CIPFA warns of potential instability if cost-capping introduced in children’s residential care market

That warning has come from the Chartered Institute of Public Finance and Accountancy (CIPFA) after examining the Children’s Wellbeing and Schools Bill now before Parliament.

The Bill proposes a new oversight regime for strategically significant providers and a power to cap providers’ profits.

Spending by local authorities on children’s residential care reached £3.2bn in 2024–25 -  a 151% real-terms increase over the past decade.

CIPFA social care policy advisor William Burns said: “CIPFA’s analysis shows that while greater financial oversight in children’s residential care is welcome, it is unlikely on its own to resolve the structural pressures driving up costs for local authorities.”

He said the profit capping and oversight mechanisms “are not silver bullets” and that without tackling demand, sufficiency and market concentration, there was a risk of unintended instability.”

CIPFA said some of the largest private providers enjoyed “materially higher profits…than would be expected in a well-functioning market”.

It said that while the Bill sought to address profiteering and market concentration, its research suggested the proposed financial oversight regime was primarily designed to detect insolvency risks, “whereas instability is more likely to arise from strategic exit linked to private equity investment cycles”.

CIPFA said it had identified four recurring risks for councils:

• increased market instability potentially with strategic providers leaving the market;
• further pressure on placements, particularly for children with complex needs;
• price increases imposed ahead of new regulations taking effect;
• limited impact on underlying costs due to complex corporate and financial structures that can allow value to be extracted other than through headline ‘profit’ 

There were though also opportunities for councils, including advance warning notices where providers are deemed at risk, which could strengthen contingency planning and improve market intelligence.

Councils could also expand in-house provision and support smaller, community-based providers to diversify supply and reduce exposure to highly leveraged operators.

Mark Smulian