Financial Transparency and Profit Limitation in Children's Residential Care: business and regulatory impact assessment

Section 1: Background, aims and options

1.1 Background to policy issue

The Promise is clear that there is no place for profiting in how Scotland cares for its children and the Scottish Government supports this principle. However, as with other parts of the UK there has been a continued increase in the number of private residential children’s homes in Scotland in recent years, due to a number of factors.

The number of private residential children and young people’s houses has increased over time and is now 171 out of a total number of 359 registered children and young people’s care homes (March 2025) and accounts for 48% of total provision in Scotland. This shows an increase of 37 homes in a 5 year period since 2020, where private provision accounted for 134 homes and 41.5% of the total number of 318 homes.^[1]

In contrast the number of local authority children and young people’s homes has declined to 116 in 2025 (32% of the total registered provision) compared to 119 homes (38% provision) in 2020. Voluntary sector provision in 2025 stands at 71 homes (20% of total provision) and although the number of homes has risen from 64 in 2020, the percentage of total provision remains stagnant at 20%.

The Competition and Markets Authority (CMA) published its report and recommendations arising from its market study into children’s social care in England, Scotland and Wales on 10 March 2022, including a Scottish specific summary. The study was launched in March 2021 in response to two major concerns that had been raised with them about how the placements market was operating. First, that local authorities were too often unable to access appropriate placements to meet the needs of children in their care. Second, that the prices paid by local authorities were high and this, combined with growing numbers of looked-after children, was placing significant strain on local authority budgets, limiting their scope to fund other important activities in children’s services and beyond.

The CMA found that the profitability of the children’s homes in Scotland of the providers in their dataset (with a coverage of 53% of places) was markedly less than the average across all three nations; from Financial Years 2016 to 2020, the average operating profit per child was £28,000 in Scotland compared to an average of £44,000 across all three nations (the CMA caution, however, that this was from a relatively small sample of just the largest providers). These levels of prices and profits are therefore less of a concern in Scotland than in England and Wales, especially as we are anecdotally aware that many services will reinvest some profits into improvements that will support the care of children. However, we do not have much in the way of detail here so financial transparency will provide the information needed to differentiate between reinvestment and profits made for stakeholders. We should also note that whilst the CMA’s findings in 2022 were in line with stakeholders expressing more limited concerns about the supply of placements in Scotland, this may not be a true reflection of stakeholders understanding of the availability of placements now.

CMA evidence suggests that the cost to local authorities of providing their own children’s home placements is no lower than the cost of procuring placements from private providers, despite their profit levels. There is a concern that legislation to reduce profit could be disproportionate to the perceived problems with the sector in Scotland. Further to this, there are risks around private providers leaving the market suddenly, causing a shortage of placements. There is potential for the quality of placements to be impacted by the shortage of beds, the subsequent pressures on staff and staffing, and high-quality private placements no longer being available.

There is, however, a dearth of clear information about the prices local authorities are having to agree with private providers when procuring private provision. While a very small number of stakeholders collect snapshot data on the financial situation of a service, either at the point of seeking registration approval or in order to operate through Scotland Excel’s framework, there is no nationally consistent, detailed, method of understanding the fees charged for placements nor the final costs paid by local authorities. Whilst some have recourse to the Scotland Excel framework, there are limitations to the information gathered as part of that process. Moreover, local authorities can also make arrangements outwith that framework, so information may not adequately be captured across the board.

1.2 Current Frameworks and Legislation

The Public Services Reform (Scotland) Act 2010 (The 2010 Act) sets out the regulatory framework for registration of all care services and their oversight by the Care Inspectorate. In relation to residential care services for children, those could include a children’s care home service or a school care accommodation service as defined in paragraphs 2 and 3 of schedule 12 of the 2010 Act.

The powers relating to the registration and inspection of social care and support services by the Care Inspectorate are set out in the 2010 Act, which has its origins in the Regulation of Care (Scotland) Act 2001.

The Regulation of Care (Scotland) 2001 Act enabled the creation of the Care Commission which later became the Social Care and Social Work Improvement Scotland (SCSWIS) under the 2010 Act, formerly adopting the name Care Inspectorate from 2011. The 2010 Act contains a list of care service types and a set of corresponding definitions, which determine which services the Care Inspectorate regulate and inspect. The definitions of care services for children and young people cover several professional groups and services, including secure care services. For the purpose of children’s residential childcare these fall within the definitions: a care home service; and a school care accommodation service.

Section 47 of the 2010 Act defines the various care services to be registered and inspected by SCSWIS. Section 59 of that Act governs the registration of services and indicates that certain requirements should be imposed on persons seeking to register a care service. Section 78 contains the relevant regulation-making power. The Social Care and Social Work Improvement Scotland (Requirements for Care Services) Regulations 2011 set out the current requirements.

The Social Care and Social Work Improvement Scotland (Registration) Regulations 2011 make provision as to: who may not apply for registration of a care service under Part 5 of the 2010 Act, the records to be kept by a provider of a care service, and the register of information and certificates of registration relating to care services.

The registration process with the Care Inspectorate is the first step to ensure that services are ‘fit’ from the onset and guidance for applicant applying to register a care service. This asks those applying to read and consider all the information about the registration process before you apply. Care Inspectorate advise that the applicant carry out their own market research to ensure their proposals are viable and that there is a need for the proposed service in the locality they plan to operate. A business advisor or their bank may be able to help with this.

Section 59(2) of the 2010 Act gives powers for the Care Inspectorate at point of registration to require and assess financial viability of registered care services as part of its primary responsibility to regulate the quality of care. The financial checks completed as part of the registration application include submission and review of the business plan, the business continuity plan, financial forecasting and banking arrangements. The Care Inspectorate undertake a financial assessment to determine any risks associated with the information provided.

Current powers for the Care Inspectorate do not provide detailed mechanisms in terms of financial transparency and would only cover registration, and ongoing general financial assessment where there is a concern around impacts upon provisions for the health, welfare and safety of service users. Applicants wishing to register or alter a care home service should consult with the Care Inspectorate on the proposed building plans prior to seeking planning permission or building warrant. The Care Inspectorate provide pre-application registration advice and guidance - Applying_registration_applicantguidance_july21-web.pdf Non-compliance with the Health and Social Care Standards, regulations and best practice may result in costly changes or refusal of the registration.

1.3 Wider Policy Development

SG Policy - Transforming Residential Childcare – delivering a sustainable approach to keeping The Promise across children’s residential care

A non-legislative approach will still require to be undertaken alongside the development of the legislation in order to build a robust evidence base and undertake in depth consideration of a number of interlinked issues including commissioning frameworks, workforce recruitment and retention, and workforce learning and development pathways, as well as forecasting future needs of children and young people to respond to future demand – aligning with the CMA recommendations in terms of taking steps towards improving commissioning of placements in the market and improving resilience of service provision - so that we can ensure funding is supporting the care and wellbeing of children and young people to best effect in line with The Promise.

Engagement and alignment with UK Government

In England around 83% of residential children’s homes are run by private providers (compared with 48% in Scotland).

On 18 November 2024 the UK government set out plans to prevent companies making excessive profit from children’s care homes through the Children’s Wellbeing and Schools Bill.

The Children's Wellbeing and Schools Bill includes provisions for private providers of residential childcare to share their financial details with government to allow profiteering to be challenged, and if providers do not voluntarily end profiteering there will be a ‘backstop’ legal provision to limit the amount of profit that can be made.

Alongside these new provisions, charities and not-for-profit providers will be encouraged to open new residential care homes to increase the number of high-quality placements available. Ofsted will also be given new powers to issue civil fines to providers to improve the standards of care.

The UK Government is also progressing a wider package of measures through the Bill and are working to increase early family support, foster carer recruitment and capital investment in its residential and secure estate for those children who cannot remain in family settings.

Welsh Policy

In Wales c.83% of care home services for children and young people are run by the private sector.

In March 2025, the Welsh Parliament passed the Health and Social Care (Wales) Act 2025 to support their ‘Eliminate [Profit] Programme.’ It includes provisions which will enable Ministers to restrict new providers of residential childcare to be not-for-profit and will eventually restrict any existing ‘for-profit’ entities from expanding their operations, before introducing restrictions on Local Authorities from placing children in privately run homes – which they intend to have in place by 2030.

1.4 Other Policy Options Considered

The Promise is clear that there “is no place for profit in how Scotland cares for its children” and in supporting this principle the Scottish Government has committed to use the Children (Care, Care Experience and Services Planning) (Scotland) Bill to improve financial transparency and to tackle excessive profit making from residential childcare.

The option of taking a similar approach to Wales (in restricting new private providers from entering the market) was considered. It was not taken forward at this time due to the current reliance on private providers in Scotland (making up c.48% of the residential childcare market) and the desire to keep that provision competitive, and also due to the ability of the private sector to respond quickly to any potential gaps in service provision that could emerge as the needs of children in care change.

The provisions being taken in this Bill, alongside wider policy changes to be developed collaboratively with the sector in relation to commissioning practices and supporting the workforce, should therefore build a strong foundation to ensuring that funding is used appropriately to secure critical provision to support children and young people in Scotland, allowing the social workers and carers who play such a vital role in children’s lives to focus on ensuring that children in residential care grow up in a nurturing environment where they feel loved, safe, listened to and respected.

1.5 Purpose/ aim of action and desired effect

The outcome the Scottish Government seeks to deliver through the residential childcare provisions in the Bill is greater financial transparency in the children’s residential care system, with a view to this informing future work in the area and ensuring that funds are directed to the care and support of children and young people to best effect.

The key aims of the Bill will be to:

• Collect information from certain services operating in Scotland to understand the range of different types of care support offered, and to understand what “need” and “complex need” of children and young people looks like in more detail, in order for the sector to build clarity around how that translates into fees charged and subsequently determine whether or not excessive profit is being made.
• Improve public and stakeholder confidence in evidencing that the care sector is not making an excessive profit from children.

1.6 Desired Outcomes and Measurement

Financial transparency regulations will be developed in consultation with the services and wider sector. It is too early to outline measurement at this stage as this consultation has not yet taken place.