New UK FDI reforms needed for growth

A recent report by TheCityUK and Freshfields Bruckhaus Deringer has shed light on the pressing need for reforms to the UK’s foreign direct investment (FDI) and national security screening regimes. The report, titled ‘Foreign direct investment and national security regimes: A path to best practice in the UK’, aims to guide the UK government in refining regulations that could encourage increased investment while ensuring national security remains a priority.

The report reveals staggering figures regarding the UK's National Security & Investment Act (NS&I Act). In the fiscal year 2023-24 alone, 906 notifications were submitted under the NS&I Act, significantly outpacing similar sized European nations like Germany and France, which recorded only 300 each. This disparity raises questions about the efficiency of the regime, as many of the transactions captured do not inherently pose national security risks. Consequently, businesses facing such administrative hurdles are grappling with additional costs associated with compliance.

The report urges a thorough examination of the NS&I regime, particularly in the context of the UK government's ambitions to enhance its attractiveness as an investment destination. It highlights that while maintaining national security is crucial, it is equally imperative that the regulatory environment does not hinder growth. Miles Celic OBE, Chief Executive Officer of TheCityUK, emphasises that "the government has rightly recognised that increasing investment is essential for the UK to realise its growth priorities." He adds that the NS&I regime "should be proportionate and targeted to ensure that it isn’t a drag on growth."

Martin McElwee, Partner at Freshfields, reinforces the call for improvement by pointing out that "although there have been some incremental improvements in the UK’s NS&I Act regime since it was adopted, our research clearly sets out steps that the government can take to further refine it." He stresses the importance of drawing on insights from best practices in other jurisdictions to reduce the administrative burden on investors while still safeguarding national security.

The report presents several policy recommendations aimed at creating a more targeted, efficient FDI regime in the UK. These include increasing transparency and defining strategic sectors more precisely to minimise unnecessary notifications, streamlining the review process, and establishing clear engagement channels between the government and investors. Specifically, the report recommends that the government should exclude internal reorganisations from notifications, limit the regime's scope to transactions with a significant UK presence, and introduce a de minimis threshold for smaller investments.

In an era where global competition for investment is fierce, the insights from this report provide a crucial roadmap for the UK as it seeks to foster an investment-friendly climate without compromising on security measures. By implementing these recommendations, the government can aim to strike a healthier balance between protecting national interests and stimulating economic growth through enhanced foreign investment.