In February 2025, Ofwat was given new powers to set rules on remuneration and governance in the water sector via the Water (Special Measures) Act 2025. Since then, we have published three rules which all incumbent water companies are currently required to follow:
- Performance related executive pay prohibition rule
- Consumer involvement in decision making rule
- Fitness and propriety rule
Performance related executive pay (PRP) prohibition rule
The PRP prohibition rule was implemented in June 2025 and requires incumbent water companies to prohibit the payment of any performance related pay to directors who are on the regulated company’s board if they trigger any of four standards related to Consumer Matters, the Environment, Financial Resilience, and Criminal Liability.
The rule can be read here: PRP Prohibition Rule v1.1 (March 2026)
Guidance for water companies on how to comply with the rule can be found here: Guidance on PRP prohibition rule v1.1 (March 2026)
Consumer involvement in decision-making rule
Ofwat implemented this consumer-focused rule in April 2026, requiring incumbent water companies to have arrangements in place for involving consumers in their decisions that are likely to have a material impact on consumer matters. This includes having in place arrangements to appropriately understand the views of consumers, ensuring those views are fed into (and taken into account) in the decision-making process, and seek feedback from consumers so that past decisions are understood, taken into account in other decisions, and inform relevant future planning. New appointees (‘NAVs’) will be required to comply with this rule from April 2027.
The rule can be read here: Consumer-involvement-rule-November-2025.pdf
Guidance for water companies on how to comply with the rule can be found here: https://www.ofwat.gov.uk/wp-content/uploads/2025/08/Guidance-on-consumer-involvement-rule-November-2025.pdf
Fitness and propriety rule
Ofwat published the final Fitness and propriety rule in December 2025 following a statutory consultation on a draft rule. The final Rule requires incumbent water companies to implement a ‘fit and proper person’ test to ensure that only individuals who meet specified standards as to fitness and propriety are appointed, or remain in place, as Board directors (both Executive and Non-Executive). These standards cover honesty and integrity, knowledge and experience, and financial soundness. Water companies should consider the principles of reasonableness, proportionality, and materiality in applying the standards.
For new appointments to any Board director role(s) from 1 April 2026, a water company must apply the test as part of their recruitment process prior to offering the role. In relation to existing directors, the company must apply the test by 1 April 2027. Water companies must provide Ofwat with a summary report of each test undertaken which we will review.
The rule can be read here: https://www.ofwat.gov.uk/wp-content/uploads/2025/09/Fitness-and-Propriety-Rule.pdf
Guidance for water companies on how to comply with the rule can be found here: https://www.ofwat.gov.uk/wp-content/uploads/2025/09/Fitness-and-Propriety-Rule-Guidance.pdf