Ofwat’s Fitness and Propriety Rule – Practical Implications for Water Company Boards

Overview

On 17 September 2025 Ofwat launched a statutory consultation on a proposed new Fitness and Propriety Rule for senior leaders in the water industry, using powers granted under Section 35B of the Water Industry Act 1991, as amended by the Water (Special Measures) Act 2025.

This rule is part of a broader regulatory overhaul aimed at improving governance and restoring public trust in water companies. It will apply to Chief Executives, executive and non-executive board directors of the largest water and sewerage undertakers in England and Wales, and potentially to new appointees (NAVs) from 2027.

The rule will require companies to assess the honesty and integrity, knowledge and experience, and financial soundness of individuals in senior roles, both at the point of appointment and on an ongoing basis.

Companies must report to Ofwat on their compliance, with implementation deadlines set for 1 April 2026 for new appointments and 1 April 2027 for existing role holders. This consultation follows earlier measures introduced under the Act, including restrictions on performance-related executive pay and rules on consumer involvement in decision-making. The consultation is open until 23 October 2025, and responses can be submitted via Ofwat’s consultation page.

Key proposals of the Fitness and Propriety Rule

• Water companies must assess directors against standards of honesty, integrity, knowledge, experience, and financial soundness.
• Water companies must undertake annual assessments and have reporting obligations to Ofwat.
• The Fitness and Propriety Rule applies to new appointments from 1 April 2026 and existing directors by April 2027.

The consultation closes on 23 October 2025.

Companies Act 2006 duties

While directors are already bound by the Companies Act 2006, Ofwat’s proposed Fitness and Propriety Rule introduces a sector-specific compliance obligation. It does not replace statutory duties but adds a regulatory overlay with enforceable standards.

Key overlap areas:

• Honesty and integrity align with duties to act in good faith and avoid conflicts.
• Knowledge and experience complement the duty to exercise reasonable care, skill, and diligence.
• Financial soundness adds a layer of scrutiny not explicitly covered under the Companies Act.

Impact on ESG (environmental, social, governance) strategy

The Fitness and Propriety Rule directly strengthens the Governance pillar of ESG.

• Governance is enforced by stronger board-level accountability, transparency, and ethical standards. It aims to rebuild public trust in water companies by ensuring directors are fit to lead. This is achieved in part by annual assessments and reporting to Ofwat.

Other elements of the rules introduced under the Water (Special Measures) Act 2025 support the Environmental and Social pillars.

• From 1 April 2026, the largest companies will be to involve customers in their decision making. This rule comes into effect from 1 April 2027 for new appointees.
• The broader Water (Special Measures) Act 2025 includes provisions for pollution incident reduction plans, real-time monitoring of discharges, and penalties for environmental breaches. Directors must be equipped to oversee pollution reduction plans, customer engagement, and climate resilience strategies. Directors failing to meet environmental standards may face consequences under both the Fitness and Propriety Rule and other regulatory mechanisms.

In short, the Fitness and Propriety Rule is a governance enhancing tool that complements existing legal duties and strengthens ESG compliance, particularly in a sector under intense public and political scrutiny.

Timeline and compliance actions

Client advice:

• Integrate Fitness and Propriety Rule into ESG reporting and treat it as a key governance measure within ESG disclosures. This reinforces transparency and accountability in leadership standards.
• Align board skills with ESG goals and ensure board composition reflects the expertise needed to oversee environmental and social performance. Align director competencies with ESG goals and Fitness and Propriety Rule criteria to strengthen governance.
• Conduct a comprehensive audit of ESG governance frameworks and undertake a gap analysis to identify areas where Fitness and Propriety Rule strengthens or exposes ESG risks ensuring proactive mitigation.
• Review board composition and ensure directors meet both Companies Act and Fitness and Propriety Rule standards.
• Update governance policies embed Fitness and Propriety Rule criteria into board appointment and evaluation processes.
• Train directors by providing targeted training on Fitness and Propriety Rule expectations and regulatory reporting obligations.
• Begin internal assessments and policy updates now.
• Document everything and make sure to maintain clear records of assessments and decisions.
• Engage legal and HR teams to ensure recruitment and governance processes are aligned to meet the Fitness and Propriety Rule criteria and ensure this feeds into any external recruitment consultants.

Summary

Ofwat’s proposed Fitness and Propriety Rule sets standards for honesty, integrity, knowledge, experience, and financial soundness for senior directors in water companies. It complements Companies Act duties, requires annual assessments and reporting to Ofwat, and applies to new appointments from 1 April 2026 and existing directors by April 2027. The rule also reinforces governance elements of ESG, with implications for board composition, oversight, and alignment with environmental and social responsibilities. Water companies should prepare now to ensure compliance with the consultation and upcoming implementation deadlines.