Background

Under the NSI regime, the Government is able to scrutinise and intervene in transactions which raise national security concerns in the UK. The regime is operated by the ISU which, as part of a broader reshuffle in February 2023, was moved from the Department for Business, Energy and Industrial Strategy (“BEIS”) to sit within the Cabinet Office. While BEIS has now been dissolved as a department, the House of Commons nevertheless currently maintains a BEIS Committee, which is appointed by Members of Parliament and reports to Parliament as a whole, although this is due to be reorganised in upcoming parliamentary machinery changes (further details below).

Despite the ISU’s early engagement with parties in navigating the NSI regime, and publication of its first Annual Report in June 2022, it has been noted by Parliament that there has been opacity in its operation as well as in the Secretary of State’s decision-making regarding which transactions are called in or subject to a final order.

Given the national security concerns at issue, it is perhaps inevitable that some parts of the ISU’s screening process remain unclear. However, this has led to commercial uncertainty and questions around the accountability of how ministers are using these new powers. Indeed, the BEIS Committee report accompanying the publication of the MoU noted that “it is essential to avoid the perception that investment-screening decisions have been politicised”.

The MoU now formalises Parliament’s oversight and scrutiny of the NSI regime and brings it more in line with the US’s foreign investment screening regime, where Congress oversees the operations of the Committee on Foreign Investment in the United States (“CFIUS”).

Overarching principles

The MoU does not signify a statutory role for the BEIS Committee regarding the NSI regime, and the commitments within it are not legally binding. However, despite lengthy disagreement over how parliamentary oversight of the NSI regime should work, the MoU finally demonstrates a way forward for Cabinet Office ministers and the BEIS Committee, and a strong step towards establishing an effective system of political scrutiny of the regime.

In the MoU, the BEIS Committee commits to having regard to the national security and commercial sensitivities of the ISU’s work and not to jeopardise its interventions or unduly impede its operational effectiveness while exercising its oversight powers. Notably, these oversight powers will be limited to retrospective scrutiny of ISU decisions, unless otherwise agreed, to maintain the ISU’s decision-making independence.

Crucially, the MoU emphasises that oversight by the BEIS Committee must not compromise information which is either commercially or security sensitive, and sets out strict procedures for the sharing of information to ensure this.

Oversight and scrutiny without intervention

The MoU confers a number of oversight powers on the BEIS Committee which allow it to scrutinise retrospectively the activities and decisions of the ISU.

• Informing the BEIS Committee of ISU decisions: The Secretary of State will inform the BEIS Committee ‘at the earliest opportunity’ when a final order has been made, varied or revoked, and when a direction has been made to the Competition and Markets Authority (“CMA”) under Part 3 of the Enterprise Act 2002.  The BEIS Committee will only be informed after the event. Where possible, it will also be informed of “impending Ministerial statements or announcements” relating to the NSI regime and decisions of the ISU.

• Annual Report: The ISU will consider requests by the BEIS Committee regarding the inclusion of information in the Annual Report. It will also provide the BEIS Committee with a confidential annex and/or briefing alongside the Annual Report, which may cover: the types of risks identified; market monitoring; how the ISU works with other parts of Governments; and parties withdrawing from acquisitions during the screening process. This information will be aggregated and anonymised as far as possible to protect national security and commercially sensitive information.

• General oversight of the NSI regime: The BEIS Committee intends, through its Sub-Committee on National Security and Investment (“NSI Sub-Committee”), to oversee the NSI regime and the operations of the ISU more generally. While the BEIS Committee will determine the remit of this oversight itself, the MoU proposes that such oversight will involve monitoring the effectiveness and efficiency of the ISU in addressing national security risks, conducting assessments and processing notifications, as well as monitoring compliance and enforcement of final orders. It will also look at the impact of the NSI regime on foreign direct investment into the UK.

• Information requests: The NSI Sub-Committee can make requests for information about individual cases from the ISU, but this will only be provided after a final order or notice is served and any window for appeal has closed. It can also request to receive briefs or to have its staff work with the ISU to obtain information.

• Public evidence sessions: The BEIS Committee can request to have public oral evidence sessions with Cabinet Office ministers and senior officials, which may require safeguards where sensitive information is discussed.

Handling of information

The MoU sets out strict requirements for the sharing of commercially or security sensitive information with the BEIS Committee. This is ensured through a number of measures, with greater precautions to be taken for the communication of the most sensitive information. These measures include:

• giving access to relevant documents at a secure government building or on Privy Council terms;

• informing the Chair of the BEIS Committee when information is being withheld and why;

• ensuring safeguards are in place at public evidence sessions; and

• allowing the ISU to redact information from the reports of the BEIS Committee where the Secretary of State considers its inclusion may prejudice national security or commercial interests.

An evolving regime

This agreement reinforces the role of the BEIS Committee in holding the ISU to account and reporting on processes and trends in ISU decisions, whilst ensuring that any examination of the NSI regime will be retrospective and will not interfere with the ISU’s day-to-day operations – something which would clearly be beyond the scope of Parliament’s role in overseeing the operation of Government. The MoU therefore seeks to provide a balance between transparency and scrutiny of the ISU, thus addressing long-standing concerns about the functioning of the regime but without compromising the flexibility and effectiveness of the ISU in its screening of (and interventions in) transactions.

It was announced in the recent changes to parliamentary Committees Related to Government Departments (Machinery of Government Changes) that, from 26 April 2023, the BEIS Committee will become the Business and Trade Committee It is presumed this reconstituted body will continue the oversight of the operations of the ISU.

The MoU’s similarity to the congressional oversight of the CFIUS regime in the US underscores the influence of the US investment screening regime on the UK and increasing alignment of the UK regime with that operated in the US. Notably, the Chair of the BEIS Committee visited the US last year with a view to gaining a greater understanding of congressional oversight of the CFIUS regime. With this in mind, it remains to be seen whether other US initiatives to enhance commercial certainty in investment screening – notably President Biden’s Executive Order in September 2022 which set out certain additional national security factors for consideration by CFIUS when reviewing deals – will be reflected in future clarifications of the UK’s NSI regime.

Authored by Christopher Peacock, Robert Gardener, Eleanor Winn, and Christopher Hutton.