UK investment screening: Balancing national security and economic growth

DOI: https://doi.org/10.58248/RR91

Overview

The National Security and Investment Act 2021 enables the UK Government to scrutinise and intervene in business transactions that may pose a risk to national security, such as takeovers, mergers, and investments.

Evidence suggests that the regime may be capturing transactions that pose a low risk to security, imposing costs on investors and the state. With global competition for investment increasing, these costs may make investing in the UK less attractive for foreign businesses.

The government has proposed reforms to the system to reduce the burden on businesses. However, these reforms may not necessarily bring the UK in line with the investment screening regimes in other comparable countries.

The current regime

The National Security and Investment Act 2021 (NSIA) significantly changed the UK’s approach to safeguarding national security in corporate transactions. Before the act, the government had more limited powers to intervene in transactions under the Enterprise Act 2002. These powers were ill‑suited to the increasingly technological and intangible nature of security risks, such as those arising from data and intellectual property.

The NSIA regime has two main features: mandatory notification and discretionary intervention powers. The regime is managed by the Investment Security Unit (ISU), operating from the Cabinet Office

Notification and pre-clearance

Investors must notify the government of all business acquisitions exceeding certain thresholds (such as the size of the shareholding stake) in sensitive sectors, including AI, quantum technology, defence, and critical suppliers to government.

For acquisitions that fall outside these mandatory thresholds, investors can still choose to notify the government to seek legal certainty where a transaction may raise concerns.

The NSIA applies irrespective of an acquirer’s nationality or the value of a transaction.  National security is not defined in the legislation, so the government can retain operational discretion as risk profiles change over time.

After notification the ISU determines whether it should be approved.

Discretionary call-in powers

The Secretary of State retains a broad power to call‑in transactions for review. This allows them to review any acquisition of control over a qualifying entity or asset, whether notified or not. This power extends up to five years after the transaction is completed, unless mandatory notification was required but the parties involved failed to do so. This aims to deter non‑compliance while preserving flexibility in confronting evolving threats.

NSIA requires the government to issue periodic ‘section 3’ statements describing how it expects to exercise its call-in powers. The most recent statement from May 2024 outlined the broad categories of concern but leaves space for case‑specific analysis.

Final orders

Once the government has called-in a transaction, it assesses the risk it poses to UK national security.

If it considers the transaction does pose a risk, it can issue a final order. This is a legally binding decision that prohibits the transaction or imposes conditions on the transaction or the future operations of the business. These conditions have typically targeted operational control, information handling, governance structures, or technology transfer pathways.

The government can also approve the transaction with no conditions by issuing a ‘final notification’.

Penalties and enforcement

If an investor does not comply with the NSIA, for example by not notifying the government of a transaction that is a notifiable transaction, it might incur potentially severe civil and criminal penalties and the transaction may be voided.

Operation in practice

Notifications are increasing but few are called-in

Notification volumes increased from 2022 to 2025. This reflected both growing investor awareness and the broad scope of mandatory sectors. In the most recent reporting period, notifications rose by 26% to over 1,100.

Despite these volumes, the system intervenes in only a fraction of cases. Over 95% of notified transactions are cleared during the initial review period without further action. This may suggest that the regime is capturing many transactions that pose minimal identifiable security concerns. The data also shows that transactions are consistently more likely to be called in if they relate to defence, dual‑use technologies, and critical infrastructure, indicating that high-risk activity is concentrated in these sectors rather than being equally distributed in the sensitive sectors.

More call-ins are leading to conditions

However, the regime is becoming more interventionist when it does call in a transaction. For example, the ISU issued 17 final orders in 2024/25 compared with five the previous year. While only one case required full divestment (related to the acquisition of a UK semi-conductor business), the growing proportion of call‑ins leading to conditions indicates that the government is becoming increasingly assertive in managing national security risks.

Review times may be an issue for investors

When the government receives a notification, it must:

• Decide whether to accept it or reject it (for example, if it has not been submitted properly)
• If it accepts the notification, it must decide whether to call-in the transaction within 30 days (the ‘review period’)
• If it decides to call-in the transaction, it must complete its assessment within 30 days (although it can extend this by 45 days, or more if the investor agrees)

The statutory review period does not begin until the ISU accepts a notification, and this step now takes around a week on average. First‑stage decisions are often issued near the end of the statutory period, implying that real‑world review timelines regularly exceed 30 days.

For investors, especially those coordinating clearance across multiple jurisdictions, timeline uncertainty is a material consideration. For the government, it highlights the resource pressures associated with requiring notification from a broad range of sectors.

At this point, investors say a week-long pre-notification process is manageable, but if the process becomes prolonged this may give rise to concerns (this is the author’s professional view based on consultation with investors).

Investment screening examples

Interventions made under the regime show a consistent pattern: the government focuses on advanced technologies, dual‑use materials, data‑rich infrastructures, and acquirers linked to strategic competitor states.

The government has, since late 2022, preferred to impose conditions on transactions but allow them to proceed, instead of preventing them outright, which signals an effort to manage risk pragmatically where possible.

Some key decisions under the NSIA illustrate how the government has interpreted risk in practice:

• Nexperia/Newport Wafer Fab: the government required a Chinese-owned parent company to divest from a major UK semiconductor facility due to concerns about strategic dependence and potential influence. The decision suggests that the UK considers semiconductor manufacturing capacity integral to national resilience and is prepared to unwind completed transactions.
• Acquisition of Pulsic Ltd by Super Orange HK Holding Ltd and HiLight Research/SiLight Shanghai: the government intervened to prevent acquisitions where downstream military applications of technology posed potential risks. These cases suggest the government is willing to treat even niche design or component technologies as strategically significant where they may contribute to sensitive systems.
• LetterOne/Upp: the government issued a divestment order based on the beneficial ownership of the acquiring company and the risks of the beneficial owners influencing UK infrastructure (fibre-optic broadband). The decision was upheld by the High Court, which broadly deferred to ministerial judgments on national security. The High Court’s decision may help reinforce the robustness of the regime and strengthen the government’s position in any future litigation. An appeal has been lodged at the Supreme Court in January 2026.
• Versarien/Anhui BIMT (2025): this case involved the acquisition of assets and intangible property rather than equity/ownership of a company. It emphasized sensitivity around advanced materials – particularly graphene – and demonstrated that the NSIA regime applies equally to intellectual property, know‑how, and intangible assets.

International comparisons

NSIA is broader than comparable regimes in other countries, suggesting that the UK’s regulation may capture a wider range of low‑risk deals. While the UK’s approach ensures comprehensive risk control, it also creates higher regulatory burdens, which may make investing in the UK seem less appealing and reduce the UK’s competitiveness. The UK regime is one of the few regimes globally that purely domestic transactions are also covered.

An analysis by industry body The City UK (PDF) found that the UK receives significantly more notifications than peer jurisdictions such as Germany and France, partly because the UK defines the 19 sensitive sectors broadly and does not exempt smaller transactions (under NSIA mandatory filing is required when acquiring shares or voting rights that exceed 25%).

Other major regimes pursue more targeted approaches. The US CFIUS framework focuses primarily on foreign acquirers and requires mandatory notifications only in narrowly defined categories tied to critical technologies or security‑sensitive data. Germany uses a two‑tier system with clear thresholds and where the acquisition relates to German companies or operational units. Australia’s system combines monetary thresholds with particular scrutiny of foreign government investors.

Economic impact

NSIA’s breadth may have implications for foreign investment in the UK (called foreign direct investment, or FDI). Research from the Organisation for Economic Co-Operation and Development (OECD) from 2019 estimated that a 10% reduction in FDI restrictiveness could increase FDI by approximately 2.1%. The OECD’s 2024 FDI Regulatory Restrictiveness Index found that investment screening accounts for 11% of overall FDI restrictiveness globally. OECD data from 2005 showed that across OECD countries, foreign affiliates were 70% more productive than domestic firms, 80% more likely to invest in research and development and pay 35% higher wages, underscoring the wider cost of deterring such investment.

Since 95% of transactions clear the first stage of the NSIA process, the framework may be capturing many transactions that pose no genuine security risk, creating regulatory friction that may deter investment.

This is in the context of weakening UK FDI. Data from the Office for National Statistics (ONS) shows inward FDI flows fell from £41.3 billion in 2023 to £13.4 billion in 2024; one of the reasons for this was that companies paid higher dividends to foreign parent companies and reduced the earnings that were reinvested in the UK. UN Trade and Development’s World Investment Report 2025 found that productive global FDI fell 11% in 2024, with Europe experiencing a 58% drop (these figures exclude the value of volatile conduit flows through European economies). The reasons for this likely include geopolitical uncertainty, trade tensions and interest rate dynamics.

Reforms to the system

The government has acknowledged that the NSIA, while necessary for national security, imposes administrative burdens on businesses and government alike. Reforms are seeking to respond to concerns about the predictability and proportionality of government intervention as well as the administrative burden of complying with the regulations.

A major call for evidence between November 2023 and January 2024 collected views on sector definitions, notification scope, and operational efficiency. Stakeholders consistently said that the breadth of mandatory sectors meant the regime inadvertently captured low‑risk transactions and pointed out uncertainties around how the regime might apply to particular deals in practice. The Business and Trade Sub-Committee on National Security and Investment fed views into the call.

A statutory review of the notifiable acquisition regulations, published in December 2024, echoed these concerns and identified several areas where greater precision could reduce unnecessary filings. Building on these findings, the government consulted on several reforms to the system in July 2025,  linked to the government’s industrial strategy, which emphasises the need to reduce regulatory friction while maintaining national security around critical technologies. Legal and industrial commentators have said these reforms signal an intention to make the regime more navigable and targeted.

The government published its response to the consultation on 12 March 2026 (PDF). It said it would make several updates including to make changes to the Critical Minerals, Semiconductors, Artificial Intelligence and Communications sectors to reduce capturing low-risk notifications and that it would create a new schedule to cover acquisitions in the Water sector.

Further options for reform

Based on the author’s professional view and drawing on consultation with investors, several targeted reforms could further improve proportionality while preserving robust security protections. Some of these may be addressed through the government’s recently proposed updates (PDF) to the system:

• Narrowing mandatory sector definitions could remove routine low‑risk filings and allow the ISU to focus resources on genuinely sensitive areas.
• Introducing a de minimis threshold, such as exempting very small entities, could better align the UK with international norms.
• Requiring a more meaningful UK connection could prevent capture of transactions with limited domestic relevance.
• Establishing a fast‑track route for low‑risk investors or allied jurisdictions could improve predictability and facilitate economic activity.
• Reforming the legal status of non‑notified transactions—from automatically void (which implies that ownership rights do not legally transfer) to voidable (which implies ownership can transfer but it is subject to the NSIA review)—could reduce commercial uncertainty.
• Increasing transparency, including anonymised decision summaries, could help investors self‑assess risk and reduce precautionary filings.

Acknowledgements

Professor Kokkoris is Chair in Competition and Economics, Queen Mary University London and Ordinary Member, UK Competition Appeal Tribunal. Afroditi Karatagli provided research assistance in this analysis.

Questions about this briefing should be referred to Oliver Bennett MBE ([email protected]) who acted as parliamentary lead for this work.