Vulnerable children in care being let down by 'dysfunctional' system, watchdog warns

The annual cost of children's residential care has almost doubled to £3.1bn since 2019, putting pressure on local authority finances.

The focus of the National Audit Office report is to evaluate the Department for Education's (DfE) response to the challenges facing local authorities, which have a duty to place looked after children.

Its conclusion is that the system isn't providing value for money, with inadequate government oversight and lack of data contributing to the issue.

One in seven children in residential care were moved home at least twice over the course of a year, as of the latest data for March 2024.

And nearly 8,000 children in residential care in England are now placed more than 20 miles from their original family home.

There are regional differences in supply affecting the availability of places, with more homes in cheaper areas such as the north west, while three in five children in the south west are placed far from home.

"Our main concern is that children are not being supported in the most appropriate setting for them. That will impact outcomes for them," Emma Willson, NAO director of value for money in education, told Sky News.

The report highlights that looked after children already face numerous challenges - two in three have a history of abuse and neglect, and those leaving care are three times more likely not to be in education, training, or employment than their peers.

"For the department [DfE] to better fulfil its role overseeing the sector, it needs to build better information on both the supply and the availability of places, but also on the children's needs for those places to be able match," Ms Willson, who was lead author of the report, said.

The distribution of homes that can support specific needs varies significantly, with fewer than 10% of homes in London able to support children with complex needs including autism and learning difficulties, as of the latest snapshot from 2020.

A previous Ofsted report, published in 2022 found that 80% of children living in children's homes had special educational needs, much higher than the 52% of all looked after children and 15% of all children.

Providers are responsible for staff recruitment and training so they can meet the needs of children in their care.

However, the lack of suitable settings for children with complex needs means they are moved further from home as a result.

Pressure on funding

In recent years, the availability of foster placements has decreased, which the DfE suggests is due to wider economic pressures and housing shortages.

Overall, spending on looked after children has increased by almost £3bn to £8.1bn from 2019/20 to 2023/24. The increase in spending on residential care contributed to more than half of increased spending.

This is because local authorities have become more reliant on residential care, with 16,510 children in residential care in March 2024, an increase of 10% from 2020.

A limited number of places for those children has resulted in a "dysfunctional market" where local authorities compete for places resulting in increasing costs.

Most of the increase in overall number of residential providers is in the private sector, rather than through local authority or voluntary provision, and private provision now accounts for 84% of the market, increased from 76% five years ago.

Though the number of homes has increased by 63%, the government does not hold data on how many places are available by provider, Ms Willson said.

Barriers to opening new homes include staff shortages, high property prices, and difficulty securing planning permission.

The average spend per child for a private residential placement in 2023/24 was £318,400 - an increase of 32% in real terms from £239,800 in 2019/20, while cases have been identified where costs are more than 10 times as high.

A separate report from 2022 by the Competition Markets Authority found above expected profits. It estimated that from 2016 to 2020, the 15 largest private providers had average profit rates of 22.6% for children's homes, with prices increasing above inflation.

'A dysfunctional market'

Sir Geoffrey Clifton-Brown, chair of the Committee of Public Accounts, said that "skyrocketing" costs of residential care "have placed additional strain on already precarious local authority finances".

"Lack of coordinated commissioning, insufficient forward planning and mismatches between supply and demand have all fuelled a dysfunctional market, as local authorities compete for placements and providers drive up prices," he commented.

"Although DfE has taken some steps towards establishing a more productive and resilient residential care market, it must do more to implement timely and decisive measures, ensuring that children are provided with the right care, in the right place, at the right cost."

Local authorities have been turning to unregistered providers, and Ofsted reports indicate that at least 86% of local authorities had used such care.

In 2023/24 there were 982 children confirmed to be placed in children's homes that were not registered with regulator Ofsted - which is illegal - increasing nearly sixfold from 147 in 2020/21.

When sent a warning letter, just 6% of unregistered providers went on to apply for registration, and subsequently only 8% of those were approved, as of the latest figures for 2023/24.

In December 2024, the Children's Commissioner found that 31% of children in unregistered placements were subject to a deprivation of liberty order court order, which is used to prevent people moving freely without permission or supervision under the mental health act.

Recommendations for improvements

As of July 2025, the DfE expects to invest £508m in capital funding across projects to create around 640 additional places in children's homes by 2029.

"The main finding there is that the department needs to better understand the places it has available to understand how this current spend on capital investment will actually address the gaps. Without that information it will not be able to tell whether it's been investing its capital investment in the right places to give children the right support in the right areas," Ms Willson said.

"The department does not have the data that it needs to, for example, identify a reasonable price or reasonable cost for residential care homes or to identify excessive profits," she added.

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