Ofwat consults on Special Measures’ bonus ban and customer involvement rules

Ofwat is consulting until 19 November on how it should apply the rules on remuneration and governance specified in the Water (Special Measures) Bill in practice.

Three rules are in the frame: 

• Prohibiting the payment of performance related executive pay (PRP) where company performance fails to meet specified standards.  Ofwat is minded to apply this rule to any executive director on the regulated company board in receipt of PRP, with ‘pay’ defined as all benefits including annual bonuses and long-term incentive plans. It intends to stick to the ‘standards’ specified in the Bill: consumer matters, the environment, financial resilience and criminal liability. While the Bill provides for exceptions to the rule, Ofwat said these would be “rare”. The rule will be implemented in respect of pay in 2024/25.
  

• Requiring companies to test whether individuals in senior roles meet standards of ‘fitness and propriety’. Drawing on its own practices and wider experience, Ofwat proposed a new fit and proper persons test for the water sector could include that a relevant individual: does not have any unspent convictions; has not been the subject of any adverse finding in civil proceedings; has not been the subject of a regulatory investigation or disciplinary proceedings; has not been involved in the management of a business that has gone into insolvent liquidation or administration within one year of the connection; and has not been the subject of adverse findings of mismanagement in relation to a regulated activity. It is also interested in views on whether individuals must have adequate knowledge and understanding of the duties of the undertaker under the relevant laws and licence conditions. Ofwat plans for the rule to apply to CEOs and board directors (executive and non executive), but could extend this to other senior management roles in future. Companies will need to apply the rule, with Ofwat acting in a monitoring and enforcement capacity. 

  
  

• Ensuring companies have arrangements for involving consumers in company decision-making. Ofwat set out the principles it intends to apply, and what decisions should be considered to have a “material impact on consumer matters” as per the Bill’s requirements. It does not intend to prescribe a specific mechanism that companies must use. It flagged up a CCW proposal to set up a new consumer panel in each water company area to inform CCW engagement with water companies. But it said compliance with the rule would be outcome-based, with firms required to take account of the views of the CCW panels but with flexibility to add other customer representation approaches to the mix, such as sub-regional or sub-customer group panels, Independent Challenge Groups, public meetings and research. Ofwat also proposed firms should have flexibility on embedding consumer focus in governance frameworks and providing access to leaders.

Once in force, Ofwat will be able to enforce compliance, including by issuing fines. It is seeking views on whether the rules should also be allied to new appointees (NAVs).