Call for evidence outcome

National Security and Investment Act 2021: Call for Evidence Response

Updated 18 April 2024

Ministerial Foreword

Businesses are the lifeblood of our economy, and our economy is fundamental to our national security. There is no greater source of resilience than financial strength, because this is what enables us to invest in Britain’s defences and keep our people safe.

It is vital, therefore, that businesses are able to start up, scale up, buy, sell, trade and invest in the UK with minimal impediment. An operating environment based on open markets and free trade, and underpinned by the rule of law, is essential to their success.

Yet in dangerous and uncertain times, our economy is increasingly a target for our adversaries. That is why the National Security and Investment (NSI) Act 2021 is so important. By enabling Government to scrutinise and intervene in acquisitions that could harm the UK’s national security, it allows us to safeguard our national security. And I know that security is as essential to businesses as our openness.

It is crucial, then, that we are giving businesses the certainty they need to invest and grow, and protecting national security in an increasingly volatile world. This means safeguarding the UK against the small number of investments that could be harmful to our national security, whilst leaving the vast majority of deals unaffected.

The NSI Act is working well, but to continue to do so, it must evolve and adapt to changing realities. That is why the input of business is so critical, and why this Call for Evidence has been invaluable. We are working hand in glove with business, constantly consulting them, and shaping policy alongside them. Indeed the UK’s approach to economic security is characterised by the close relationship between government and business, and I want that to continue.

So I thank everyone who took the time to contribute. In this response, we set out which areas of work the Government will be taking forward to fine-tune the NSI system, ensuring it stays ahead of the threats facing the UK, and remains as pro-business as possible, without compromising the Government’s ability to conduct proper scrutiny.

I was clear when I announced the Call for Evidence that we can’t have yesterday’s regulation for tomorrow’s world. We are fulfilling that promise, honing the scope of the system to ensure it remains up-to-date, while reducing burdens on businesses wherever possible.

Together, we are making Britain the best, and the safest, place in the world to do business.

Background

To date, the Government has reviewed over 1,700 notifications and made 20 necessary and proportionate final orders under the NSI Act to protect our national security. But over the same period the global security environment has deteriorated and the economic security threats we face have continued to evolve. 

The Government wants the NSI system to keep ahead of the national security risks facing the UK and adapt to the changing nature of our economy, whilst minimising the burden it places on businesses and encouraging investment to enable our economy to grow. This is why we launched the NSI Call for Evidence - to give businesses, investors and other stakeholders the opportunity to share their views on how the system has been operating. These views will help us to consider how best to fine-tune the essential protections we need for our national security, whilst ensuring the regime remains as frictionless as possible for the vast majority of transactions that do not pose any concern. 

This document sets out what the Government is taking forward based on the responses received, and includes summaries of the key themes raised. 

Scale of responses  

The Government received 110 full responses to the Call for Evidence, of which 41% were from legal firms, 15% from trade bodies and Business Representative Organisations, 15% from banks or investors, 11% from businesses operating in the 17 NSI mandatory areas and 7% from academic and research institutions. Other respondents included think-tanks, consultants and respondents not replying on behalf of an organisation. Overall, the feedback regarding the operation of the system and business understanding on how the NSI Act works was positive. Over 75% of all respondents had been involved in transactions that had gone through the NSI system, of which almost three quarters had been involved in cases cleared to proceed in the initial 30 working days and 19% had been involved in final orders. The feedback received therefore provides particularly useful insight into the experience of respondents who have directly interacted with the NSI system.

Next steps     

In response to the feedback received, the Government will focus on five areas between now and Autumn 2024: publishing an updated statement on how the Secretary of State expects to exercise the call-in power (‘the Section 3 Statement’); publishing updated market guidance; consulting on changes to the mandatory notification areas; considering certain technical exemptions to the mandatory notification requirement; and making further improvements to the operation of the NSI system, including the NSI Notification Service.

1. Publish an updated NSI Section 3 Statement in May 2024

As part of the Call for Evidence, the Government sought feedback on how well stakeholders understand the NSI Act and the risks it is designed to address. 80% of all respondents agreed or strongly agreed they have a good understanding of the risks the Government is seeking to address.

However, responses also raised particular topics where businesses would welcome more transparency on where the Government sees risk. Respondents requested more clarity on the areas of the economy the Government considers most sensitive and how the Government assesses the national security risks of a transaction. In order to help stakeholders better understand what the Government is seeking to protect and the factors the Secretary of State expects to take into account when exercising the call-in power, the Government will publish an updated Section 3 Statement.

Some respondents also called for a fast track process for certain types of acquirer, for example those who have already had a prior transaction cleared through the NSI system. The Government wants transactions that are unlikely to create national security concerns to face as little delay or uncertainty from the NSI system as possible, but the Government is not considering such a fast track process. As set out in the Call for Evidence, some targets are considered so sensitive they will always warrant screening and so transactions need to be assessed on a case by case basis. It is the Government’s aim that further guidance and updating the Section 3 Statement will help businesses to better understand where the Government may intervene and why. The Government is keen to maintain a careful balance to ensure it can conduct proper scrutiny of transactions that could harm national security, while ensuring the NSI Act does not hold back the large majority of transactions that present no risk to national security.

2. Publish updated market guidance in May 2024

Of 74 responses to the question about further guidance, 81% requested further specific guidance across a range of areas, including the factors the Government expects to take into account when assessing risk, how the Act applies to transactions in the academia and research areas and how statutory time limits are calculated. Over 30% of respondents to this question requested further guidance on what is captured by the mandatory area definitions. 

38% of all respondents to the Call for Evidence said they would welcome further specific guidance on the situations in which the NSI Act can apply to Outward Direct Investment. In response to this, the Government will publish further market guidance on the topics stakeholders have raised, including the application of the NSI Act to academia and Outward Direct Investment.

We also received helpful views on the application of mandatory notification to Automatic Enforcement Provisions in secured lending agreements. 20% of all respondents have reflected NSI mandatory notification requirements in the terms within lending agreements, either as part of new agreements or through updating existing agreements.12% of all respondents said it had affected their approach to secured lending or had created uncertainty in the markets. 14% specifically noted that the inclusion of Automatic Enforcement Provisions under mandatory notification had not affected their ability to access loans, or to enforce such provisions. Based on this feedback, and the very small number of notifications the Government has received in respect of these transactions, the Government does not expect to exempt transfers of control under Automatic Enforcement Provisions. The Government will consider where it can provide further guidance in this area. 

3. Consult on updating the mandatory areas by Summer 2024 

The Call for Evidence sought feedback from stakeholders on the Notifiable Acquisition Regulations that specify the 17 sensitive areas of the economy that are  subject to the NSI Act’s mandatory notification requirements. Specifically, the Government sought feedback on possible additions to the list of 17 areas, as well as changes to how some of the existing areas are defined. 63% of respondents provided feedback on changes to the definitions. Over half of these said they understand the activities that might bring an entity in scope of the Act’s mandatory notification requirements. Respondents also requested clearer definitions and/or guidance in the 9 mandatory areas set out in the Call for Evidence. For example, a number of respondents flagged that they would welcome clearer definitions for the Artificial Intelligence and Advanced Material areas and additional or clarified guidance for the Defence and Critical Suppliers to Government areas.    

In response to this feedback, the Government will launch a formal public consultation on updating the mandatory area definitions by the summer. This will include proposals for a standalone Semiconductor area and a Critical Minerals area, which 26% of respondents who answered this question expressed support for. The Government is also exploring the possibility of adding water to the list of areas subject to NSI mandatory notification.

4. Consider technical exemptions to the mandatory notification requirement for inclusion in legislation to be laid in Autumn 2024, subject to parliamentary time

The Call for Evidence invited feedback on whether some targeted exemptions from mandatory notification may be appropriate, for example for certain types of transaction that tend to confer either minimal levels of control or no additional control.  Broadly, stakeholders supported targeted exemptions in the areas set out in the Call for Evidence. 

25% of all respondents supported an exemption for the appointment of liquidators, official receivers and special administrators from the NSI Act’s mandatory notification system.  Respondents commented that the inclusion of the appointment of liquidators as an activity that requires mandatory notification could detrimentally impact entities in financial distress, and is considered an anomaly to the existing carveout for administrators who have the same type of control over distressed assets and entities. Having carefully considered this feedback the Government will bring forward secondary legislation to exempt the appointment of liquidators, official receivers and special administrators.

27% of all respondents provided feedback on possible exemptions for certain internal company reorganisations, 15% of all respondents provided feedback on exempting transactions involving Scots law share pledges and 30% of all respondents provided suggestions on exemptions for public bodies. The feedback received suggested that pre-notifying internal reorganisations can impact investment or restructuring timelines. It also suggested that businesses do not fully understand the national security risks the Government considers in transactions involving Scots law share pledges and by public bodies. 

The Government is committed to making the regime as business friendly as possible, but this must not compromise its essential national security protections. Before deciding whether to make targeted exemptions for certain internal reorganisations, Scots law share pledges and public bodies, further work is first required to consider the feasibility and potential national security impact. The Investment Security Unit will undertake a thorough national security risk assessment to understand whether exemptions for these transactions are feasible and whether they can be designed in such a way that they do not compromise the integrity of the NSI Act. 

5. Improving the operation of the NSI system 

The Call for Evidence detailed a number of improvements the Government has already made to the operation of the NSI system. It welcomed further suggestions on changes to the Investment Security Unit’s operational processes, the notification forms and the NSI Notification Service (the ‘portal’). 

19% of all respondents called for greater transparency around the operation of the NSI system. Respondents also provided feedback on the Investment Security Unit’s engagement with transaction parties following an NSI notification and the length of the assessment process. The Government has already made improvements to the Investment Security Unit’s operational processes in many of the areas raised by stakeholders, including routinely offering calls at key stages of the NSI process and providing senior contacts for parties to engage post call-in. The Investment Security Unit will consider further such improvements based on the feedback received. 

Over half of the 50 respondents who expressed views on the notification form opposed requesting additional information through the notification forms. The Government will carefully consider this feedback before making any future changes to the forms.   

Many respondents indicated that the digital notification process generally works smoothly and appreciate the time and resources the Government has put into developing the portal. Over half of all respondents provided suggestions on possible improvements to the portal, with half of these raising the issue of ‘false positive’ firewall blocks that sometimes prevent users from progressing notifications. Respondents also suggested a range of potential functional improvements to the portal. The Investment Security Unit is aware of the issues users have encountered with the firewall and has been trialling potential solutions in recent months. The Investment Security Unit continues to make other improvements to the notification portal and will be assessing the technical feasibility of suggestions received, with a view to incorporating these into its forward work plan. 

Conclusion

By fine tuning the NSI system in these areas, the Government is ensuring it remains proportionate and well-targeted, and as pro-business and pro-investment as possible, without compromising the Government’s ability to conduct proper scrutiny. The Government will continue to closely monitor the performance of the NSI Act and will consider further changes to refine the NSI Act’s essential national security protections where necessary to keep pace with the evolving threats we face. The Government is grateful to all the respondents that took the time to respond to the Call for Evidence.