Lawyers have backed proposals to reform the UK government’s foreign direct investment (FDI) regime to drive growth put forward by TheCityUK and Freshfields.
The report – Foreign direct investment and national security regimes: A path to best practice in the UK – argues that the UK’s National Security & Investment Act casts a “very wide net” over UK investment activity compared to other regimes competing for the same FDI money.
It was unveiled at TheCityUK International Conference in London on 23 April. It highlighted the balancing act facing the Labour government under Prime Minister Keir Starmer in protecting the UK’s national security, managing economic and trade dependency risks, aligning with trading partners, and pursuing a pro-growth agenda.
Dame Anne Richards, chair of TheCityUK, noted that “in this competitive trade environment, [the Act] must be calibrated carefully, ensuring we protect genuine national security interests without deterring vital international investment”.
Professor Loukas Mistelis, a partner at Clyde & Co in London and co-chair of London International Disputes Week, agreed: “As geopolitical pressures mount and investor-state relations grow more complex, the question of how best to resolve disputes involving states and state-owned entities is more relevant than ever.”
Mistelis added that the UK’s evolving investment screening framework under the act reflected the broader global tension between safeguarding national security and attracting international investment.
Steven Francis, a financial services regulatory partner at Faegre Drinker in London, welcomed the report’s comparative approach, saying it was essential to align UK best practice with other leading jurisdictions, particularly in such a sensitive area.
Jonathon Gunn, an associate in Francis’s team, added that while practitioners understood the new UK legislation and welcomed the clarity provided by the government, its “broad scope still captures many low-risk transactions, unnecessarily discouraging otherwise beneficial investment”.
Gunn said the report’s recalibrated, risk-based approach, excluding internal reorganisations and de minimis transactions, would better balance security and economic growth. Defining strategic sectors more precisely, as proposed by the report, would also be a positive step.
“Many prima facie low-risk transactions can trip up on ambiguous drafting, which can trigger the application of the Act on a technicality, notwithstanding that substantive national security concerns are seemingly absent,” he said.
Proposals for earlier and more substantive pre-notification dialogue with the government could reduce system pressure, provide businesses with clarity sooner and decrease notifications made from uncertainty, rather than risk. However, Gunn said sufficient resources should be available to implement this approach.
“The proposals around risk-based fast-track or post-closing procedures are innovative, but openly preferencing investors from certain jurisdictions is likely to be very contentious – or potentially imprudent – in the current geopolitical climate,” Gunn added.
Francis mentioned that one surprising recommendation was to eliminate criminal sanctions for non-compliance.
He explained: “UK law often imposes criminal sanctions for administrative corporate failures. Prosecutions are not automatic – considerable thought is given to the exercise of discretion, and prosecution is reserved for serious failings only. This is the correct approach to take.”
To adopt blanket decriminalisation may send the wrong message about the importance the UK places on vital national security interests. As Francis added, “a rule without any form of sanction for breach is undesirable”.
Mistelis said an LIDW session at this year’s International Arbitration Day would also explore the legitimacy and effectiveness of arbitration in this space, where public trust is tested by increasingly high-stakes awards, provisional measures and non-compliance by certain states.
He concluded: “As the UK seeks to align regulatory policy with its growth ambitions, this discussion offers a timely opportunity to consider how arbitration can support investor confidence and sovereign accountability.”
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