The UK’s National Security and Investment Act has placed costly regulations on foreign investment. If British lawmakers want to promote the UK as a global economic hub, they must adopt a more business-friendly foreign investment review framework.

In early January, the National Security and Investment (NSI) Act became law, expanding the United Kingdom government’s power to block foreign investments for perceived security risks. While the government is right to take national security concerns in sensitive industries seriously, the new investment review framework’s expansive scope and lack of accountability risks harming Britain’s reputation as a global economic hub open to foreign investment.

As in the European Union and the United States, growing foreign investment in British high-tech industries — especially from China — has strengthened calls for increased scrutiny of foreign investment in recent years. The NSI Act, which applies to 17 sectors ranging from nuclear energy to quantum technologies, will allow the government to impose remedies or block transactions if a specific investment results in voting shares beyond predefined thresholds or the acquisition of broadly defined “assets.”

However, the NSI Act is overly broad in scope, meaning many potential investments that carry no national security risk could face burdensome and unnecessary scrutiny under the new investment review framework. Instead of targeting specific national security risks within certain industries, the NSI Act targets broadly defined sectors from “artificial intelligence” (AI) to “computer hardware.” For example, an investment resulting in 25 percent foreign ownership of an AI-enabled translation or language-learning app, which carries little security risk at all, could be subject to cumbersome and unnecessary national security review under the new law.

The vague statutory language, combined with the NSI Act’s extraterritorial application, means that companies with foreign headquarters could be subject to frivolous investigation by the UK’s newly established Investment Security Unit. Even internal restructuring or a merger between two foreign companies could be subject to review on the basis of even a flimsy UK nexus, such as whether one of the companies “distributes goods to a UK company.”

Potential penalties, which can be as high as five percent of a firm’s global turnover, are also set too high. Worse still, these penalties can be imposed retroactively, meaning deals completed up to five years earlier can be suddenly subject to investment screening long after the fact. These features mean that the UK’s new investment review process can become more arbitrary and cumbersome than the existing regimes in France, Germany, and even the United States.

Even worse yet, not all decisions taken by the Investment Security Unit will be subject to judicial review, so many of its decisions cannot even be appealed. Like the UK’s Competition and Markets Authority (CMA), the Investment Security Unit is unlikely to face accountability for its potentially arbitrary national security determinations. As my colleague Iain Murray points out, a CMA decision can only be overruled by the Competition Appeals Tribunal in cases where “the CMA acted irrationally, illegally or with procedural impropriety.” However, most appeals are ultimately decided in the CMA’s favour because such reviews tend to focus on procedural flaws rather than on substantive legal issues.

That will have at least two effects. First, as firms face the risk of arbitrary and potentially hefty fines, many will seek prior authorisation from the Investment Security Unit. However, as caseloads increase, delays will ensue, even for investments with little bearing on national security. If such delays become long enough, many investors might choose to invest in more business-friendly jurisdictions, such as Ireland and the Netherlands, which already rank among the UK’s chief competitors in financial services. Second, as the Financial Times reports, the NSI Act’s vague definition of national security risks and broad scope means that politicians could exploit the new investment review framework to extract concessions from companies — such as a promises to invest and create jobs in politically favoured constituencies.

The NSI Act’s timing is another cause for concern. The new law comes at a time when UK regulators are taking an increasingly aggressive approach against tech companies. The CMA recently decided to block Meta’s acquisition of Giphy and launch an investigation into Microsoft’s proposed acquisition of Nuance Communications — even though none of these companies are headquartered in Britain. Against this backdrop, the NSI Act risks damaging Britain’s long-term reputation as an economic centre that is open to foreign businesses.

Brexit provides the UK an opportunity to craft a more market-friendly regulatory framework and attract innovative foreign companies. However, by passing laws such as the NSI Act, Westminster appears to be trying to outcompete Brussels in imposing costly regulations on businesses. As British lawmakers seek to promote the UK as a global economic hub, they need to adopt a more business-friendly foreign investment review framework. A less cumbersome investment review process — which targets a narrower set of pre-defined security risks, limits retroactive and extraterritorial application of the law, and establishes more transparency and oversight for the Investment Security Unit’s decisions — will be a right step in that direction.

Ryan Nabil is a Research Fellow at the Competitive Enterprise Institute in Washington, DC.

This article is published under a Creative Commons License and may be republished with attribution.