National Security And Investment Act: Government Confirms Updates In Response To Call For Evidence

Background

The NSI Act came into force on 4 January 2022, creating a new standalone regime allowing the Investment Security Unit (ISU) to scrutinise different types of transactions with a UK nexus in the interest of protecting national security. If necessary, the government may impose conditions on, or even block, deals that could give rise to a national security risk. Read our briefing note summarising the key provisions of the NSI Act here.

In November 2023 the government published a Call for Evidence, which gathered views from stakeholders on the impact of the NSI regime on businesses and investors. In particular, the government aimed to assess whether the scope and requirements of the NSI regime are proportionate and effective, in addition to informing its review of the 17 specified sectors relevant to mandatory notifications. Read our summary on the Call for Evidence here.

The Response

The government has now published its Response to the Call for Evidence, which sets out details of the five areas on which it will focus during 2024. These five areas are summarised below:

• Publish an updated Section 3 statement.The Section 3 Statement sets out how the call-in powers are expected to be exercised.These powers allow the government to "call-in" any transaction that is within the scope of the NSI regime, irrespective of whether it has been notified, to assess the risk of that transaction to national security. The government reported that 80% of respondents agreed or strongly agreed they have a good understanding of the risks the government is seeking to address with the NSI Act, however, respondents also requested more transparency on the areas where the government sees risk and on which areas of the economy the government considers most sensitive.In response, the government plans to publish an updated Section 3 Statement to help stakeholders better understand what the government is seeking to protect and the factors it expects to take into account when exercising its call-in power. The government has also explicitly stated that it has no plans to introduce a "fast track" process.
• Publish updated market guidance.The government will publish further market guidance on a range of areas requested by stakeholders as well as update existing market guidance in May 2024. It is anticipated that this will include: (i) details of the factors the government will take into account when assessing risk; (ii) how the NSI regime applies to transactions in academia and research areas; (iii) the situations in which the NSI regime can apply to outward direct investment; (iv) how the statutory time limits are calculated; and (v) the application of the mandatory notification regime to Automatic Enforcement Provisions in secured lending agreements.
• Consult on updating the mandatory notification areas.The Call for Evidence sought feedback on the regulations that specify the 17 sensitive areas of the economy that are subject to the NSI mandatory notification regime. Respondents requested clearer definitions to be provided in respect of these areas and guidance on their interpretation to remove ambiguity and reduce the number of unnecessary filings. Examples of areas with guidance that was criticised for being too complex include Defence, Suppliers of Emergency Services and Critical Suppliers to Government. Artificial Intelligence and Advanced Materials were also specifically named as example areas where the definitions were criticised for lacking clarity. The government intends to launch a formal public consultation on updating the definitions of the 17 sensitive areas of the economy, which ties in with the government's legal obligation to review the definitions of the sensitive sectors every three years. It remains to be seen how far the government will go with the consultation, but it is expected that it will include proposals for new standalone "semiconductor" and "critical minerals" areas. The government is also understood to be exploring the possibility of adding water to the sensitive sectors.
• Introduce exemptions for certain transactions.The Call for Evidence invited feedback on whether some targeted exemptions from the mandatory notification requirement might be appropriate. In an effort to reduce the burden of the regime on businesses, the government will bring forward secondary legislation to exempt the appointment of liquidators, official receivers and special administrators from the NSI regime. The ISU will also undertake a thorough national security risk assessment to determine whether other targeted exemptions can be created for intra-group reorganisations, transactions involving Scots law pledges and transactions involving public bodies.
• Improving the operation of the NSI system. The response welcomed suggestions to improve the operational processes of the ISU and the NSI notification portal. Acknowledging that improvements have already been made to the ISU operational processes, the government will consider where further improvements could be made based on the feedback received, including to address improvements to the online portal which over half of respondents raising the issue of false positive firewall blocks that can prevent notifications being progressed.

What next?

It is anticipated that new Section 3 statement and new and updated guidance on the NSI regime will be published during May 2024, while the other changes outlined above are expected between now and Autumn 2024. We will continue to monitor these changes and provide updates on them.