The National Security and Investment Act: Three years on

Government review signals potential expansion of sectors and clarification for industry participants in Advanced Materials, AI, Defence and Synthetic Biology.

Executive Summary

• The first statutory review of the UK’s new national security regime praises the successful implementation of enhanced notification rules.
• Activities involving generative AI, Life Sciences R&D and Pharmaceuticals may fall within the regime's scope in the future.
• Clarification and guidance on Advanced Materials, Artificial Intelligence, Defence and Synthetic Biology are indicated as areas for future improvement.

Background 

The enhanced national security regime ushered in by the National Security and Investment Act 2021 and accompanying regulations (the “NSI Regime”) has significantly impacted transactions which take place within certain sensitive sectors of the UK economy. This regime, a broad overhaul of the less interventionist approach taken under the Enterprise Act 2002 (which saw fewer than 20 notifications across the 20 year period in which it applied), empowers the Investment Security Unit (“ISU”) branch of the Cabinet Office to scrutinise and intervene in transactions with potential national security implications. The NSI Regime aligns the UK more closely with other nations' approaches to foreign direct investment.

Since its implementation on 4 January 2022, nearly 2,000 notifications have been made and 123 transactions have been 'called-in' under the NSI Regime.

Outcomes of the Statutory Review 

The Government’s recent review into the efficacy of the NSI Regime concluded that the regime has been broadly successful in achieving its objectives of (i) protecting national security through the identification of transactions warranting scrutiny, (ii) minimising the burdens on business, by reducing the number of required notifications and (iii) ensuring stakeholders can confidently determine when an acquisition must be notified. 

However, the review also identified areas for improvement. In consultation with legal, business and banking representatives, the Government’s call for evidence highlighted that:

• ongoing review is needed to keep the legislative framework up-to-date with new technologies and national security risks. In particular, some of the respondents felt there were specific areas not currently covered by the NSI Regime that they believed should be, such as Generative AI in the Artificial Intelligence area, and Life Sciences Research and Development and Pharmaceuticals in the Synthetic Biology area;
• certain activities fall within the mandatory notification regime despite being unlikely to present material national security risks due to the broad scope of some sensitive sectors;
• 25% of respondents felt aspects of the NSI Regime were unclear, particularly in the highly technical fields of Advanced Materials, Artificial Intelligence, Defence and Synthetic Biology and called for more guidance.

Notable Statistical Findings 

Aggregated data from the past three years has also provided a greater insight into the practical application of the NSI Regime. In particular:

• academic research and development in higher education accounted for the highest number of voluntary notifications leading to a call-in, at 48.6%; 
• 11% of acquisitions which had not been notified were subsequently called-in by the ISU, mainly in Advanced Materials (50%), Communications (21.4%) and Computing Hardware (21.4%);
• only 4.9% of notified transactions were called-in, with 95.1% cleared to proceed within the statutory time limit of 30 working days; and
• 39 offences were recorded for completing notifiable acquisitions without approval.

Key takeaways

The statutory report suggests the Government is broadly satisfied with the NSI Regime. While the framework may be updated with additional guidance and areas over time (with Semiconductors and Critical Minerals likely to become new standalone sensitive areas), a radical recalibration of the NSI Regime is unlikely in the foreseeable future.

The report also emphasises the current administration's desire for economic growth, with a clear message from the Cabinet Office that, when appropriate, the Government “gets out of the way and lets investment flow as fast as possible". In view of this policy position, it is likely that the ISU will continue to take a measured rather than an aggressive approach to call-ins.