Legislation in Focus: Ofwat's New Fitness and Propriety Rule

What Water Companies Need to Know

Overview

Ofwat has introduced a new Fitness and Propriety Rule requiring the 16 largest water and sewerage companies in England and Wales to carry out a fit and proper person test on all board-level Directors. The rule was issued on 15 December 2025 under powers granted by the Water (Special Measures) Act 2025 and takes effect from 1 April 2026 for new appointments, with existing Directors to be assessed by 1 April 2027. This is a brand-new regulatory obligation — there was no prior fitness and propriety rule for the water sector.

Background

Public trust in the water sector has been under sustained pressure following a series of high-profile failures in environmental performance, governance and executive accountability. The Water (Special Measures) Act 2025 received Royal Assent on 24 February 2025, giving Ofwat new powers to set rules on remuneration and governance. The Fitness and Propriety Rule is the third rule issued under these powers, following the performance-related executive pay prohibition rule (June 2025) and the consumer involvement rule (November 2025).

Ofwat ran two rounds of consultation before finalising the rule: an initial policy consultation in October 2024 covering all three rules, which attracted over 11,000 responses, and a dedicated statutory consultation on fitness and propriety in September 2025. The final rule, decision document and accompanying guidance were all published on 15 December 2025.

Key Takeaways

15 December 2025: Ofwat published the final Fitness and Propriety Rule, decision document and guidance.
1 April 2026: Water companies must apply the fit and proper person test to all new Director appointments from this date.
1 April 2027: Existing Directors must have been assessed and appropriate action taken by this date.
Ongoing: Annual re-assessments required before the start of each financial year, plus ad hoc re-assessments whenever circumstances change.
Scope: Applies to all board members ("Directors") of the 16 largest water undertakers and sewerage undertakers in England and Wales. Ofwat intends to extend the rule to new appointees from 2027.

Who does the Rule apply to?

The Rule applies to in-scope undertakers and focuses on “Director” appointments — meaning members of the undertaker’s board. In practice, this covers executive and non-executive board roles, and often the Chief Executive where they sit on the board.

It also matters who supports your hiring process. If you use recruitment consultants for senior roles, the Rule expects undertakers to ensure third parties understand what information is required and how it will be verified.

What the Rule Requires

The rule establishes a fit and proper person test built around three core standards. Companies must not appoint or retain any Director who cannot reasonably be considered to meet each of these standards:

a) Honesty and integrity — the individual must have the appropriate level of honesty and integrity for the relevant role.

b) Knowledge and experience — the individual must have the appropriate level of knowledge and experience for the relevant role.

c) Financial soundness — the individual must have the appropriate level of financial soundness for the relevant role.

The Assessment Factors

The rule sets out specific factors that companies must consider when assessing each standard. These are expressed as minimums ("without limitation"), meaning companies can and should go further where appropriate.

Honesty and integrity factors include:

Whether the individual has any unspent criminal conviction in any jurisdiction, particularly (but not limited to) dishonesty, fraud, financial crime or water-industry-related offences.
Whether the individual has been a financial director or had material influence in the financial management of a business that entered insolvency, liquidation or administration while connected, or within one year of that connection.
Whether the individual has been disqualified from acting as a director in any jurisdiction.
Whether the individual has been responsible for, materially contributed to or facilitated any serious misconduct or mismanagement in a regulated activity, particularly in the water sector.
Whether the individual has had authorisation refused, revoked or restricted, or had disciplinary, compliance, enforcement or regulatory findings made against them by any regulatory body.

Knowledge and experience factors include:

Whether the individual has reasonably demonstrated through experience and training (completed or planned) that they are suitable for the role.

Financial soundness factors include:

Whether the individual has any relevant insolvency history in any jurisdiction within the last 10 years, including bankruptcy filings, bankruptcy orders or bankruptcy restrictions orders.
Whether the individual has been the subject of any judgment debt or award that remains outstanding or was not satisfied within a reasonable period.

When Assessments Must Happen

Companies must carry out assessments at three points:

Prior to appointment — before offering any Director role from 1 April 2026.
Annually — before the start of each financial year, for all Directors already in post.
On change of circumstances — as soon as the company becomes aware that a Director may no longer meet the standards.

Reporting to Ofwat

The rule introduces several reporting obligations:

New appointments: A summary of the pre-appointment assessment must be provided to Ofwat no later than 15 working days before the new Director takes up their role.
Annual re-assessments: Results must be submitted alongside the annual regulatory accounting statements.
Change of circumstances: Where the board becomes aware of a relevant change, it must notify Ofwat in writing within 15 working days.
Public statement: Companies must publish an annual statement confirming they have appropriate processes in place and have completed the required assessments.

How This Translates into Background Screening

The fit and proper person test factors map directly onto a range of established pre-employment and executive screening checks. Verifile's typical interpretation of the rule covers the following:

F&P declaration — a self-declaration by the individual covering the rule's specified factors.
Basic DBS check — to identify any unspent criminal convictions, particularly those relating to dishonesty, fraud, financial crime or water-industry offences.
Directorships search (including disqualification) — to confirm current and past directorships and check for any disqualification orders in any jurisdiction.
News and wider internet search — to surface any public information relevant to serious misconduct, mismanagement, or regulatory or enforcement action.
Social media search — to identify publicly available content that may be relevant to honesty and integrity considerations.
Employment verification (past 10 years) — to confirm the individual's career history and support the knowledge-and-experience assessment.
Civil courts search — to identify any outstanding judgment debts or awards relevant to the financial soundness standard.
Highest degree verification — to validate the qualifications underpinning the individual's claimed expertise and suitability for the role.
Relevant professional membership checks — where applicable, to confirm professional standing and any disciplinary findings.
Credit report (including bankruptcy, CCJs and IVAs) — to address the financial soundness standard and the 10-year insolvency history requirement.

If your company's Compliance or Legal team is working to a slightly different interpretation of the rule, that's no problem — we can adjust the scope to match your compliance approach. We can also add enhanced screening options depending on what you need and your budget.

Parallels with Other Regulated Sectors

The fit and proper person test concept is well established in other regulated sectors. Financial services firms have operated under the FCA's Senior Managers and Certification Regime (SM&CR) since 2016, which includes its own fit and proper person test. Similar requirements apply in the insurance, energy and charity sectors. The Ofwat rule draws on these existing frameworks, particularly in its structure around honesty, competence and financial soundness. For water companies, however, this is entirely new territory — and the learning curve is steep given the 1 April 2026 deadline for new appointments.

Wider Context

The Fitness and Propriety Rule sits alongside other new governance measures under the Water (Special Measures) Act 2025. The performance-related executive pay prohibition rule has been in force since June 2025, and the consumer involvement rule took effect from 1 April 2026. A broader consultation on company governance rules (replacing the current Board Leadership, Transparency and Governance Principles 2019) is expected to follow.

Following the Independent Water Commission's final report in July 2025, the UK Government has also signalled the creation of a new combined water regulator in England. Ofwat has indicated it will keep the application of the Fitness and Propriety Rule under review, including a planned review in 2027, and will consider how the rule supports any future senior managers regime for the water sector.

Next Steps for Water Companies

Map your Director roles: Identify all board members who fall within scope of the rule.
Design your fit and proper person test process: Establish the procedures, systems and governance required under paragraph 7(a) of the rule. Review Ofwat's accompanying non-mandatory guidance for practical direction.
Start screening new appointments now: The rule applies to any Director appointment from 1 April 2026. If you are recruiting for board roles, build the fit and proper person test into your recruitment process immediately.
Plan the existing Director assessments: All sitting Directors must be assessed by 1 April 2027. Factor in the time needed for each screening component.
Set up reporting procedures: Ensure you can meet the 15-working-day pre-appointment notification and the annual reporting requirements aligned to regulatory accounting deadlines.
Engage a screening partner: A specialist background screening provider can manage the end-to-end process, ensure consistency across all assessments and provide a clear audit trail for Ofwat reporting.