Financial transparency and profit limitation in children's residential care: consultation analysis

6 Profit limitation (Q12–Q16)

6.1 Part 2 of the consultation paper dealt with proposals relating to profit limitation – i.e. ensuring that excessive levels of profit are not made from local authorities or from other public funds. It stated that introducing Ministerial powers to limit profit was in line with the clear view expressed in The Promise that there should be no place for profiting in how Scotland cares for children and young people. It noted that the proposals for increased financial transparency would provide the information required to assess the need to use any powers to limit profit, and that the proposed approach was in line with powers being introduced in England via the Children’s Wellbeing and Schools Bill.

6.2 Five questions asked respondents for their views on aspects of the proposals and the possible impact on services.

Question 12: Do you agree with the proposed measures outlined above? [Yes / No] Could you give reasons for your answer?

Question 13: How would you define profit for these purposes? Please explain your answer.

Question 14: Could this impact a residential childcare service’s ability to meet their aims/function and objectives? Please explain your answer.

Question 15: What challenges would services face in trying to reduce profit/surplus and how could this be supported? Please explain your answer.

Question 16: What impacts could these provisions have, both positive and negative, on providing the best care for children and young people? Please explain your answer.

6.3 Responses to each of these questions are presented below. However, it should be noted that there was a great deal of overlap in the comments made across this set of questions. As far as possible, the points made are discussed at the most appropriate section in the chapter. The need for (i) further evidence gathering and engagement, (ii) greater clarity regarding the provisions – specifically the definitions of ‘profit’, ‘excessive profit’, ‘surplus’, ‘reserves’, etc. – and (iii) careful design and implementation were particularly prevalent recurring themes. These issues are largely covered at Question 12 and 14 but were raised at all questions in this section.

Proposed measures on profit limitation (Q12)

6.4 Question 12 asked respondents if they agreed with the measures outlined in the consultation paper on giving Scottish Ministers the power to limit profit in residential childcare services.

6.5 Table 6.1 shows that, overall, 18 respondents agreed and 8 disagreed. Among organisations, 13 out of 18 agreed. Individuals were more divided in their views, with 5 agreeing and 3 disagreeing.

6.6 A follow-up question asked respondents to give reasons for their answer. Altogether, 25 respondents (20 organisations and 5 individuals) provided comments at this question.

Views of those who agreed with the proposed measures

6.7 Respondents of all types who agreed with the proposed measures said that they supported the removal of profit from children’s services and / or they endorsed the view in The Promise that there was no place for profit in caring for Scotland’s children. Respondents believed that the proposed measures would help ensure that public money was focused on providing the best quality of service and best outcomes for children and young people.

6.8 Some respondents talked about the extent of profit that should be captured by the provisions, with respondents in the public sector, regulatory and professional bodies and other organisation types categories stating that ‘profit’ or ‘surplus’ was not ‘inherently negative’ and that the provisions should focus on ‘excessive’ profit, which would need to be clearly defined.

6.9 As well as expressing general support for the measures, some respondents also raised issues and concerns about how the provisions would be implemented and the impact they might have on services. These respondents highlighted the challenges of developing and implementing provisions that took account of the different legal arrangements, financial structures and service models associated with private companies and not-for-profit organisations operating across the sector. Some, including respondents in the public sector, regulatory and professional bodies category, urged caution in order to avoid disruption and unintended consequences in an already challenging market.

6.10 With regard to private providers, respondents highlighted the often-complex group structure arrangements of provider organisations which involved cross-group activities and flows of money and would make it difficult to identify profit related to individual services. With regard to not-for-profit originations, and charities in particular, respondents raised questions about how the provisions would treat surpluses and reserves. They noted that charities are not able to extract ‘profit’ in the way that other businesses can, but they nevertheless need to make a surplus and maintain reserves to allow them to develop their services and provide stability during periods when services are not fully used. Respondents were keen to know how such differences in arrangements would be treated to be fair to all providers. Once again, there was a specific call for the provisions to not apply to registered charities.

6.11 There was also a general view that more work was needed to (i) fully understand different provider models and related financial arrangements, the relationship between costs and profit, the overall operation of the children’s residential care market, and the possible impact of the provisions on services, and to (ii) allow the development of clear and agreed definitions and approaches. Respondents said that this should be done on a collaborative basis with relevant stakeholders across the sector.

Views of those who did NOT agree with the proposed measures

6.12 Those who did not agree with the proposed measures offered two main contrasting reasons for their responses.

• One group of respondents (all classed as other organisation types) disagreed because they felt the proposals did not go far enough. These respondents wished to see the elimination of all profit (rather than ‘excessive’ profit) from children’s residential services (or all children’s services), and / or the removal of for-profit organisations from this area. It was noted that the Welsh Government has taken steps to remove private providers from children’s residential care and suggested that the Scottish Government should also take this approach.
• Another group of respondents (comprising individuals and one respondent in the other organisation types category) disagreed because they thought the proposals would have a negative impact on service availability and quality – by, for example, reducing investment and discouraging innovation, and potentially leading to service closures. It was also suggested that the proposals would be unworkable, and could add to the cost of services.

6.13 One further respondent (a care provider organisation) said that the proposals were currently insufficiently developed to allow them to agree.

Defining profit (Q13)

6.14 Question 13 asked respondents how they would define ‘profit’ for the purposes of the proposed measures outlined in the consultation paper. Altogether, 23 respondents (17 organisations and 6 individuals) provided comments at this question.

6.15 Among respondents who commented at this question, there was widespread agreement about the importance of adopting a clear agreed definition of ‘profit’.

6.16 Some offered similar short definitions of profit as ‘money generated by an organisation over and above operating costs that is not invested back into the organisation for the benefit of service users and / or is paid out to owners and shareholders’. Respondents also pointed to the definitions used in the Welsh Government’s Health and Social Care (Wales) Act 2025 and in the Competition and Market Authority (CMA) report as examples that could be adopted for the provisions proposed for Scotland.

6.17 However, alongside this, others discussed the complexities of defining ‘profit’ and applying any agreed definition in taking forward the provisions of the Bill. Respondents expressed specific concerns that any definition (i) should allow full cost recovery plus an element of profit / surplus to support service investment and sustainability, and (ii) should not inadvertently set a limit on the costs of providing care for individual children, or impact on the ability of services to provide ongoing high-quality care. There was agreement on the importance of shared definitions that could be applied consistently and fairly across all providers.

6.18 A key issue for respondents of different types was the need for clarity about how any definition would apply to charitable organisations. They said that any definition must take account of the distinction between ‘surplus’ within the charitable sector and ‘profit’ that can be extracted from private companies. Respondents noted that surplus generated by a charity was retained within the organisation and used for service investment and development or kept for contingency purposes. Surpluses of this type were crucial for the sustainability of organisations and the delivery of high-quality care and could not be extracted from charities for personal benefit, unlike profit made by private companies.

6.19 Respondents also noted specific challenges in defining and applying any definition of profit. Points made included the following:

• Clarity was sought on whether capital expenditure and other expenditure related to service development and sustainability would be included within the definition of profit. While some saw this as allowable expenditure, it was also argued that investment of this type by private companies had the effect of increasing the value of the business and should therefore be included in any calculation of profit.
• It was noted that money could be extracted from private companies in a range of ways via directors’ fees, loans, payment for inter-company services, and inter-group subsidies within organisations as well as via declared profits, and that this presented challenges in establishing ‘profit’ related to individual services. Respondents said this had to be considered in any approach to defining profit. Such complexities led one respondent in the other organisation types category to argue for the removal of all private service provision from the children’s services market.
• Finally, some respondents highlighted the importance and challenges of drawing a distinction between ‘profit’ (or surplus) which was crucial to the sustainability of all service providers, and ‘profiteering’ or ‘excessive profit’. Respondents generally said that the focus of the provisions should be on the latter. Note, however, that some respondents argued for the elimination of all profit from children’s residential services (see paragraph 6.12, bullet 1).

Impact on ability to meet aims, function and objectives (Q14)

6.20 Question 14 asked respondents if they thought that the proposals on profit limitation could impact on a service’s ability to fulfil its function and / or meet its aims and objectives. Altogether, 22 respondents (17 organisations and 5 individuals) provided comments at this question.

6.21 Respondents expressed three main views: some thought the proposals would have an impact, others thought they would not, while a third group said that this would depend on how the policy was designed and implemented and on other contextual factors.

6.22 A range of respondents thought the proposals would have an impact on the ability of services to fulfil their function and / or meet their aims. These respondents were concerned that introducing restrictions on profit (or surplus) would affect both profit and not-for-profit organisations. It would do this by reducing funds available for service delivery and development, and by diverting resources from frontline service delivery, and potentially duplicating existing scrutiny processes in the charitable sector. Smaller, more specialist providers were seen as particularly vulnerable to this. There was a concern that this could lead to the closure of some services in Scotland. One respondent reported that uncertainty around these provisions was already having an impact on planning and investment decisions in the sector.

6.23 One care provider respondent said the provisions would have no impact on not-for-profit organisations but might lead to private sector businesses withdrawing from the market if they could not meet their objective to make profit. They saw such an impact as being in line with the intentions of the Promise.

6.24 Those who thought the provisions would not have an impact on services included public sector organisations, respondents in the other organisation types category and some individuals. These respondents said that:

• The proposed provisions were not particularly onerous and would not be an issue if service providers were investing any profit / surplus in services.
• The only aim of children’s services should be to meet the needs of children and young people, and the proposed provisions would stop money being taken from organisations and ensure it was spent on care, potentially enhancing the achievement of service objectives.
• The costs of services in the independent sector were currently higher than in the public sector, and organisations should be able to accommodate any new provisions without impacting on meeting service objectives.
• Greater transparency and accountability might ensure spending by service providers was better targeted and might, in turn, enhance the quality of care provided.

6.25 A range of organisational respondents said that any impact on the ability to meet service objectives would depend on how the provisions were designed and implemented. These respondents often expressed concerns about the possible impact on services, but said that said that there was scope to mitigate this if the provisions:

• Are carefully designed and implemented and informed by evidence and stakeholder engagement with clear guidance and clearly defined and agreed definitions of profit, surplus, etc.
• Recognise the planning and adjustment that may be required by services to accommodate any profit limitation requirements
• Take account of the need for providers to make a surplus to meet the needs of individual children, invest in services, and to carry sufficient reserves for contingency purposes (for example, during periods of low occupancy in specialist facilities).

Challenges for services trying to reduce profit / surplus (Q15)

6.26 Question 15 asked respondents what they saw as the challenges for services in trying to reduce profit / surplus, and how they could be supported in this. Altogether, 21 respondents (17 organisations and 4 individuals) provided comments at this question.

6.27 For the most part, respondents did not comment on specific challenges for services in trying to reduce profit / surplus. Rather they repeated concerns raised in response to earlier questions about the possible impact on service providers and service quality, availability, and sustainability.

6.28 Those who identified potential challenges discussed similar issues. For example, they referred to the challenge of maintaining service quality and workforce investment, the challenge of navigating fluctuating external costs, and the challenge of responding to unexpectedly large surpluses in an environment in which profit or surplus was restricted.

6.29 Some respondents in the other organisation types category did, however, suggest that private providers may face particular challenges in finding ways to continue making a profit for investors, or in adjusting their financial models to meet the requirements of any profit limitation provisions.

6.30 Two respondents from the public sector, regulatory and professional bodies category highlighted the risk of poor value expenditure (for example, close to the year-end) to meet any profit limitation requirements. They said that there should be guidance on this, and that organisations should be required to demonstrate a direct link between expenditure and service outcomes.

Impact on providing the best care (Q16)

6.31 Question 16 asked respondents about the impacts the provisions could have – both positive and negative – on providing the best care for children and young people. Altogether 21 respondents (18 organisations and 3 individuals) provided comments.

6.32 Respondents were split between those suggesting positive impacts, those suggesting negative impacts, and those suggesting both positive and negative impacts.

6.33 A range of respondents suggested possible positive impacts including better quality care and better outcomes for children and young people as a result of diverting funds from profit / surplus into services. Some also suggested positive impacts in terms of greater financial transparency and improved value for money, lower costs paid by local authorities for care placements, better understanding of costs and the operation of the children’s services market, and greater alignment with the aims of The Promise.

6.34 Those identifying negative impacts on the provision of care highlighted issues discussed at previous questions. Some respondents discussed this issue in relation to service providers. These respondents, who were mainly service provider organisations, identified negative impacts in terms of:

• Increased bureaucracy for service providers, along with risks to financial stability and sustainability
• Downward pressure on fees paid by local authorities for placements
• The creation of an ‘uneven playing field’ with large-scale operators able to adopt sophisticated accounting techniques to circumvent any requirements to the disadvantage of smaller and not-for-profit providers.

6.35 Other respondents discussed possible negative impacts in terms of service quality and availability. These respondents, including care providers and respondents from the other organisation types category, highlighted the possibility of:

• Reduced investment in services
• Reduced availability and choice of residential places, particularly in relation to more intensive or specialist forms of care
• Reduced flexibility and innovation in services provided.

6.36 The possibility of some organisations, including smaller, more specialist providers, withdrawing from the market was noted. However, some saw an opportunity for not-for-profit organisations to fill any gaps resulting from private operators withdrawing from the market.

6.37 The issue of achieving a balance between profit limitation and quality of care was highlighted by some respondents. For example:

• One care provider raised questions about the implications if a high-quality service provider were found to be in breach of profit limitation rules – they wanted to know how any response to this would be balanced against meeting the best interests of the children placed with that service.
• One public sector, regulatory and professional body said that any framework ‘must strike a careful balance between financial oversight and service resilience, ensuring that providers can continue to meet their objectives while operating transparently and ethically’.

Other comments

6.38 Other more general comments made by respondents at this set of questions included the following:

• They said that any efforts to address profit should be undertaken as part of a process of wider system review and reform. The aim should be to deliver improvements in care and outcomes for children and young people, and best value for public expenditure. If attention is not given to this wider context, financial regulation and profit limitation alone would not deliver the intended improvement in care quality and outcomes.
• They stressed the need for provisions in Scotland to align with similar provisions being developed elsewhere in the UK to avoid the situation of providers withdrawing from one country because of more favourable legislative conditions elsewhere. One respondent warned against a situation that might lead to an increase in the use of cross-border placements, and the placing of children far from their home area.
• They noted the ongoing challenge for care providers to achieve full cost recovery for individual care placements, particularly in the context of responding to increasing complexity of need in individual cases and increasing external costs.

6.39 Finally, one respondent in the other organisation types category suggested extending the Ministerial duty introduced by the Care Reform (Scotland) Act 2025 to report on the state of the social care market to cover children’s services too, as a ‘more effective and efficient’ way of addressing issues of financial transparency and profit limitation in the children’s service market.