National Security Bill implementation poses investment risks

The Bill, which enters Parliament for its Second Reading today [Tuesday], vastly increases the Government’s ability to scrutinise and intervene in business transactions. Though it provides more transparency around the process behind interventions than the current system, the expansion in scope and strength of powers could open the door to politicisation, the IoD said.

The new Bill would see a sharp rise in the number of transactions that the Government scrutinises, and the IoD urged Government to ensure sufficient resources were put in place to meet the new workload, to prevent a backlog from slowing down benign business deals. While the Government has committed to short processing times in most cases, there is no firm limit to the number of voluntary notifications that may be made by companies under the new system.

The Government has also committed to providing a process whereby parties can have informal discussions with officials to inform decisions regarding notification, and the IoD anticipates high demand for this service.

Dr Roger Barker, Director of Policy at the Institute of Directors, said:

“Intervening in the economy on the grounds of national security is an increasingly important challenge for the UK Government. It’s crucial that the Government’s powers are as robust as in other leading economies, and reflect the rise in dual-use technologies and the shifting geopolitical environment.

“However, there needs to be more clarity around when the new powers might be used. National security should not be used as a political tool to pursue economic nationalism or an industrial strategy by stealth. We welcome the Government’s assurances that the powers will not be used for broader economic reasons, but the door is open for unintended consequences. Certainty around how national security is defined is crucial, anything that isn’t clearly set out will harm perceptions of the UK’s competitiveness.

“The Government is hugely increasing its workload with this new system, and this must be matched with the right resources. Directors will fear getting stuck in bureaucracy. There’s no doubt that backlogs could delay or even curtail benign business transactions.

“The UK has benefited immensely from its global reputation as a good place to do business. As the transition period draws to a close, it’s more important than ever that we keep that reputation intact. Greater protections on national security should complement that, not conflict with it. If we don’t get this right, there will be a chilling effect on investment.”

Further detail

The National Security and Investment Bill, which enters Parliament for its Second Reading today [Tuesday], vastly increases the Government’s ability to intervene in business transactions on the grounds of potential threats to national security.

The Government has said that the ‘powers will be exclusively for use on national security grounds’, but has not defined national security for the purposes of the Bill. As a result, the powers could conceivably be used to target transactions on the basis of a broad definition of national security, encompassing issues relating to industrial strategy.

Under the Bill, businesses in a range of sectors will have to make mandatory notifications ahead of ‘trigger events’ that would see the change in levels of control of an entity or asset. In addition, businesses can voluntarily notify Government of such an event if they are outside these sectors but believe the transaction may have implications for national security.

The Business Secretary can ‘call-in’ transactions they deem to have a bearing on national security up to 5 years after the fact. Non-compliance with the regime can lead to 5 years’ imprisonment.

The OECD has estimated that $750bn has flowed into the UK as a result of FDI over the past ten years. In addition, the UK’s reputation as a global centre for business investment contributes to its attraction as a destination for the world’s most entrepreneurial companies and directors.