Cabinet Office
1. The Business and Trade Committee made a submission to the NSI Call for Evidence on 6th February 2024*. The following text is the Governments response to the Committees submission, taking the Committees recommendations in order. The bold headings come from the Committees submission whilst the plain text is the Governments response.
(*) Business and Trade Subcommittee response to the Call for Evidence on the National Security and Investment Act 2021 retrieved 17 April 2024
The Changing Context
A. There has been a significant change in inbound investment trends. The nature of the threat to the UK has also changed. Our allies strategy has also evolved. It is vital that the UK does not become a back door through which our adversaries acquire capabilities that imperil NATO allies collective security.
2. The Committee has identified a number of significant global changes, in particular changes in inbound investment trends, the nature of threats to the UK, and our allies strategies. These shifts form important parts of the rationale for the introduction of the NSI Act and the way it has been operated, and the backdrop for the strategy articulated by the Government in the Integrated Review 2021 and the Integrated Review Refresh 2023.
3. Given these changing and uncertain times, the Government has directed substantial resource to develop national security legislation (including the NSI Act) and underpinning systems that are flexible enough to respond to the ever-changing threats, whilst being transparent and predictable enough to ensure the UK remains an attractive place to invest.
4. Two years after the NSI system commenced, we can see that it is working well, and the Call for Evidence represents an excellent opportunity to keep the system under review in a predictable and measured way.
5. The Government continues to work very closely with our allies to ensure the UKs investment screening system draws on global best practice. Through this continuing engagement, our allies are also now learning from the UKs experiences as they amend their own approaches. In February 2023 the US Government upheld the UKs status as an Excepted Foreign State under the US investment screening system, describing the NSI system as robust and demonstrating their confidence in the operation of the NSI Act even at that early stage.
6. The Government is committed to ensuring that the NSI system remains effective and flexible, adapting to the changing nature of our economy, in line with our allies approaches. The recent NSI Call for Evidence and its outcomes demonstrate that commitment.
B. The lack of a clear definition of national security undermines the NSI system: an explicit definition of national security, which is well-communicated and understood by business in particular, would help to ensure that we create a small garden and high fence.
7. National security risks are multifaceted and constantly evolving, as the Committee acknowledges in its submission. In line with other legislation and longstanding governmental practice, the Government therefore does not define national security, since providing a definition could itself result in risks being missed and harm the Governments ability to safeguard national security. This was subject to extensive debate at the time the NSI Bill was going through Parliament, and the Governments position has not changed.
8. The Government already follows a small garden, high fence approach: safeguarding the UK against the small number of deals that could be harmful to our security whilst leaving the vast majority of transactions unaffected. The Acts mandatory notification requirements ensure that the Government does not need to be notified of the large majority of deals that pose no national security risk while making sure it is notified of those deals that do warrant consideration under the Act. However, this does not prevent the Government from scrutinising or intervening in acquisitions in the rest of the economy where it identifies national security risk.
9. The Government is committed to ensuring that the legislation operates as transparently as possible, ensuring that businesses understand how the Act applies to them, without compromising national security or constraining its ability to conduct proper scrutiny. This is why the Government published guidance on the exercise of the call-in power (the Section 3 Statement) and the mandatory sector definitions, which the Government will be reviewing over the coming months to reflect the past two years of experience. Doing so will ensure the legislation continues to operate in a transparent and predictable manner.
C. Awareness amongst industry of the NSI Acts coverage appears to be low.
10. Contrary to the Committees assertion, responses to the Call for Evidence indicated high awareness of the NSI Act. 80% of the 110 responses the Government received agreed or strongly agreed they have a good understanding of the risks the Government is seeking to address. This is the result of extensive and ongoing engagement with sector-specific trade organisations, as well as with individual businesses and legal firms over the last three years since Royal Assent. The Government is reassured by the level of understanding and believe the number of notifications the Government receives reflects strong awareness of and compliance with the NSI Act.
11. Nevertheless, the Government remains committed to improving understanding of the legislation. This was the driver for the questions in the Call for Evidence which asked about particular topics where businesses would welcome more information or clarity. The Government will respond to this by engaging with stakeholders and through our continuous updates to guidance, in order to aid comprehension and compliance, following our best practice established through the development and implementation of the Act.
The Scope of the Act
D. We welcome the Governments proposals to:
a) create a standalone semiconductors sector that would be covered under the Act to make it clearer which types of transactions involving semiconductors are subject to mandatory notification;
b) create a standalone critical minerals sector under the Act.
We call on the Government to take this opportunity to secure wider critical minerals supply chains [and] ensure that the new critical minerals category under the NSI Act remains aligned with the UK Critical Minerals Strategy.
12. The Government is grateful for the Committees endorsement of these proposals. The proposals are the result of careful engagement with businesses over the past two years, which in turn followed extensive consultation during the original development of the Notifiable Acquisition Regulations.
13. As the Committee may be aware, the Government has a statutory obligation to review the Notifiable Acquisition Regulations within a three year period of them coming into force. The Call for Evidence effectively launched this review and, to refine the proposals further, the Government will publish a consultation on updating the mandatory area definitions in the summer. This means that the Government will not comment on the specific proposals now, but would like to provide reassurance that the ISU will continue to work closely with the relevant experts inside and outside of Government, and intends to harmonise the new Critical Minerals area with the Critical Minerals Intelligence Centres (CMIC) latest criticality assessment. CMICs first criticality assessment informed the list found in the Critical Minerals Strategy.
14. As with the current regulations, any changes will be drafted carefully to ensure they capture current and future risks: circumstances can change quickly and the regulations must be adaptable to that reality.
E. We call on the Government to use this review to bring the UKs investment screening regime under the NSI Act into stronger alignment with those of allies, and in particular with President Bidens Executive Order 14083 (September 2022). This would involve:
- creating a new standalone sector to capture transactions relating to media freedoms and the integrity of our democracy;
- measures to protect access to UK persons sensitive data;
- measures to protect the UKs cybersecurity, starting from the definition provided in EO 14083;
- measures to protect the supply chains and critical imports for strategically important infrastructure and technologies, including those that are essential to the current and future collective security of NATO Allies;
- measures to protect industry, intellectual property and sensitive data relating to the UK biosecurity industry, including genomics (which is not specifically mentioned under the current secondary legislation), whether through the creation of a standalone sector or inclusion in another sector.
15. The NSI system is in close alignment with our allies approaches to investment screening, including the USA, with whom the Government continues to engage and collaborate with closely.
16. As a relatively new system, the NSI Act has been able to adopt or adapt the best parts of older systems from around the world, in a way that best suits the UK. Therefore, it should not be a surprise that the areas of focus desc