‘Fit and proper’ test introduced by the Water (Special Measures) Act comes into force

On 1 April, Ofwat's new Fitness and Propriety Rule,  issued on 15 December 2025 pursuant to Ofwat’s powers under the Water (Special Measures) Act 2025 (“WSMA”), came into force.

The Rule requires water and sewerage undertakers 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 Directors (defined as ‘any person who is a member of the undertaker’s board’). The Rule applies to new applicants from 1 April, whereas the obligation to undertake the test in relation to existing Directors must be complied with in advance of 1 April 2027.

Under section 35B of the Water Industry Act 1991 (as inserted by section 1 of the WSMA), Ofwat is required to issue rules which achieve (amongst other things) a requirement on a statutory undertaker to appoint persons to ‘senior roles’ only if they meet the requisite standards as to fitness and propriety and to prevent the continuation of senior roles held if those standards cannot be met.

The Rule prescribes that Directors must not be appointed or hold a Director role if they cannot reasonably be considered to meet the following standards:

1. Having the appropriate level of honesty and integrity for the relevant role.
2. Having the appropriate level of knowledge and experience for the relevant role.
3. Having the appropriate level of financial soundness for the relevant role.

The Rule identifies the criteria needed to ensure those standards can be met; namely having in place and maintaining robust processes, systems and governance to ensure that any Director is fit and proper to occupy that role by reference to specific factors, and conducting assessments to ensure the Directors remain as such. Specific factors include whether the individual has unspent criminal convictions, been disqualified from directorship of another company, had involvement in or responsibility for misconduct or failed companies or any broader insolvency history or history of disciplinary, compliance, enforcement or regulatory findings made against them. 

In addition to the aforementioned requirements, statutory undertakers are required to report to Ofwat on the assessments and re-assessments undertaken. Ofwat has issued guidance on how to comply with the Rule and what is expected of undertakers conducting the assessments against standards and factors (including a summary assessment report template  for use in reporting). Water and sewerage undertakers are also required to publish a statement each year, confirming compliance (or otherwise) with the Rule.

Where Ofwat considers an undertaker has contravened the Rule, it will engage in the first instance to ‘understand its position’ and may request further information. Escalation may include issuing a direction under section 35B(7) of the Water Industry Act 1991 requiring steps to be taken and further enforcement action by the regulator.

The introduction of the Rule against a backdrop of increased scrutiny of the water industry over the last few years is intended, in Ofwat’s words, to “strengthen water company leadership and rebuild public trust in the sector”.  Although the factors are hard-edged, Ofwat’s guidance considers the importance of applying the principles of reasonableness, proportionality and materiality when undertaking the assessment; this means taking account of the materiality of any issue and applying an approach which is both reasonable and proportionate. In theory, this suggests that Ofwat is willing to allow a degree of flexibility, provided that sufficient justification and rationale is documented in the assessment. That said, given that the fit and proper test is intended to signal to the public that those in senior roles in the sector will be held to high standards of integrity and experience, it is conceivable that the regulator may use assessments undertaken pursuant to the Rule against statutory undertakers when assessing broader water company compliance with their core statutory obligations. 

We will continue to monitor Ofwat’s approach to the Rule and any updated guidance it publishes on respect of the same.  If you have any questions in relation to regulatory compliance in the water sector, please contact Michael Barlow or Philippa Shepherd.

The water sector must regain public trust, and these new rules set out clearly to companies what we expect of them – senior leaders who meet the highest standards of integrity, and companies putting arrangements in place to ensure consumer voices are heard and acted on when making important decisions

https://www.ofwat.gov.uk/new-rules-on-water-company-executives-integrity-and-consumer-involvement-come-into-force/