The UK government should seek to reform its foreign direct investment (FDI) regime to drive growth, according to new research from 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 investment activity in the country compared to other screening regimes that are competing for the same FDI money. 

The number of FDI notifications submitted under the act (906) was three times higher than in countries such as Germany and France, in part because the UK’s act requires submissions for transactions that don’t pose any national security issues.

While all of those submissions were subject to a basic review, 95.6% were cleared without any further investigation. In light of this, TheCityUK and Freshfields are calling on the UK government to re-examine the regime to ensure the act doesn’t adversely impact potential investment into the country and hold back growth.

Miles Celic, TheCityUK’s CEO, said: “The government has rightly recognised that increasing investment is essential for the UK to realise its growth priorities. While it is vital to ensure that our national security is protected, we also need to ensure that the system is focused and unnecessary regulatory hurdles to investing in Britain are removed. The NS&I regime should be proportionate and targeted to ensure that it isn’t a drag on growth and supports the attractiveness of the UK as a place to invest and do business.”

The report recommends that the government increases transparency and dialogue so fewer transactions enter the system unnecessarily, and limiting the scope of transactions covered, such as excluding smaller deals that would have minimal impact on national security. The report also calls for fast-track processes for sectors that are the most sensitive, while also urging the government to amend non-compliance effects to improve regulatory predictably.

Martin McElwee, an antitrust partner at Freshfields, said: “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, while also retaining its important focus on national security.

“By drawing on insights of best practice from investment screening regimes across a range of key jurisdictions, our policy recommendations will not only help to boost the appeal of doing business in the UK but will serve to limit the administrative burden on investors and reduce government spend, thus saving time and money.”

A report last year by TheCityUK and Freshfields found that the UK is leading the way in transparency and accountability in financial regulation.