK “the best country to invest in anywhere,” the government recently consulted on a package of reforms to the NSIA regime designed to make investment screening more pro-business, pro-innovation and fit for purpose. As implementation approaches what should businesses look out for in the next six to twelve months?

Notifications for internal reorganizations – finally on the way out

In a welcome move to carve-out low risk transactions from mandatory screening, the government plans to exempt some internal reorganizations – widely seen as an unnecessary burden on corporate restructures. The extension of the exemption for appointment of administrators to other types of insolvency practitioners will also be welcomed.

Businesses can expect the government to bring secondary legislation to Parliament for consultation soon and should look for opportunities to comment on the scope of the exemptions at this stage.

Mandatory notification sectors – new target activities brought in scope and others removed

Proposed changes to the Notifiable Acquisition Regulations (NARs) – which define the sectors and activities that trigger mandatory notification – will bring new businesses into scope and remove others. Key changes include:

• Critical Minerals and Semiconductors: the government proposes new standalone sectors for Critical Minerals and Semiconductors (currently part of the broader “Advanced Materials” sector) and a wider range of activities to be brought into scope in each case. This reflects the recognition that these inputs are essential to several of the Modern Industrial Strategy’s growth-driving “IS-8” sectors, including Advanced Manufacturing, Clean Energy Industries and Digital and Technologies, and are therefore strategically important for UK strength and resilience.
• Data Infrastructure: to mitigate heightened threats to critical digital infrastructure, the government proposes bringing investments in all third-party operated data centers within the scope of mandatory notification. This would bring more investments under scrutiny, including data centers operated by certain cloud service providers that manage data infrastructure on behalf of other entities. The lack of a proposed materiality threshold means the definition could encompass an overly broad range of entities, including those engaged only in limited data processing or storage.
• Artificial Intelligence: proposed changes would remove certain low-risk activities, such as the use of consumer AI as a tool within internal processes. This reflects the reality of widespread AI use and aligns with Business Secretary Peter Kyle’s recent suggestions to minimize regulatory burdens for AI development. However, the proposed drafting remains broad, and there is a risk that businesses could still fall within scope simply for using enterprise AI rather than consumer-facing AI in low-risk internal processes.
• Water: the most headline-grabbing proposal is to bring the water sector into the mandatory notification regime. If adopted, any investment of more than 25% in the licensed water and/or sewerage companies across England and Wales would be reviewed on national security grounds. At a time when the water sector urgently needs investment and the government is promoting lower administrative costs, the move could amount to triple regulation of water mergers. The Independent Water Commission’s Report in July recommended a new super regulator to replace Ofwat and other water regulators, empowered to block changes of control where an investor is deemed undesirable. Assuming the government’s proposals are implemented, the NSIA regime would join this super regulator and the CMA in reviewing water-sector investments. The regulatory burden could therefore increase significantly without clearer guidance and coordination between authorities.

Investors and businesses should stay alert. Even if the government does not expect a major rise in mandatory notifications, broadly drafted proposals could produce one.

Low-hanging fruit for greater transparency

The government also invited stakeholders, including investors, to share views on increasing transparency under the NSIA, particularly to inform new guidance. Investors continue to cite a lack of predictability and transparency in how the government assesses risk where trusted foreign investors acquire interests in sensitive sectors – understandable given confidentiality surrounding case decisions. The government’s intention to publish additional guidance is therefore likely to be welcomed by investors.

So far, the government has consistently declined to introduce a “whitelist” for trusted investors that would be exempted from close NSIA scrutiny. In our feedback, Freshfields proposed several more measured ways the government could still enable trusted investors to make more informed decisions. These low-hanging fruit could include:

1. Introducing a fast-track process for low-risk investments, based on factors such as investor profile, target sector, and transaction structure to determine transaction eligibility. Australia’s Foreign Investment Review Board has set a good example here.
2. Updating published guidance for investors with strong track records to highlight positive factors used to determine whether a transaction is lower risk. Such factors could include being a known investor to the Investment Security Unit; having a good compliance record under the NSIA regime; or having a long-standing positive track record as an owner of UK critical infrastructure or supplier to the UK government and/or UK defense sector.
3. The government offering more informal guidance and non-binding comfort to trusted investors who are considering investing in a sensitive sector.

Now is an important time to contribute views on reforms that could increase deal certainty for investors in strategic sectors. Please get in touch to learn more about the changes investors could push for.

National and economic security are converging

Enforcement under the NSIA has tested the boundary between national security and economic growth.

In September, for example, the government imposed behavioral conditions on the acquisition of Oxford University spin-out Oxford Ionics by US-headquartered IonQ, Inc. The decision required Oxford Ionics’ science, engineering and infrastructure functions – along with suitably qualified personnel – to remain in the UK, highlighting growing emphasis on protecting domestic quantum computing capabilities along with other frontier technologies that underpin the government’s Modern Industrial Strategy goals for “IS-8” sectors such as “Digital and Technologies.”

While outright blocks remain rare and so far confined to investors linked to high-risk jurisdictions such as China and Russia, remedies are frequently imposed on UK, EU and US investors to ensure strategic activities stay in the UK or that key asset transfers are pre-notified and approved.

Across both merger control and national security reviews, the government’s growth mission and Modern Industrial Strategy is proving all-pervasive. Investors and businesses should keep these broader priorities in mind when navigating the UK’s regulatory landscape – but do not assume that pro-growth will necessarily mean less scrutiny.  

With thanks to Freshfields Sarah Jensen, Nick English and Joschka Nakata for their contributions to this update.