Overview
The UK Cabinet Office has launched a consultation on proposed changes to the scope of the UK’s mandatory notification regime for scrutinising national security risks associated with inbound investments involving certain sensitive economic sectors and activities (the “Consultation”). The Consultation’s purpose is to ensure that the mandatory notification regime “remains targeted and proportionate, protects national security, and provides investors with the certainty they need to fuel sustained growth.” The Consultation is considering three main changes. First, updating the scope of the mandatory notification regime for certain sectors to ensure they remain up to date and exclude areas where national security risk is assessed as unlikely to materialise. Second, addressing areas of emerging national security risk by creating new standalone sectors from areas already covered elsewhere in the regime such as critical minerals and semiconductors. Third, bringing new areas into the mandatory notification regime such as the water sector. Underpinning many of the proposals in the Consultation is an effort to improve clarity and certainty regarding the circumstances in which a mandatory notification requirement arises. Affected businesses and investors should assess the proposed changes to the regime and consider whether to participate in the consultation, which will close on October 14, 2025.
UK National Security and Investment Regime
Under the National Security and Investment Act 2021 (“NSIA”), the UK government can scrutinise and intervene in acquisitions of entities and assets in, or connected to, the UK economy that may pose a national security risk. While these powers cover all areas of the economy, the regime also requires acquirers to submit a mandatory notification to the UK government when a proposed acquisition involves certain activities in a specified list of sensitive sectors. These notifiable acquisitions require approval prior to completion.
The National Security and Investment Act (Notifiable Acquisition) (Specification of Qualifying Entities) Regulations 2021 (the “Regulations”) set out the activities in sensitive sectors that trigger the mandatory notification requirement. The sectors currently within the scope of this requirement are: (i) advanced materials; (ii) advanced robotics; (iii) AI; (iv) civil nuclear; (v) communications; (vi) computing hardware; (vii) critical suppliers to government; (viii) cryptographic authentication; (ix) data infrastructure; (x) defence; (xi) energy; (xii) military and dual-use; (xiii) quantum technologies; (xiv) satellite and space technologies; (xv) suppliers to the emergency services; (xvi) synthetic biology; and (xvii) transport.
Updates to Existing Mandatory Notification Sectors
The Consultation proposes a number of changes to the scope of sectors already covered by the mandatory notification regime. For example, the definition of advanced materials has been expanded to include rare earth elements and their use in the production of certain dual-use objects, as well as other materials (e.g., activated carbon) to mitigate possible national security concerns associated with those materials.
The Consultation also proposes revising the definition of AI to, among other things, ensure that low risk cases involving the use of consumer AI as a tool within internal processes (absent further research and development of the technology being performed) are removed from the scope of the mandatory notification regime.
Where evolving national security risks have been identified, the Consultation also seeks to update definitions to capture relevant risks and provide greater certainty as to what falls within the scope of the mandatory notification regime. For example, the data infrastructure definition has been amended to include third-party operated data centres, including data processing and storage facilities, as well as those offering peering / interconnection or subsea cable connections. This includes Cloud Service Providers and Managed Service Providers that offer or resell platform-as-a-service and infrastructure-as-a-service.
New Standalone Definitions of Critical Minerals and Semiconductors
Critical Minerals
The Consultation proposes removing critical minerals from the existing definition of advanced materials and creating a standalone schedule in the Regulations to increase clarity as to the minerals that are within the scope of the regime. The list of critical minerals would be expanded to add 18 additional minerals, in alignment with the latest UK criticality assessment. The extraction, processing, and recycling of such minerals would also be brought within the mandatory notification regime’s scope.
Semiconductors
The Consultation proposes removing semiconductors from the existing definition of advanced materials and creating a standalone schedule in the Regulations that merges with the existing definition of computing hardware. The definition of semiconductors would also be expanded to include: (i) advanced packaging techniques; (ii) activities involving the wider design process of processing units and memory chips (e.g., research and development); and (iii) semiconductor-related devices and advanced chip designs.
Inclusion of New Sectors
Investment in the UK’s critical national water infrastructure has been identified as a potential route that could be used by malicious actors to threaten critical infrastructure through access to sensitive information and assets. Therefore, the Consultation proposes the introduction of a new schedule to the Regulations covering acquisitions in the water sector that would cover the regional water and/or sewage monopolies operating in England and Wales, enabling the UK government to take action on national security grounds and grow its awareness of changes in ownership that could create national security risks.
Key Considerations for Business
In the first instance, businesses and investors operating in the sectors impacted by the Consultation should assess the potential impact of the proposed changes on their activities and consider, when appropriate, responding to the consultation directly or through a relevant industry body. For more information on these proposed changes and their implications, contact the author of this post, Alexandra Melia in Steptoe’s International Trade and Regulatory Compliance team in London.
