UK Government Consults on Expanding NSIA Mandatory Regime to Include Water Sector and Streamlining Changes

Background

On 22 July 2025, the UK government launched a long-awaited consultation on proposed amendments to the National Security and Investment Act 2021 (NSIA) Notifiable Acquisition Regulations (NARs). The consultation seeks to revise some of the definitions contained in the NARs relating to the 17 sensitive sectors subject to mandatory notification, with a significant proposal to include the water sector, as well as some streamlining measures in other sectors. This move reflects the government’s ongoing efforts to ensure that the NSIA regime remains responsive to evolving national security threats, particularly in light of increasing digitalisation and geopolitical risks, while at the same time facilitating much-needed inward investment consistent with the Labour government’s ambitious Growth Agenda.

Key Takeaways

• Water Sector Schedule to be added to the NARs: Certain investments in water infrastructure and services, which are currently outside the scope of mandatory notification, would become notifiable under the NSIA. This reflects a growing concern over the national security implications of the expected £100 billion of investment between 2025 and 2030 in UK water infrastructure and services, with much of this coming from foreign investors. The government expects at least 17 water operating companies to fall within the new Schedule, at a time when public confidence in water companies is at an all-time low.
• Creation of a separate Critical Minerals Schedule in the NARs: Moving critical minerals out of Advanced Materials and into their own Schedule reflects the importance of, inter alia, aluminium, manganese, natural graphite, rhodium, zinc, lanthanum, promethium and other rare earth elements to the UK economy and national resilience, in line with the latest UK criticality assessment. At the same time, other strategically important minerals necessary for defence or scientific purposes beyond the criticality list will also be retained. The government is also adding the extraction, processing and recycling of Critical Minerals to the scope of the new Schedule.
• Introducing a bespoke Semiconductors Schedule: Removing semiconductors from the Advanced Materials Schedule and merging it with Computing Hardware makes a lot of sense. Semiconductors are the foundation of modern electronics and are ubiquitous in consumer electronics, communications, the clean transition, aerospace, defence, artificial intelligence (AI), automotive and health care. The government also wants to add advanced packaging techniques and research and development (R&D) involving the wider design of processing units and memory chips within the Semiconductors Schedule to reflect the vital importance of chip security and sovereignty and a concomitant increased risk profile.
• Clarifying and streamlining changes: The definition of AI would be streamlined to exclude the rapidly expanding number of businesses using AI for low-risk activities. Importantly, entities that test the safety of AI systems, evaluate the risk of disinformation or misinformation, or conduct research into the capabilities of AI systems that could potentially create a risk to the health, safety or security of persons, will be kept in scope. Other technical updates and edits to the Schedules relate to communications, synthetic biology, energy, data infrastructure, critical suppliers to government and emergency services. The aim is to ensure the UK regime remains fit for purpose in light of evolving technological and geopolitical risks plus the rapid development of AI.
• Consultation Aim: Stakeholders are invited to submit responses online through a specially created portal. The government is particularly interested in views on the proportionality of the proposed changes and their potential impact on investment and compliance burdens.

Rationale and Sectoral Impact

The rationale for the inclusion of the water sector is driven by its critical role in public health, environmental protection and national resilience. The government notes that the increasing reliance on external investment and the interconnectivity of water systems elevate the sector’s vulnerability to foreign interference. The proposed changes aim to mitigate these risks by ensuring that investments in key water infrastructure and services are subject to a national security review by the government, including restructurings and other types of investments. The addition of this sector is estimated to increase the number of mandatory notifications under the NSIA by up to five per year (which is a modest increase as a whole).

In addition to the water sector, the consultation outlines a number of proposed amendments to the definitions of other sensitive sectors (a useful summary of all planned sectoral changes is available here). These updates are intended to close existing gaps in definitions and scope, and reflect technological advancements.

Other changes include semiconductors and critical minerals becoming separate sectors in order to bring more clarity and streamline the scope of the advanced materials sector which currently covers these areas. On the other hand, computing hardware is due to be merged with semiconductors, which makes sense from a practical perspective.

It is disappointing that the government has not yet proposed an exemption for intra-group transactions and other forms of internal reorganisations from the mandatory notification obligation—something that practitioners and investors alike have been recommending since the NSIA’s inception. The introduction of a fast-track process for urgent financial restructurings would also be a welcome development. Meanwhile the government has responded that it continues to consider such possible changes, including in relation to certain internal reorganisations and the appointment of liquidators.

Implications for Investors and Businesses

If implemented, the proposed amendments in several sectors would broaden the scope of transactions requiring mandatory notification under the NSIA. Investors and businesses operating in or adjacent to the water sector in the UK, for example, should assess whether their current or planned transactions may fall within the revised NARs. Failure to notify such an acquisition in the future could result in the transaction being void and may be coupled with civil and criminal penalties.

Legal and compliance teams should begin reviewing their transaction pipelines and internal processes to ensure readiness for the potential changes. Early engagement with external legal counsel is recommended to navigate the evolving regulatory landscape and if necessary, prepare submissions during the consultation period.

Next Steps

The consultation remains open until 14 October 2025. Interested parties are encouraged to submit their views, particularly on the proportionality of the proposed changes and their potential impact on investment and compliance burdens. The proposed changes could potentially come into force in early 2026, subject to the outcome of the consultation and the duration of the legislative process afterwards.

We are monitoring the consultation closely and we are already advising clients on the government’s proposals and how this may impact current and future transactions. If you would like to discuss the potential implications for your business or would like assistance in preparing a response to the consultation, please contact a member of our team.