Britain must rethink its ‘national security’ law


The writer is a specialist regulatory adviser and former head of The Office of Fair Trading (now the Competition and Markets Authority)

Last November, a significant piece of legislation was introduced in the UK parliament that in more normal times would have provoked far greater coverage and concern.

Although it has been overshadowed by Covid and Brexit, the new National Security and Investment Bill threatens to change the investment environment in Britain radically — though few companies yet realise the extent of its impact. Peter Mandelson, a former UK business secretary, has described the bill as “a powerful deterrent to foreign direct investment”.

The bill introduces a new regime for monitoring inward investment on national security grounds. It requires any investment in a company in one of 17 industrial sectors that amounts to more than 15 per cent of the company’s value to be notified to a new government body: the Investment and Security Unit. For other sectors, notification is voluntary. The bill gives the government power to block a transaction if the ISU has concerns.

Such legislation captures the zeitgeist of the times. Other advanced economies have also recently introduced or extended laws to protect sensitive industries from foreign takeover. But this is far more than the UK playing catch-up in a worldwide outbreak of protectionism. It goes way beyond what has been introduced elsewhere — in two ways.

First, the scope is incredibly wide. It covers all sectors of the economy, and the investment threshold for mandatory notification is incredibly low. The UK government will even be able to intervene in cases involving businesses that have no UK assets, because the law will cover foreign companies that are active, or sell goods and services, in Britain.

Second, the powers of intervention are draconian and can be applied retrospectively. The government can “call in” deals up to five years after they have been completed, and it then has the power to declare them to be null and void. This applies to any investments made after the bill was introduced.

The threat of such drastic action means investors will want to play safe — especially as there is no definition in the bill of what actually constitutes “national security”. Before going ahead with any deal, participants will be keen to seek full clearance from the ISU — an organisation that does not yet exist. When it does, the body will be expected to handle hundreds of times more deals than are currently investigated for national security. That may lead to long waiting times and, perhaps, some investors seeking other homes for their money.

Ironically, two days before the bill was introduced to parliament, the prime minister launched a new “Office for Investment”, set up specifically to improve the UK’s ability to attract foreign investors. That is sensible, as there is clear evidence that foreign direct investment increases productivity. But the security bill ensures this new office will start with at least one hand tied behind its back. 

The most worrying aspect of the bill, however, is that it will encourage any vested interest that does not like the look of a deal to lobby politicians to call it in for investigation on national security grounds. Regulatory delays or uncertainty can kill deals. Foreign investment into wind-farm projects could be stymied by a complaint from competing energy firms. A takeover could be held up by workers objecting to job relocation. At present, ministers can say they lack the ability to intervene, but the bill will change all that. It will be a charter for economically wasteful lobbying amid Kafkaesque bureaucracy.

At a broader level, the legislation is simply misdirected. It buys into conspiracy theories about malevolent foreigners itching to buy up corporations in order to steal hard-won secrets. When introducing the bill, the former business secretary Alok Sharma said that “hostile actors should be in no doubt that there is no back door to the UK”. How can direct investment in a company be described as a secret “back door”?

In most of the 17 mandatory sectors identified by the bill, national security risks lie more with people and knowhow than with capital. Why would malevolent foreigners buy expensively into companies when they can simply try to hire a few key employees who carry valuable intellectual property in their heads? Or when they can recruit leading academics from university research departments?

In the US, the FBI is well aware of this latter possibility and recently sharpened its focus on America’s key universities, asking a number of them specifically to monitor the information that their Chinese research students can access. The interests of national security are better served by steps that target the risk directly than by threatening to staunch the economic lifeblood of foreign direct investment.

With a new secretary of state for business, Kwasi Kwarteng, now in post, it is time for a radical rethink.


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