Legal experts say the UK’s foreign investment law needs urgent refinement to avoid deterring capital
The UK government’s foreign direct investment (FDI) regime is under increasing scrutiny from legal experts, who argue that its broad scope could hinder growth unless reformed. A recent report from TheCityUK and law firm Freshfields calls on Prime Minister Keir Starmer’s Labour administration to implement a more focused, risk-based approach to UK FDI reform.
Unveiled at TheCityUK International Conference in London on 23 April, the report – Foreign direct investment and national security regimes: A path to best practice in the UK – contends that the National Security & Investment Act (NSIA) is far broader than equivalent regimes in competing economies. Lawyers warn that without urgent recalibration, the regime could repel valuable international investment at a time when Britain is hungry for capital.
Dame Anne Richards, chair of TheCityUK, stressed the need for balance. “In this competitive trade environment, [the Act] must be calibrated carefully, ensuring we protect genuine national security interests without deterring vital international investment,” she said.
Professor Loukas Mistelis, a partner at Clyde & Co and co-chair of London International Disputes Week (LIDW), echoed that warning, citing intensifying geopolitical pressure and growing complexity in investor-state disputes. “The question of how best to resolve disputes involving states and state-owned entities is more relevant than ever,” he said.
Mistelis added that the UK’s evolving FDI framework mirrored a global dilemma: how to secure national interests while remaining open to capital flows. He said international arbitration would play an increasingly pivotal role in maintaining investor trust.
Steven Francis, a financial services regulatory partner at Faegre Drinker, welcomed the report’s comparative lens, saying the UK should align with global best practice. His colleague Jonathon Gunn noted that while lawyers welcomed recent clarifications from the government, the Act’s scope remained problematic.
Embed from Getty Images“The broad scope still captures many low-risk transactions, unnecessarily discouraging otherwise beneficial investment,” Gunn said. He pointed to ambiguous language that can trigger reviews for routine internal reorganisations and small-scale deals, even where no credible security threat exists.
Gunn endorsed the report’s proposal for a recalibrated, risk-based model. It calls for excluding trivial transactions, defining strategic sectors with greater precision, and increasing pre-notification dialogue to reduce unnecessary filings. He said this would ease pressure on the system and give businesses earlier certainty.
However, Gunn warned that fast-tracking or relaxing rules based on the investor’s country of origin could spark geopolitical backlash. “Openly preferencing certain jurisdictions is likely to be very contentious – or potentially imprudent – in the current geopolitical climate,” he said.
A more controversial suggestion in the report is to remove criminal sanctions for breaches of the Act. Francis was sceptical. “UK law often imposes criminal sanctions for administrative corporate failures. Prosecution is rare and reserved for serious failings only – and that’s the right approach,” he said. Removing penalties altogether might suggest national security isn’t being taken seriously enough.
Mistelis noted that LIDW’s International Arbitration Day would include sessions on how arbitration mechanisms can bolster investor confidence, particularly as some states increasingly resist the enforcement of awards. “With rising public scrutiny and political risk, arbitration’s legitimacy is being tested,” he said.
As the Labour government sets its pro-growth agenda, legal experts argue this is a pivotal moment. Aligning regulatory rigour with economic ambition may define the UK’s success – or failure – in the global investment race.
