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

Using information to watch for potential market failure (Q11)

5.33 Question 11 asked respondents if they thought it would be useful for the Scottish Government to use the financial information collected to watch for potential market failure among providers of children’s residential care services.

5.34 Table 4.2 shows that, overall, 19 respondents answered ‘yes’ and 5 answered ‘no’. Most organisations (14 out of 16) answered ‘yes’. However, there was less consensus among individuals, with 5 answering ‘yes’ and 3 answering ‘no’.

5.35 A follow up question asked respondents about the reasons for their answer. Altogether, 22 respondents (16 organisations and 6 individuals) provided comments. The views of those who answered ‘yes’ and the views of those who answered ‘no’ are discussed below. Note that those who answered ‘no’ generally thought that there were other, more relevant sources of information to use as indicators of potential market failure.

Views in favour of using financial information to identify potential market failure

5.36 Respondents who thought financial information from care providers should be used to help identify potential market failure believed that this information would help provide early warning of market fragility. Indeed, there was a view that the identification of early warning signs of market failure was one of the key benefits of greater transparency in financial reporting. One organisation described it as a proactive measure that would support the sustainability and resilience of Scotland’s residential childcare sector.

5.37 Respondents noted that the sudden failure of a care provider would have serious consequences for children and young people and their families – as well as for local authorities in delivering their statutory duties. There was a view that not only should financial information be used to identify potential market failure, but once identified, steps should be taken to prevent this and / or mitigate any associated negative impact.

5.38 One respondent suggested that market failure in the context of children’s residential services could include:

• Sudden exit from the market by a provider due to financial instability
• Consolidation or monopolisation – reducing choice and competition
• Loss of specialist or local provision, particularly from small providers
• Over-reliance on a limited number of providers.

5.39 Examples of early warning signs of market failure were seen to be (i) declining profit margins, (ii) unsustainable levels of debt, and (iii) over-reliance on cross-subsidisation.

5.40 Some respondents (care providers in particular) suggested that care services in the private sector were more likely than those in the charitable sector to collapse suddenly – for example, if investors withdrew or because of debt, or pressures for financial returns.

Views that there are other more relevant indicators of potential market failure

5.41 For the most part, respondents who answered ‘no’ at Question 11 suggested that market stability is already monitored effectively through existing regulation and oversight. For example, when registering new homes, providers are required to submit financial forecasts to the Care Inspectorate. This group thought the Care Inspectorate’s overview of registrations and closures may be a better source of information for identifying failure in the provision of residential childcare services.

5.42 One individual noted that, in practice, most service closures are linked to poor quality, which is already tracked through inspection activity. Poor quality often leads to failure and, ultimately, to closure. Thus, the Care Inspectorate is best placed to identify and act on early warning signs.

5.43 It was also noted that any financial information will be collected in arrears (i.e. for the past year) and thus would be available too late to predict most cases of financial collapse.