Labour’s Balancing Act: The National Security and Investment Act and the UK’s Investment Climate

3 Jul 2024, 08:33

By Joseph Ridding, Research Executive

With the United Kingdom holding a General Election on 4 July, the topic of national security has been at the forefront of campaigning due to increased tensions in the international system. The National Security and Investment Act (NSIA), often noted as a key success of the Conservative Government, was updated before the election was called and is likely to receive renewed focus once a new Government is formed. With the Labour Party polling to win the General Election, it begs the question: how will Labour navigate the NSIA due to the party’s commitments focused on national security and boosting economic growth?

Just this week, the NSIA and its legislation was the focus of reports relating to a proposed takeover of Graphcore, a British artificial intelligence organisation, by a Japanese conglomerate.

The NSIA came into force on 4 January 2022 through the Cabinet Office as part of the Government’s efforts to enhance the UK’s national security in the post-Brexit environment. The Act grants the Government the ability to review, investigate, and potentially prohibit transactions on national security grounds across various sectors, including but not limited to artificial intelligence, energy, defence, and data infrastructure. By applying to both inbound foreign and British investment decisions, the NSIA aimed to ensure comprehensive oversight and protection of national security interests within the UK.

Many high-profile transactions and acquisitions have been reviewed under the Act's scope across various sectors such as nuclear, telecommunications and semiconductors. Over the past six months, the NSIA has frequently been cited by Rishi Sunak's Government as a crucial measure to enhance the UK’s national security.

In May 2024, before announcing the General Election, the Government introduced reforms to streamline the NSIA, seeking to make it more effective and easier to manage for businesses navigating the UK’s investment climate. Critics of the NSIA have highlighted that the legislation’s scope does not promote a positive investment climate in the UK. For instance, the perception of too much government intervention in investments can create uncertainty for businesses, while decisions under the NSIA can be seen as politically motivated – these concerns led the Government to publishing a consultation on fine-tuning the NSIA to make it as “business friendly as possible”. On the other hand, the NSIA can be seen as protecting sensitive sectors and creating a safer environment for investment in the UK.

As the Labour Party laid out its plans for Government in its manifesto, it has pledged to establish a pro-business environment in the UK through supportive competition and regulatory frameworks. Although the manifesto underscores Labour’s commitment to ensuring the UK’s national security, it does not detail how this will be achieved. With Labour aiming to deliver economic stability and growth, it will have to consider the extent to which it wishes to use the NSIA while balancing between its ‘securonomics’ push on one hand with its desire to attract further foreign investment into the UK on the other.

Amid growing geopolitical tensions and the renewed focus on national security, businesses must prepare for the Cabinet Office to keep the legislative framework under review. This could lead to further changes in the NSIA’s scope, the powers it offers an incoming Government and the sectors it covers, which the previous Government had already started.

The team at Rud Pedersen is highly experienced in navigating the NSIA and its supporting legislation. If you are contemplating a transaction in the UK or concerned to understand the risks around existing assets and would like support, please get in touch via [email protected].