Avoid penalties, protect your registration: Understanding the new profit cap & oversight regime for children's social care providers

Profit cap: a new era of financial scrutiny

The CWSB introduces powers enabling the Secretary of State to impose a profit cap on non‑local authority run providers of children’s homes and fostering agencies in England. Although currently limited to these settings, the government has reserved the ability to extend the cap to supported accommodation providers in the future.

Government has described the profit cap as a “measure of last resort”, intended to be used only where other market interventions fail. However, the framework being created is extensive.

Providers may be required to submit annual financial returns to demonstrate compliance with any imposed cap. Where a provider exceeds the cap, the Secretary of State may issue a monetary penalty.

The legislation also anticipates “disguised profit arrangements” - structures designed to artificially reduce declared profit. Regulations will later define what constitutes such arrangements, how profits are measured, and the level of any cap.

A breach of the profit cap will become a ground for cancellation of registration under Section 14 of the Care Standards Act 2000 (the 2000 Act). This elevates compliance from a financial issue to a regulatory one, with potentially serious operational consequences.

Government states that a profit cap aims to:

• Reduce excessive profit‑making
• Lower placement costs
• Improve placement quality and suitability

The impact assessment suggests that only providers who fail to comply will be negatively affected, with the expectation that others will reinvest surplus funds into improving services.

Provider oversight: strengthening Ofsted’s powers

The CWSB also expands Ofsted’s ability to intervene at group level, addressing long‑standing concerns about large provider groups operating multiple settings with inconsistent quality.

Ofsted will be able to issue an improvement plan notice on a parent undertaking where one or more subsidiaries are registered with Ofsted and there are reasonable grounds to cancel a subsidiary’s registration.

Providers must be given at least 28 days to submit an improvement plan and Ofsted must approve the plan. Providers will have a right of appeal to the First Tier Tribunal on Ofsted's decisions to issue or reject a plan.

This measure is designed to prevent situations where a provider simply closes a failing setting and opens another, avoiding meaningful accountability.

The legislation also amends the 2000 Act to allow regulations determining whether individuals are “fit” to carry on or manage an establishment to take into account whether a parent undertaking has failed to comply with requirements - linking group‑level behaviour directly to registration decisions.

Ofsted will also gain the power to impose financial penalties for non‑compliance, adding another layer of enforcement.

The earliest these powers are expected to come into force is April 2026, subject to the CWSB receiving royal assent. Government anticipates that only a small number of providers will be affected, and only where compliance issues are identified.

Impact on providers

The direction of travel is clear - greater oversight, tighter financial controls, and stronger enforcement mechanisms.

The policy rationale reflects broader concerns about high and rising placement costs; variable quality across large provider groups; limited levers for intervention where systemic issues arise; and ensuring public money is used to support children, not excessive profit.

For providers, this means:

• Preparing for increased financial transparency
• Reviewing group structures and governance
• Strengthening compliance frameworks
• Ensuring quality and safeguarding standards are robust across all settings

Those who act early will be best placed to adapt to the new regulatory landscape and demonstrate their commitment to high‑quality, sustainable provision.

We have been working with providers in order to pre-empt these changes. If you operate or would like to open a children's home in England or Wales and need advice or would like to talk through your options, please do not hesitate to contact Natalie Wargent.

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For more information or advice, please contact Jen Davie in our Regulatory Compliance team.