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

3 The principle of financial transparency (Q4–Q6)

3.1 The consultation paper stated that increased financial transparency was crucial to assist local authorities in managing budgets and making decisions about residential care placements. The Scottish Government therefore was considering proposals for collecting nationally consistent information from providers on the range of different types of care provided and the fees charged, which, in turn, would assist in assessing whether excessive profits are being made.

3.2 The consultation paper contained three questions seeking views on the proposal to increase financial transparency, and the implications and impacts of this for services and service providers.

Question 4: Do you agree with the proposal to increase financial transparency? [Yes / No] Could you give reasons for this?

Question 5: What implications will financial transparency have on the different types and sizes of residential children’s homes?

Question 6: How could we minimise any negative impacts you have outlined above? Please explain your answer.

Proposal to increase financial transparency (Q4)

3.3 Question 4 asked respondents if they agreed with the proposal to increase financial transparency.

3.4 Table 4.1 shows that, overall, 20 respondents agreed and 6 disagreed. Most organisations (16 out of 18) agreed. However, individuals were divided in their views on this question, with 4 agreeing and 4 disagreeing.

3.5 A follow-up question asked respondents to give reasons for their answer. Altogether 26 respondents (19 organisations and 7 individuals) provided comments. The views of those who answered ‘yes’ and those who answered ‘no’ are discussed below. Two respondents did not answer the closed question but made comments that were similar to those who answered either ‘yes’ or ‘no’. The views of these two respondents are covered in the sections below and are not presented separately.

Views in favour of the proposal to increase financial transparency

3.6 Respondents who answered ‘yes’ at Question 4 – both organisations and individuals – commonly made three main points in their comments:

• They highlighted the benefits of increased transparency.
• Some highlighted potential issues with or concerns about the proposals.
• Some offered suggestions in relation to implementation.

Benefits of increased transparency

3.7 Respondents who answered ‘yes’ often said that they supported the principle of increased financial transparency across children’s residential care services. Some also expressed support for the Scottish Government’s commitment to keep The Promise and they reiterated their organisation’s own commitment. These respondents highlighted what they saw as the potential benefits of increased financial transparency, including the following:

• It would build public confidence and improve accountability in the provision of children’s residential care services at a time when there is increasing pressure on public sector spending.
• It would give greater confidence to local authorities, children and their families that providers of residential care services are financially sound.
• It would build a clearer national picture of the relationship between children’s needs, service delivery, and placement fees, and allow a fairer comparison to be made between providers.
• It may also provide an early warning of any issues in provision, such as a reduction in services.
• It will support strategic planning, improve commissioning outcomes, and help deliver on the principles of The Promise.

Issues with or potential concerns about the proposals

3.8 Some who were in favour of the proposal to increase financial transparency nevertheless highlighted issues with, or concerns about, the proposals – or they caveated their support. Those who raised these issues were mainly care provider organisations and organisations with a focus on care-experienced children and young people.

3.9 Most commonly, this group thought that the requirement for increased financial transparency would need to be carefully designed to avoid placing an overly onerous, complex, or unnecessary administrative burden on care provider organisations. There was a view that any new requirements should be proportionate, avoid duplication, and demonstrably add value to information that was already in the public domain. They highlighted the range of existing reporting requirements some organisations already had – in particular, the requirements for charities to submit annual financial returns to the Office of the Scottish Charity Regulator (OSCR). Some respondents argued that increased financial transparency should be required of private care providers but should be unnecessary for registered charities – because of their existing OSCR reporting requirements.

3.10 There were also suggestions that, if legislation is introduced:

• It should not result in a reduction in the quantity, quality or diversity of residential care provision currently available to children in Scotland – nor should the legislation result in any disruption to a child’s home environment or relationships.
• The legislation should be based on adequate evidence, consultation, engagement and preparatory work – as well as learning from the implementation of similar legislation elsewhere.

3.11 Some respondents cautioned against an assumption that high costs in the provision of residential childcare services might be related to excessive profits.

3.12 One organisation noted that children’s residential care services are commissioned locally, nationally, and through various hybrid models. This creates a fragmented landscape and inconsistency in financial scrutiny. Achieving comparability in financial reporting across different provider types may be challenging because of variations in organisational structures, accounting practices and service models.

Suggestions in relation to implementation

3.13 A range of organisational respondents – including those in the public sector, those with a focus on children and young people in care, and those in the other organisation types category – offered suggestions about the implementation of the proposal, including that:

• Local authorities should be closely involved in the development of the proposal – to ensure an understanding of the wider context of commissioning children’s care services.
• Improvements in financial reporting should include information about expenditure on property, rent, utilities, labour, debt repayment – and who is receiving payment for these costs.
• Clear guidance, transitional support and regulatory oversight should be provided to avoid unintended consequences.

3.14 Finally, several organisations answering ‘yes’ at Question 4 suggested that all children’s residential care providers should be required to have charitable status. This, they suggested, would not only simplify the process of obtaining consistent financial data from these services, but would also be the simplest, most effective and cost-efficient way of ensuring that these services are not profiting excessively.

3.15 An alternative view – mentioned by one organisational respondent – was that local authority residential care capacity should be strengthened. This organisation queried why the Scottish Government had appeared not to consider this possibility as an option.

Views opposed to the proposal to increase financial transparency

3.16 Of the six respondents who answered ‘no’ at Question 4, five (two organisations and three individuals) made further comments to explain their views. Note that the responses from individuals suggested that one or more of these respondents may have been associated with private residential care providers.

3.17 Among those who answered ‘no’ at Question 4 and who provided comments, all but one did not agree there was a need for increased financial transparency among children’s residential care services. These respondents thought that, rather than adding additional layers of governance, existing resources could be better used to achieve greater financial transparency. This group made a range of points, arguing that:

• Financial transparency is already available through freedom of information, through financial reporting requirements with Companies House and OSCR, and through public sector procurement processes managed by Scotland Excel (SXL). One individual suggested that if SXL processes are not providing the necessary benefits to local authorities in terms of financial transparency, then SXL should either be removed from the process or given additional resource to operate as the Scottish Government would like.
• Local authorities already have access to detailed information about fees, service quality, contracts and placement monitoring, and they are free to choose not to use a particular service if they are dissatisfied with either the cost or quality of that service. Local authorities could also be better supported to compare services more effectively and / or to develop their own provision if they feel this offers better value for money.
• Requiring private providers to publish detailed financial accounts is unnecessary and disproportionate. These services were described as ‘private businesses operating in a regulated marketplace’. There was a view that commercial information should remain confidential.

3.18 One of the respondents who answered ‘no’ at Question 4 (an organisation in the other organisation types category) agreed with the principle of financial transparency and also agreed there should be no place for profit in children’s services. However, this respondent thought that the Scottish Government’s proposal to achieve this was inadequate and likely to be unworkable in relation to the private sector specifically. This respondent argued that:

• Even if all private providers were required to supply full management accounts at year end (covering all income and expenditure) for each service they operate, this would still only provide some of the information required to track the movement of funds and arrive at a clear understanding of the profit being made by the company. Such a requirement would also take at least two years to implement.
• A monitoring system that effectively tracks profit would be expensive to implement – not for the providers, but rather for the public sector – and there was a question about whether the public sector would have the necessary expertise to create such a system.
• The idea that it might be possible to translate information about the needs of children into organisational staffing requirements and fees for services has been previously found (in similar exercises for adult services) to be unworkable. One of the reasons for this is that needs are constantly fluctuating and thus demands on staff are also constantly fluctuating. The best way to respond to changing needs is for a professional manager to consider the needs of children in a service at any one time and, where necessary, bring in additional staff – based on professional judgement, not on financial considerations.

Implications of financial transparency (Q5)

3.19 Question 5 asked respondents what they thought the implications of financial transparency would be for different types and sizes of residential children’s homes. This was an open question, and 25 respondents (18 organisations and 7 individuals) provided comments.

3.20 Respondents identified a range of potential unintended consequences from the proposal to increase financial transparency and often highlighted the same (or similar) issues, regardless of whether they supported or did not support the principle of greater financial transparency – that is, similar issues were raised regardless of how the respondent had answered Question 4.

3.21 Most commonly, respondents said that a requirement for increased financial transparency would lead to increased administrative costs – and would result in no real benefit to children and young people using the services. It was suggested that these increased costs would be harder for smaller services to absorb, and so smaller services may be financially disadvantaged by the requirement.

3.22 Care providers highlighted other potential implications, including:

• The potential for duplication of existing reporting requirements (e.g. to OSCR for charities)
• Diversion of resources away from direct service provision to children
• Regulatory confusion (by creating parallel oversight systems)
• Potential destabilisation of the residential childcare market due to disclosure of commercially sensitive data.

3.23 However, one care provider organisation thought that the implications for services would depend on the requirements, and noted that, at present, these were unclear. Another noted that any efforts to increase financial transparency among not-for-profit organisations would need to account for ‘cross-subsidy’ – whereby the surplus from a service in one area is used to cover a deficit in a service in another area.

3.24 Among non-care providers, there was a range of views about the potential implications of increased financial transparency in children’s residential care services.

3.25 Some said that they did not see why there would be different implications for children’s residential homes based on the size of the establishment. It was suggested that it should be a relatively simple exercise to compare weekly costs (utilities, council tax, etc.) and divide by the number of young people in the home to estimate the cost per place. This would then allow a direct comparison between different establishments. Where certain homes were found to have significantly higher costs than others, the service manager could be given the opportunity to explain these costs.

3.26 There was also a view that the implications of financial transparency for services in the voluntary sector would be minimal given their existing OSCR reporting requirements.

3.27 Some respondents thought that the implications of financial transparency could be positive. For example, greater transparency could help bring the wages of care staff working in private sector organisations in line with those of staff in similar roles in public sector services. There was also a view that financial transparency could lead to an increase in the number of charitable and not-for-profit residential services, and give local authorities the opportunity to invest more in their own resources for keeping children and young people at home, or in their own communities.

3.28 Other respondents (including individuals, who may have been associated with private sector care provider organisations) saw mainly negative implications. These included reductions in investment, innovation, growth, and sustainability, and the withdrawal of private providers from the market – leaving local authorities with fewer options and less flexibility.

3.29 There was also a separate view that the implications of financial transparency would depend on the scale, structure and financial model of the provider organisation, and there was a call for the Scottish Government to undertake further detailed engagement, evidence gathering and analysis to better understand the issues which could arise. It was noted that there is limited evidence on the impact of profit-making on the quality of care and outcomes for children in Scotland, and one respondent cautioned against simply extrapolating research from England to a Scottish context. It was also suggested that further information was needed about (i) current levels of care being provided for children in Scotland (including which needs are currently being met and not met, and whether needs are being met appropriately), and (ii) how terms such as ‘profit’, ‘transparency’ and ‘surplus’ should be defined in the context of providing high-quality residential care for children.

Minimising negative impacts (Q6)

3.30 Question 6 asked respondents how the negative impacts on different types of services (as discussed above) could be minimised. This was an open question, and 23 respondents (16 organisations and 7 individuals) provided comments.

3.31 A wide range of suggestions were made although some common themes were apparent. The suggestion made most often (by care providers and some organisations in the other organisation types category) was to use – as much as possible – information already being collected rather than creating new forms of reporting. Within this broad theme, various respondents suggested:

• Aligning reporting requirements with SXL tendering requirements and / or OSCR reporting requirements to avoid duplication
• Considering developments in England and Wales to avoid divergent regulatory approaches
• Co-designing arrangements with staff working in the residential childcare sector and with local authorities
• Ensuring that the requirements are proportionate – for example, allowing smaller non-profit organisations to use a simplified reporting form, with larger organisations providing more detailed accounts.

3.32 Some care providers suggested other ways of minimising negative impacts by: (i) providing clear guidance and support prior to implementation, (ii) having a phased introduction, and (iii) providing a standardised template to collect the required information. There was also a suggestion that registered charities could be excluded from this requirement altogether so long as they are covered by enhanced OSCR oversight.

3.33 Public sector, regulatory and professional bodies did not address the issue of how to minimise the impacts of financial transparency on care providers, but rather discussed ways in which improved financial information could be used. There were suggestions to:

• Create a framework of expectations of how profits could be reinvested to support the care needs of children – for example, through offering educational and recreational experiences and opportunities; enhancing living environments; increasing staff numbers; improving training and support for staff; and ensuring staff have appropriate terms and conditions of employment / remuneration.
• Ensure that commissioning processes are informed by financial transparency.

3.34 Finally, respondents (mostly individuals) who were not in favour of the proposal to increase financial transparency offered different suggestions about how to minimise negative impacts. These included:

• Not introducing legislation but rather undertaking an independent market-wide review to assess the value of increasing financial transparency
• Allowing the private sector to work within commissioning framework guidelines and letting market forces guide pricing
• Strengthening commissioning practice and engagement between local authorities and care providers.

3.35 In relation to the latter point, one respondent noted that enabling care provider organisations to directly engage in detailed discussions with local authorities about the costs of creating and sustaining services is likely to lead to the best outcomes.