As the name suggests. this condition is associated with wet weather and animals kept in muddy conditions. But that isn't the whole story. Rain rot, rain scald, weather beat and even skin fungus, as it is variously known, is among a complex number of infections responsible for scurf, greasy heels, and mud fever. Perhaps the most common culprit is a bacterium called Dermatophilus congolensis. Despite its name this disease is not always associated with wet conditions and has several forms. Environmental conditions and condition of the horse will affect the variety seen.
At its mildest (sometimes called the "summer form,") the horse develops dozens of tiny little scabs maybe an eighth of an inch across. They can be felt as small bumps as you run your hand over the affected areas (which can develop anywhere on the body). They are easily scrapped off with your finger nail and will have hair embedded in the scabs. Usually the horse will show obvious discomfort when they are removed.

At its worst, the winter form, dermatophillus can cause large scabs several inches across that when removed (again the hair over the scab will come off and remain embedded in the scab) leave behind a moist or purulent irritated shallow erosion. As with the summer form, it can develop anywhere in the body and these areas are very painful. This is the form written about in books that is usually seen in wet weather on horses receiving little attention.  

  Other forms include greasy heels and mud fever. Greasy heels may also be mixed infections that include staph and strep. When chronic there may just be open sores or scabs with the hair embedded scabbing around the periphery.
Some horses seem more susceptible to the problem than others. There are several reasons a particular horse might have more problems with dermatophillus. Some are related to the immune system e.g.

Stress

Poor condition

Steroids

The very young or the very old horse with a poor immune system.

Other reasons can be linked physical factors:

Thicker Coat

Thinner skin

Habits that promote more dirt (like rolling)

Insect bites

The organism can gain entry when the skin is softened by saturation and through minor abrasions. Dermatophillus persists in the environment for a long time. The source of contamination is the scabs. To help reduce exposure, it is best to dispose of the scabs after treating a horse. Other sources of infection would be brushes and tack that have been used on infected horses. Treating brushes and grooming tools with a mild antiseptic solution will kill the organism.

The condition is best prevented by good management and by allowing the horse or pony to dry out at least once per day. Treatment is largely based on correcting the conditions that allowed the disease to develop i.e. stabling and or rugging the animals. Your vet may also suggest medicated shampoos and/or antibiotics if the sores have become infected.