An independent review of the water industry is to recommend sweeping changes to the way the sector is managed, including the potential replacement of Ofwat with a strengthened body combining economic and environmental regulation.

Former Bank of England governor Sir Jon Cunliffe will publish the findings of the Independent Water Commission on Monday, with stakeholders across the industry expecting significant changes to regulation to be at its heart.

The existing regulator Ofwat has been under fire from all sides in recent years amid rising public anger at levels of pollution and the financial management of water companies.

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Campaigners and politicians have accused Ofwat of failing to hold water operators to account, while the companies complain that its focus on keeping bills down has prevented appropriate investment in infrastructure.

In an interim report, published in June, Sir Jon identified the presence of multiple regulators with overlapping responsibilities as a key issue facing the industry.

While Ofwat is the economic regulator, the Environment Agency has responsibility for setting pollution standards, alongside the Drinking Water Inspectorate.

Sir Jon’s final report is expected to include a recommendation that the government consider a new regulator that combines Ofwat’s economic regulatory powers with the water-facing responsibilities currently managed by the EA.

In his interim report, Sir Jon said options for reform ranged from “rationalising” existing regulation to “fundamental, structural options for integrating regulatory remits and functions”.

He is understood to have discussed the implications of fundamental reform with senior figures in industry and government in the last week as he finalised his report.

Environment Secretary Steve Reed is expected to launch a consultation on the proposals following publication of the commission report.

The commission is also expected to recommend a “major shift” in the model of economic regulation, which currently relies on econometric modelling, to a supervisory approach that takes more account of individual company circumstances.

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How water can teach Labour a much-needed lesson

Liz Bates

Political correspondent

@wizbates

On Monday, the government’s long-awaited review into the UK’s water industry will finally report.

The expectation is that it will recommend sweeping changes – including the abolition of the regulator, Ofwat.

But frustrated customers of the water companies could rightly complain that the process of taking on this failing sector and its regulator has been slow and ineffective.

They may be forgiven for going further and suggesting that how Labour has dealt with water is symbolic of their inability to make an impact across many areas of public life, leaving many of their voters disappointed.

This is an industry that has been visibly and rapidly declining for decades, with the illegal sewage dumping and rotting pipes in stark contrast with the vast salaries and bonuses paid out to their executives.

It doesn’t take a review to see what’s gone wrong. Most informed members of the public could explain what has happened in a matter of minutes.

And yet, despite 14 years in opposition with plenty of time to put together a radical plan, a review is exactly what the government decided on before taking on Ofwat.

Month after month, they were asked if they believed the water industry regulator was fit for purpose despite the obvious disintegration on their watch. Every time the answer was ‘yes’.

As in so many areas of government, Labour, instead of acting, needed someone else to make the decision for them, meaning that it has taken over a year to come to the simple conclusion that the regulator is in fact, not fit for purpose.

As they enter their second year in office, maybe this can provide a lesson they desperately need to learn if they want to turn around their fortunes.

That bold decisions do not require months of review, endless consultations, or outside experts to endlessly analyse the problem.

They just need to get on with it. Voters will thank them.

Sir Jon has said the water industry requires long-term strategic planning and stability in order to make it attractive to “low-risk, low-return investors”.

The water industry has long complained that the current model, in which companies are benchmarked against a notional model operator, and penalised for failing to hit financial and environmental standards, risks a “doom loop”.

Thames Water, currently battling to complete an equity process to avoid falling into special administration, has said the imposition of huge fines for failing to meet pollution standards is one of the reasons it is in financial distress.

Publication of the Independent Commission report comes after the Environment Agency published figures showing that serious pollution incidents increased by 60% in 2024, and as Thames Water imposes a hosepipe ban on 15m customers.

Ofwat, Water UK and the Department for the Environment all declined to comment.

The number of most serious water pollution incidents rose by 60% last year, according to data covering England, with three companies responsible for the bulk of them.

The Environment Agency (EA) – under fire for its own oversight of water firms’ pollution performance – said that more than 80% of the 75 instances of pollution in its two most serious categories were the responsibility of Thames Water (33), Southern Water (15) and Yorkshire Water (13).

But the body added it had found “consistently poor performance” across all nine water and wastewater firms in the country – a similar summary to that of 2023.

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According to the report, reasons behind the 2024 results included persistent underinvestment in new infrastructure, poor asset maintenance, and reduced resilience due to the impacts of climate change.

The period was dominated by spells of intense rainfall, which overwhelmed storm overflows and resulted in sewage discharges.

The EA reported 2,801 pollution incidents in total during 2024 – a hike of almost a third.

Thames Water, which has almost 16 million households on its books and is struggling to shore up its very future, was fined a record £105m by the regulator Ofwat in May for breaching wastewater rules.

Fast-forward to 2025 and England is experiencing its driest start to the year since 1976.

Hosepipe bans are expanding as drought conditions are declared.

The data was released as a committee of MPs called for regulation of water companies to face a “complete overhaul” amid a lack of public trust and anger over surging bills to pay for long overdue infrastructure improvements.

The Public Accounts Committee said that Ofwat and the EA had failed to secure industry compliance and warned that even the high bill settlements to 2030 would only result in 44% of sewage overflows being overhauled.

The Independent Water Commission, established by the government last year and led by former Bank of England deputy governor Sir Jon Cunliffe, is due to make final recommendations on the regulatory framework next week.

He warned when the interim report was published last month: “There is no simple, single change, no matter how radical, that will deliver the fundamental reset that is needed for the water sector.”

Alan Lovell, the EA’s chair, said: “This report demonstrates continued systemic failure by some companies to meet their environmental targets.

“The water industry must act urgently to prevent pollution from occurring and to respond rapidly when it does.

“We have made significant changes to tighten our regulation of the water industry and ensure companies are held to account.

“With a dedicated larger workforce and increased funding, our officers are uncovering and acting on failures to comply with environmental law.”

A spokesperson for industry group Water UK responded: “While there have been some improvements it is clear that the performance of some companies is not good enough. The Environment Agency is right to highlight underinvestment in infrastructure and maintenance as the major causes of these results.

“Investment in the sector has been suppressed with Ofwat prioritising short -term cuts to people’s water bills over the long-term resilience of the network. This is finally being put right, with a record £104bn investment over the next 5-years to secure our water supplies, support economic growth and end sewage entering our rivers and seas.

“However, fundamental change to regulation is also needed. We hope that the recommendations of the Independent Water Commission next week will ensure the sector continues to get the investment it needs to drive down pollution incidents.”

Victims of the loan charge received advice from professional accountants who were being paid to place them into tax avoidance schemes. 

Sky News has seen evidence of chartered accountants advising their clients to enter loan arrangements, run by companies that were paying them a commission.

These schemes were later targeted by HMRC, and workers were hit with giant tax bills, sometimes hundreds of thousands of pounds.

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In some cases, the tax demands have been crippling. It’s a campaign that has driven people to the brink of bankruptcy, devastated families and has been linked to 10 suicides.

MPs are now calling for a public investigation into the role of accountants and other professional bodies in the proliferation of these schemes.

An independent review of the loan charge is currently under way, but it is limited in its scope.

What is the loan charge scandal?

It is the latest revelation in a scandal that has caused untold misery for tens of thousands of people, who were enrolled into tax avoidance schemes, often against their knowledge.

They included contractors who were urged to avoid setting up limited companies and to instead receive payment through the schemes, which were meant to handle their pay and taxes.

They worked by paying workers what were technically loans, instead of a salary. This allowed them to circumvent paying income tax. What many assumed were tax deductions on their payslips were, in fact, fees going towards the promoters of the schemes.

Tax avoidance is not illegal, but HMRC has successfully challenged tax avoidance schemes in the courts, and workers have subsequently been asked to pay the missing tax. There is no suggestion that these accountants broke the law.

Richard’s story

For Richard Clancey, HMRC’s handling of the loan charge feels like “state-sponsored bullying”.

After being offered a contract role in 2010, Mr Clancey, now a retired computer services professional, contacted a chartered accountant in Kent to help him set up a limited company.

The accountant encouraged him to enrol in a payment scheme instead.

“He gave us an hour’s presentation on the benefits of the scheme and how it worked,” Mr Clancey said.

“This included how they would handle all administration, pay all tax that was due, was IR35 and tax law compliant, had a lower risk than using a limited company, had been approved by a tax QC and was currently used by several people who were working for HMRC.

“The presentation was very elaborate and complicated and I cannot claim that I understood it all, but I wanted to ensure I was legal and compliant, so I trusted the advice of a chartered accountant that use of this scheme was the right thing to do.”

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The accountant told him that he was receiving an introductory fee, but not that he would receive ongoing payment.

In 2014, Mr Clancey received an email from his accountant outlining that the previous year he had received £257 in commission. However, he did not receive statements for the previous two years.

“Although you were notified of this commission before, we are also required to declare the amount of commission to you according to the guidance of the Institute of Chartered Accountants of England and Wales,” the email read.

“This commission has not cost you anything,” it added.

The company’s former website page clearly stated that it offered accountants commission, boasting that the rates had been raised.

At this point, Mr Clancey was already on the radar of HMRC.

In 2012, tax authorities wrote to him to explain that he had been in a tax avoidance scheme that “HMRC believes does not work”. He was subsequently asked to pay more than £100,000.

“Over the next seven years, I received multiple penalties and threats from HMRC who said I had been a tax avoider who should settle their debts now or face worse consequences later,” he said.

“There hasn’t been a single day when I haven’t been consumed by the frustration and anger of my situation and how it arose… Since my involvement with [the scheme] and the subsequent hounding from HMRC and government, a lot of that has changed. This state-sponsored bullying has caused me to suffer some mental health issues.

“My personal stress levels were through the roof. I dreaded the next brown envelope coming through the post box with outrageous, unsubstantiated demands. My poor wife would apologise and burst into tears as she brought these to me.”

HMRC said it takes the wellbeing of all taxpayers seriously. “We are committed to identifying and supporting customers who need extra help with their tax affairs and have made significant improvements to this service over the last few years.”

Like others in his position, Mr Clancey is frustrated by the blunt approach of the tax authority and the lack of accountability from other parties.

“I have been increasingly concerned that my chartered accountant led me into the hands of a scam organisation,” he said.

“HMRC continues to persecute victims.”

Government reaction

The government has now launched an independent review into the loan charge, and HMRC is pausing its activity until that review is complete – but its focus is on helping people to reach a settlement.

The review will not look at the historical role of accountants, promoters and recruitment agencies, even though they propped up the schemes.

Politicians and campaigners have called for a broader investigation.

Greg Smith, MP and co-chair of the Loan Charge and Taxpayer Fairness APPG, said: “It’s clear that many chartered accountants were directly involved in the promotion of loan schemes.

“People trusted accountants and had the right to rely on this advice, and yet, instead, are facing life-ruining bills. There needs to be a proper investigation into this as part of an independent inquiry into the loan charge scandal,” he said.

“Either HMRC warned accountants not to recommend these schemes, in which case the accountants were giving reckless and potentially fraudulent advice; or HMRC didn’t tell accountants not to do this, in which case HMRC themselves were seriously at fault.

“Either way, it is quite wrong that the current government continues to only pursue those who took and followed professional advice and not those who gave it, whilst profiting from doing so.”

The experience has damaged Mr Clancey’s faith in the sector. “I will never again trust professional financial advice,” he said.

“If the advice of a chartered accountant can cause this much damage without culpability, then there is something very wrong. It is a failure on the part of the entire tax industry that accredited professionals can, through their advice, destroy the lives of the individuals that they advise.”

A spokesperson for the Institute of Chartered Accountants in England and Wales, an industry body, said: “We expect chartered accountants to adhere to the highest standards in all of their work, including tax.

“Robust rules for members performing tax work are contained in standards which have been developed and strengthened to prevent the involvement of members in aggressive tax avoidance.”

The organisation strengthened its standards in 2017, after the loan charge legislation was announced, adding that “members must not create, encourage or promote tax planning arrangements or structures that set out to achieve results that are contrary to the clear intention of parliament in enacting relevant legislation and/or are highly artificial or highly contrived and seek to exploit shortcomings within the relevant legislation”.

Anyone feeling emotionally distressed or suicidal can call Samaritans for help on 116 123 or email jo@samaritans.org in the UK.

In the US, call the Samaritans branch in your area or 1 (800) 273-TALK.