The EU’s foreign investment screening regulation – Part 2: what does the future hold?

In Part 2 of this blog post following our podcast with Damien Levie, Head of the Technology and Security Unit for FDI Screening in the Directorate-General for Trade (DG Trade) at the European Commission, we consider the future of the European Union’s foreign investment screening regulation, and what developments we might see. 

Our first post considered how well the FI Screening Regulation has worked to date and how aspects, such as transparency, have somewhat improved since its inception. This second blog post looks at forthcoming regimes, whether harmonisation might be achieved across Member States, and the possibility of outbound investment screening at EU level.

What regimes are on the horizon?

Levie said that he expects 23 of the 27 EU Member States to have national FI regimes in place by the end of this year, with Ireland and Sweden likely to join the growing tally. The total now stands at 21, with the Netherlands, Belgium, Denmark, Luxembourg, and Estonia having recently introduced regimes. Sweden’s legislation is expected to be effective from 1 December 2023, with Ireland’s coming soon after that (albeit delayed – it had originally been expected in early 2023).

Levie told us that there are a further four Member States currently working on legislation, with the EC helping them technically, as well as with political conversations, on these topics. This suggests that all 27 Member States might soon have national FI screening regimes in place.

Politically, we know that the Commission has repeatedly encouraged all Member States to adopt a regime, with a recent call to action having been included in the EC’s Joint Communication on a European Economic Strategy. And Levie confirmed that the EC engages with experts when questions are asked about the establishment of FI screening regimes - but these engagements are fairly limited. 

Will we see increased harmonisation amongst Member States’ regimes?

Levie hopes that national FI regimes will become more predictable over time, but he thinks that it is too early to say whether we will see convergence between Member States. Foreign investment screening is still relatively new within the EU - after all, not all Member States currently have screening mechanisms in place.  

The problem of discrepancies between the Member States’ handing of transactions was identified in an OECD report published last October, which highlighted issues in 12 areas. In particular, when it comes to multi-jurisdictional deals, there can be a lack of synchronicity, with procedures starting at different times and insufficient predictability regarding individual and cumulative timelines. 

In addition, one barrier which will always remain is the fact that FI screening concerns national security aspects. In Levie’s view, it is the prerogative of each Member State to define its own regime to protect its national interests and public order. But the analysis is different across Member States - and what is important or relevant for one may not be so for another. 

Levie commented that when the Regulation was first tabled six years ago, we were not seeing the multi-country deals that are around today. So, whether this is an aspect that warrants more regulation is something that might need to be addressed in future iterations of the EU’s screening mechanism. 

What about outbound investment screening?

Proposals on a potential outbound regime were set out in the Commission’s Joint Communication on a European Economic Strategy. The EC is establishing a group of Member States’ experts to determine potential risks and gaps in the regulatory framework, and whether there should be regulatory intervention at an EU level. We were told that this is an area of focus for the Commission, particularly with emerging technologies such as advanced AI or quantum computing. 

Nevertheless, Levie highlighted that when the Commission tabled the legislative proposal for the Regulation in 2017, there were 12 Member States that had already implemented, and were therefore familiar with, FI screening. Outbound investment screening, on the other hand, has not - to date - been introduced in any Member State. 

It is possible that, in future, as Member States decide to introduce regimes which monitor, control and prohibit certain outbound investments, lessons can be drawn from these experiences to determine what should be done at the European level. Levie indicated that the Commission is keeping a close eye on what is happening globally, with Taiwan and Japan mentioned as countries that already have outbound regimes in place. 

What can we expect next?

The Commission has been consulting on possible revisions to the Regulation. This has been an opportunity for practitioners (including Linklaters) and other stakeholders to comment on the improvements that they might like to see. The consultation has now closed, with the Commission due to present a report to the European Parliament and Council on the functioning and effectiveness of the Regulation by the end of 2023. The Commission’s next annual report is also due to be released in September, so watch this space – we will be covering both developments!