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

Provision of explanatory information (Q8)

5.8 Question 8 asked respondents what explanatory information they would want to provide, alongside the financial information collected, to demonstrate the ways in which the service’s finances are structured. This was an open question and altogether 23 respondents (17 organisations and 6 individuals) made comments.

5.9 Respondents focused on the importance of providing explanatory information in relation to five main issues:

• The costs (including capital costs) of delivering a service and an explanation where these differ substantially from what was budgeted for or agreed through the SXL framework agreement
• Quality data (e.g. Care Inspectorate and Education Scotland reports)
• Any profit or surplus made in delivering a service and what this will be used for
• Risk reserves, restricted reserves, and the purpose of any reserves
• Planned reinvestment (e.g. new services, workforce development, therapeutic resources, etc.).

5.10 Less often, there were suggestions (in most cases, made by just one respondent) that it would be useful to provide:

• A list of the individuals involved in overseeing the finances of a care provider organisation (governors, directors, trustees, etc.)
• The organisation’s strategic plan
• A copy of the narrative included in the organisation’s most recent management accounts
• Information about the commissioning context (i.e. how fees are agreed with local authorities)
• Where providers operate across multiple services or jurisdictions, information should clarify how costs and surpluses are allocated – especially where centralised functions (such as human resources, finance, and property) are shared.

5.11 The following related comments were made (usually by just one respondent in each case):

• If financial information is to be collected, it must be accompanied by explanatory context – otherwise, a misinterpretation of the numbers could be misleading and risk unfairly portraying responsible providers in a negative light.
• Any narrative explanation to accompany financial information should focus on how the service is seeking to improve outcomes for children.
• Care providers should not have to defend their decisions to invest in their services or their staff.
• There needs to be a recognition that highly specialist services are sometimes required to support children with complex needs, such as self-harming behaviours, mental health conditions or disabilities. This type of specialist support can be costly.
• Some organisations may engage in fundraising activities, and these may result in restricted reserves. Similarly, a legacy donation may be restricted in how it can be used.
• It should be clarified in any explanatory material whether reinvestment is for services or infrastructure.
• Reports submitted to OSCR provide details of how the provider’s funds have been used to advance their charitable purposes.
• Additional bureaucracy may not achieve its aim. Larger operators with complex structures are more able to absorb or reframe requirements, while smaller and newer providers may be disproportionately burdened. This could reduce diversity in the sector.

5.12 In addition, one respondent suggested that this question implied a misunderstanding of how finances are managed and how capital investment is financed. This respondent argued that it would have been more helpful to ask: ‘What explanatory information should providers be asked to provide about any operational surplus and the assets of the company?’

Levels at which information should be provided (Q9)

5.13 Question 9 asked respondents if they agreed that the information on financial transparency should be provided at (i) individual service level, (ii) provider level and (iii) parent / associated company level. This question was phrased as a closed (yes / no) question, and ‘yes’ / ‘no’ response options were included in the consultation document. However, the online response form did not include the closed question, and respondents could only provide comments. Nonetheless, all but two respondents (two organisations) introduced their comments at Question 9 with a clear ‘yes’ or ‘no’ response. This has allowed the responses to the closed question to be imputed at the analysis stage, and Table 5.1 presents the results.

5.14 Table 5.1 shows that 20 respondents said they agreed that financial information should be provided at individual service level, provider level and parent / associated company level, and 3 said they did not support information being provided at all these levels. Among organisations, all but one agreed, whereas individuals had more mixed views, with four out of six agreeing and two out of six disagreeing.

Notes:

(1) If a respondent’s comments did not include a clear ‘yes’ or ‘no’ response, no response to the closed question was imputed. Note that one care provider organisation answered ‘not fully’ before going on to provide further comments. This response has been imputed as ‘no’.

(2) The total number of respondents included in the table (23) represents those who provided a written comment at Question 9 that included a clear ‘yes’ or ‘no’ response. The table does not include two organisations that made comments that could not be interpreted as either a ‘yes’ or ‘no’ response.

5.15 Altogether, 25 respondents (19 organisations and 6 individuals) made comments at Question 9. The views of those who agreed and those who disagreed are discussed separately below. The views of the two organisations whose views could not be imputed as ‘yes’ or ‘no’ are presented briefly at the end of this section.

Views in support of information being provided at all levels of an organisation

5.16 Respondents who agreed that financial information should be provided at individual service level, provider level and parent / associated company level argued that this type of approach is consistent with the principle of transparency and will give a more complete picture of an organisation’s accounts. They also said that financial information collected at these different levels would ensure a comprehensive and transparent understanding of how residential childcare services are funded, operated and structured. This was seen to be particularly important in cases where an organisation operates across jurisdictions or has a complex ownership structure. In particular, this type of approach would highlight cases where a subsidiary not-for-profit organisation is owned by a profit-making parent organisation and enable a better understanding of how the fees charged for residential care are used across larger organisations.

5.17 One public sector organisation commented that information at provider and individual service level would give local authorities the ability to look at performance across services and compare how different care providers use their funds. The same organisation said that information at parent / associated company level may help to inform wider strategic commissioning.

5.18 At the same time (and as noted elsewhere), there was also a recurring view among respondents in this group that any requirements relating to financial reporting should be proportionate to the size and type of provider. It was also noted that the finances of a parent company are likely to be very complex.

5.19 Respondents who supported information being provided at all levels of an organisation made a range of additional points, including the following:

• To ensure fairness and clarity, there should be clear definitions of each reporting level; standard reporting templates; and the ability for care provider organisations to provide contextual explanatory notes along with financial disclosures to ensure that reinvestment, surplus allocation and cross-subsidisation are properly understood.^[3]
• Charities already report at all these levels through OSCR consolidated accounts requirements.
• The Care Reform (Scotland) Act 2025 (s. 31) requires Ministers to report regularly on the state of the adult social care market and gives Ministers the power to require providers to supply financial information. As some organisations provide services for both children and adults, relevant departments in the Scottish Government should work together in a joined-up way to ensure that a single standard format is used for collecting financial information across different types of services.

Views opposed to providing information at all levels of a company

5.20 Respondents who did not agree that financial information should be provided at all levels made the following points:

• The most relevant and useful information is at the service level, as this is where local authorities commission placements and where outcomes are measured. It may also be appropriate to collect provider-level financial data in some cases. However, gathering data at parent or associated company level risks misinterpretation and confusion, particularly in cases involving large companies with complex structures.
• Most smaller care providers are already open and transparent with local authorities through commissioning discussions. Extending reporting requirements to multiple levels may simply favour larger companies with complex structures who can present information in ways that obscure the true picture, while at the same time over-burdening smaller providers.

5.21 The respondents in this group offered two alternative suggestions:

• Collect financial information at the level of Care Inspectorate registration only – whether this relates to an individual residential home or a group of care providers. Analysis of group accounts should take account of other sources of income which may impact on a group’s ‘profit’ but are not directly generated by commissioned services.
• Strengthen local authority commissioning, so that commissioners can proactively profile providers, compare costs and quality, and shape the market effectively. This would ensure accountability without bureaucracy.

Other views

5.22 Two organisational respondents made comments at Question 9 that did not clearly indicate either support or opposition for the proposal to collect financial information for all levels of an organisation. One (a respondent in the other organisation types category) simply said that financial information on children’s residential care services was already available in the public domain. The other (an organisation with a focus on care-experienced children and young people) said that the consultation paper provided insufficient detail for them to be fully able to respond to this question, but that it would be helpful to consider in more detail what information might be needed to ensure that services are best equipped to meet the needs of children and young people in their care. From that starting point, it was suggested, it would be easier to identify what information should be gathered at any and each of the levels of an organisation.

Additional information that should be collected (Q10)

5.23 Question 10 asked respondents if they had any suggestions for additional information that the Scottish Government should collect. This was an open question, and 20 respondents (15 organisations and 5 individuals) made comments.

5.24 There was very little commonality in the suggestions offered by respondents. The discussion here focuses on the range of views expressed, presented by organisation type and respondent type. Some respondents repeated comments which had been made at Question 9. These are not restated here.

Views of care providers

5.25 Care provider organisations suggested that, in addition to collecting financial information along with explanatory text, the Scottish Government should also collect the following information:

• Debt services costs
• Dividend payments
• Management fees
• Proportion of surplus reinvested locally
• Quality data (to maintain a focus on standards and outcomes).

Views of public sector, regulatory and professional bodies

5.26 Just one of the public sector, regulatory and professional bodies suggested that additional information should be collected. This respondent thought it would be helpful to have information about ‘unit costs’ (or ‘cost per placement’). This respondent also noted that the figures published as part of the Local Government Benchmarking Framework (LGBF) for residential childcare are not accurate.

5.27 A second public sector, regulatory and professional body thought that there should be an analysis of the landscape of residential childcare services in Scotland (including third sector, private and local authority provision) to provide a national picture. This exercise should include an audit of placement numbers to estimate future need and inform commissioning activities.

5.28 A third public sector, regulatory and professional body noted that many children’s houses are small four-bedded properties, and suggested that, while it may be tempting to collect a lot of data, the desire for greater transparency should not result in excessive demands being placed on small services.

Views of other organisation types

5.29 Respondents in the other organisation types category made a variety of different points:

• One respondent thought there were several areas where additional information could strengthen the Scottish Government’s ability to assess financial sustainability, value for money and the broader impact of residential childcare services. This respondent suggested collecting:
  • A breakdown of income sources (distinguishing income received through local authority placements and income received from other sources or generated by the service itself through fundraising activities)
  • Information on use of reserves and retained earnings (understanding how these are used – for reinvestment, contingency planning, or cross-subsidisation of other services)
  • Capital expenditure and investment plans (planned or recent capital investments)
  • Staffing and workforce costs (breakdown of staffing costs, agency spend, training budgets and vacancy rates)
  • Placement data linked to financial reporting (linking financial data to placement type, duration and complexity of need)
  • Cross-jurisdictional operations (to understand how financial flows are managed between jurisdictions)
  • Narrative on financial strategy and risk (including any external factors that may influence a provider’s financial position).
• However, another organisation with a focus on children and young people in care thought the priority and focus of any information collection should be on the facilitation of consistent standards of care across all providers. This respondent thought that any efforts to improve financial transparency should first be informed by evidence-gathering and preparatory activities which should include an assessment of what data is currently collected about children and young people’s experiences in residential services in Scotland, and data on the services themselves. This respondent expressed concern that services face multiple time-consuming reporting requirements, which overlap to some extent and can be burdensome for services and reduce the time staff can spend with children and young people.
• One organisation suggested that the Scottish Government should consider how its proposals will work for businesses registered outside Scotland.

Views of individuals

5.30 It was clear from the comments made at Question 10 that some individuals were associated with or worked for residential childcare providers. The comments of these individuals reflected those that have been discussed above: some wanted detailed financial information to be collected; others advocated for more focus on outcomes for children. One individual emphasised the importance of being able to compare spending by different establishments.

5.31 However, one suggested that, rather than collecting more data from providers, the Scottish Government should prioritise collecting and analysing information already available from local authorities which, they suggested, would give a more accurate and balanced picture of the sector. In particular, the Scottish Government should gather:

• Data on local authority expenditure on their own in-house residential services, including full costings, staffing levels and outcomes
• Information about how local authorities are planning for future needs for residential childcare services and how they work with providers to commission services
• Information about placement stability and outcomes – comparing local authority, third sector and private provision
• Evidence of proactive commissioning, rather than reactive spot-purchasing.

5.32 This respondent noted that placements within residential childcare services often have to be arranged urgently by local authorities and this can result in placements that don’t fully meet a young person’s needs. This, the respondent suggested, is where reform is needed – rather than placing additional administrative burdens on providers.