Can increased regulation lead to growth in the children’s social care market?
The Children’s Wellbeing and Schools Bill (the Bill) reported at Committee stage on 11 February 2025. We considered state-funded education in our first article. In our second article in the series considering the impacts of the Bill, we consider the proposals to increase regulation of the children’s social care market and whether they will deliver growth and balance to a market found to be “dysfunctional” by the Competition and Markets Authority (CMA) in its March 2022 report[1], and created conditions described as a “national scandal” by the Children’s Commissioner in her December 2024 report[2] on illegal children’s homes.[3]
Background
The Bill proposes a series of measures to re-shape the market. Whilst provision has increased, primarily driven by private providers who operate 83% of children’s home places, the provision has not alleviated difficulties faced by local authorities in finding appropriate placements.[4] The CMA expressed concern about the price of private places and the resilience of the market should a provider exit the market; the risk of disorderly exit found likely to increase given the “level of indebtedness” carried by some of the largest providers.[5] This market context is compounded by illegal, unregistered provision which both the CMA and the Children’s Commissioner found were used by local authorities despite being illegal, often for children with specialist needs that could not be met by registered provision. The Children’s Commissioner found that on 1 September 2024, 775 children were in unregistered accommodation, almost a third of those children were subject to a Deprivation of Liberty (DoL).
Proposals in the Bill
The proposals in the Bill to redress the imbalance in the market and deliver better outcomes for children and young people include:
Additional enforcement powers for Ofsted
The Bill proposes to expand Ofsted’s powers to issue fines for non-compliance with registration requirements, where currently only criminal prosecution is available, to enable swifter penalties and act as a deterrent to operators of illegal children’s homes. The Children’s Commissioner welcomed the proposed introduction of civil penalties to be used against providers of unregistered children’s homes but considered, “there is a risk that highly profitable providers of unregistered homes will not be deterred by fines”[6] and stressed in a January 2025 briefing to MPs on the provisions set out in the Bill, “It’s important to note that, as these placements are not registered with Ofsted and they will not be subject to the measures in the Bill aimed at limiting profit making.”[7]
Additionally, recognising most provision is owned and controlled by provider groups, the Bill proposes to enable greater provider oversight by supplementing the existing regime, which holds accountability at individual setting/agency level, to include parent undertaking level. Where Ofsted have grounds for concern, the provider group may be required to prepare and implement an Ofsted approved improvement plan to address issues across all settings under the control of the parent undertaking. The new provisions will enable Ofsted to issue a fine and/or refuse further registrations from the provider group if it does not implement the improvements required.
Financial Oversight Scheme for ‘difficult to replace’ providers
The Bill seeks to introduce a new Financial Oversight Scheme for ‘difficult to replace’ providers led by the Department of Education (DfE). Currently, local authorities are unable to foresee financial instability of private providers that could risk exit from the sector. Under the proposed Scheme, providers who “meet a set of conditions relating to their market significance”[8] would be required to provide regular financial and business information to the DfE and submit a contingency plan so that if providers exit the market the needs and outcomes of the children they accommodate would be considered. Monetary penalties would be available to the Secretary of State to enforce compliance with the scheme.
Use of accommodation for depriving liberty
The current statutory framework authorises DoL provision in a secure children’s home only and does not allow sufficient flexibility to meet the often complex care and treatment needs of children the scheme aims to protect, leaving a disproportionate number of vulnerable children subject to a DoL order in unregistered provision. The government hopes that creating a statutory basis for court-authorised deprivation of liberty in provision which provides care and treatment, in combination with the physical features that enable deprivation of liberty, will lead to growth in provision of this type and reduce reliance on emergency DoL orders under the High Court’s inherent jurisdiction, that can lead to expensive and often unsuitable temporary accommodation. Linked to this measure, and essential if local commissioners are to be able to shape market growth, is provision for local authorities to establish regional cooperation arrangements to harness collective buying power and enable collective forecasting.
Future profit cap
The Bill establishes provision for a future profit cap to be established through regulations, which the government has said it will implement “as a last resort” if other measures in the Bill do not sufficiently rebalance the market.[9] The CMA found that the 15 largest providers of placements for looked after children were making (on average) profits of 19.4% on fostering, 22.6% on children’s homes, and 35.5% on supported accommodation which the government has said it intends to bring within the scope of any profit cap in future.[10] The government must consult on any profit cap and the way in which profit will be determined and the level of the cap is therefore yet to be fixed.
Will it work?
The CMA found the central problem facing the market is “the lack of sufficient capacity”.[11] Which raises two issues central to the success of the provisions in the Bill, firstly, as raised by Katharine Sacks-Jones, Chief Executive of Become[12] in oral evidence before the Bill’s Committee, “There is nothing in the Bill that really increases sufficiency and brings on board more public sector provision and more charity section provision”.[13] Will a fine for an unregistered provider deter local authorities from placing children in their care when there is seemingly no alternative? And will a fine deter unregistered providers, whilst there is still a need for their provision, who will not be subject to financial oversight or any profit cap?
Secondly, the CMA chose not to take forward recommendations to cap prices or profits in the sector because it could “further reduce the incentives of private providers to invest in creating new capacity…and therefore risk increasing the capacity shortfall.”[14] Similarly, the Bill’s Impact Assessment on the additional regulation proposed by the Financial Oversight Scheme described the overall business impact of the Scheme as “Negative” acknowledging the “potential risks to the attractiveness of the CSC placement market as ‘difficult to replace’ providers will face increased financial scrutiny through the Scheme.”[15]The CMA considered in its market review that whilst the shortfall could be made up by local authority provision, this would take significant capital investment and would be unlikely to align with the urgent need to increase provision. It seems that there is, therefore, a significant risk that imposing further restrictions in an already highly regulated area may discourage investors and/or operators in the sector and worsen the shortfall in provision.
The success of the measures proposed in the Bill relies on capital investment, Ofsted (itself the subject of recent severe criticism and undergoing significant change in its regulation of schools), local authorities working together effectively to shape the market according to need, and private providers accepting the government’s terms as they develop through secondary legislation.
Sir Martyn Oliver, Chief Executive of Ofsted, confirmed in evidence to the Bill’s Committee that measures to address the most disadvantaged children, such as children in unregistered accommodation, is a “top priority” but went on to say, “I do think that we will see significant issues with addressing the most disadvantaged and vulnerable, especially…on children’s social care”.[16] Unfortunately, this was not explored further by the Committee’s questioning and it remains to be seen how the proposals will increase sufficiency of placements needed to restore balance to the market, and ensure the needs of vulnerable children and young people are met.
We will be monitoring the Bill as it progresses to Report Stage and our team is on hand to assist with your regulatory queries.
[Co-authored by Areesha Qureshi, Solicitor Apprentice at CMS]
[2] cco-illegal-childrens-homes.pdf
[3] It is a criminal offence to run a children’s home, as defined by the Care Standards Act 2000, without appropriate registration
[4] Children’s Wellbeing and Schools Bill - policy summary notes
[6] See page 21 cco-illegal-childrens-homes.pdf
[7] See page 12 Childrens-Wellbeing-and-Schools-Bill-Briefing-for-MPs-1.pdf
[8] See page 46 Children’s Wellbeing and Schools Bill - policy summary notes
[9] See page 50 Children’s Wellbeing and Schools Bill - policy summary notes
[10] Ibid
[11] See section 7 Final report - GOV.UK
[12] The charity for children in care and young care leavers
[13] See column 58 Children's Wellbeing and Schools Bill (Second sitting) - Hansard - UK Parliament
[14] See section 7 Final report - GOV.UK
[15] See page 24 DfE-CWSB-RP-02 - Children's Social Care Financial Oversight Scheme - Regulatory impact assessment
[16] See column 48 Children's Wellbeing and Schools Bill (Second sitting) - Hansard - UK Parliament
