My Lords, Amendment 142 is in my name. It sets out to make the case for the inclusion of supported accommodation in the scope of the proposed profit cap. Following clarification from my noble friend the Minister, including in answers to questions in earlier groups in Committee, I am content that that is the case, and that the intention is to include supported accommodation within these measures, so I will not be moving this amendment.
My Lords, Amendments 142A to 142C, 504A and 505A are in my name. I will not speak to Amendment 142 in the name of the noble Baroness, Lady Longfield, and I thank her for giving me advance notice of her intentions. I will also probe the merits of Clause 15 standing part of the Bill.
Amendment 142A mirrors my earlier Amendments 138D, 138E and 139A, which would have excluded natural persons with a role in the management of a business from receiving personal financial penalties. I have reread the Minister’s remarks in Hansard from our debate on Tuesday, and I confess I am still not entirely clear about the status of a natural person who is registered at Companies House. The Minister said earlier that the figure of 10 operators out of over 2,700 was based on Companies House data. Forgive my ignorance, but I do not know what legal status an organisation registered with Companies House has if it is not a company. If it is a company, I am not sure what the status of a natural person is.
The reason for these amendments is simple, as I set out before. It is based on a concern that, without these amendments, the Bill will limit the number of people who are prepared to take senior management responsibility in such providers and will lead to providers exiting the sector. I may have misunderstood what is meant by “an operator”—namely, that it is the owner of a business rather than the senior management—but perhaps the Minister could clarify both those points when she sums up.
Amendments 142B and 142C would limit the maximum fine for a provider to 10% of its turnover and, if imposed on a natural person, to £100,000. We have heard that margins in the children’s home sector average 22%, although in the LGA-commissioned report this figure is taken from, the range of margins is very wide. If we took 10% of a company’s turnover and accepted an average margin of 22%, that would be almost 50% of its profits, which surely is a very strong incentive to avoid being fined. Can the Minister set out what level of fine the Government expect to impose and what the criteria will be for different levels of financial penalty?
1:00 pm
There are a lot of other significant points in the LGA-commissioned report, including that 50%, rather than 85%, of the 20 largest providers have private equity or sovereign wealth fund ownership, 15% are charities and 35% are privately owned not by private equity, including by a social enterprise—which will please the noble Baroness, Lady Thornton, who sadly is not in her place to celebrate—and by an employee ownership trust. It highlights the concentration of profitability in relatively few organisations and the decline in margins in recent years.
I raise these points because of the concerns I raised in earlier groups about the capacity and skills within the department to deliver the work included in Clauses 14 and 15 in particular. It is not a promising start to equip the Minister with facts that look to be partial and out of date.
My Lords, the noble Baroness’s speech makes me think that looking at what “excessive profit” means, or at least what the Government think about it, would not be a bad idea, because we are agreed that these services are often gone to because the state cannot or will not provide them. What we consider to be reasonable to pay for them is something the whole Committee should be concerned about. I am sure—or at least I hope—that the Government have given this some deep thought, and finding out in a little more detail what that will be will help consideration on this and forthcoming business. I look forward to the Minister’s reply.
My Lords, as I said in Committee on Tuesday, in 2022 the Competition and Markets Authority found the children’s social care placement market to be dysfunctional. It found that the largest private providers were making profit margins significantly above what would be expected in a well-functioning market. Most significantly, notwithstanding the profit levels that are being made, we know that there are still insufficient high-quality placements for children who desperately need them. To that extent, the profit levels being made are not, as the noble Baroness, Lady Barran, suggested, driving the sort of supply that we want to see.
The amendments in this group cover Clauses 15, 16 and 17, which implement important legislative elements of our children’s social care placement market reforms: the new profit-capping powers and their associated financial penalties. Introducing profit-capping powers will ensure that we have further powers to curb profiteering if the wider package of measures that I outlined on Tuesday, which we expect to rein in excessive profit-making, do not have their intended effect. This is a power to have in place if other elements of the programme do not work.
I turn to the points raised by the noble Baroness, Lady Barran, on whether Clause 15 should stand part of the Bill. Having outlined the broad intention of the profit cap, I want to be clear that, although some private providers are clearly doing brilliant work, we want to ensure that all providers deliver high-quality placements at sustainable cost. As I say, we know that this is not always happening.
The Competition and Markets Authority found the market to be dysfunctional and estimated that the largest private children’s social care placement providers were making profit margins of between 19% and 36%—well above what would be expected in a well-functioning market. As I have said previously, excess profits have not led to sufficient supply in this market. Furthermore, making these levels of profit from providing placements for some of our most vulnerable children is unacceptable and must end.
On the point of principle—why you would put a profit cap on one area of the economy where you think there is profiteering on the back of vulnerable children, but not on another—the Minister said that there was no intention to extend this; indeed, she said that she hoped it would not be used. I certainly agree with that, but I do not really understand why, where children have been sexually assaulted or raped and companies are making far higher profit margins than the ones we are talking about here, the Government would choose to apply a profit cap on one and not the other. That does not feel very coherent to me.
I also felt that the Minister was slightly selective in the quotes she chose to identify from the Competition and Markets Authority report. The CMA was clear that it thought that a profit cap was not a good idea. I would also like to clarify something for the record. I think the Minister suggested that I said that current margins were driving supply. I said that current margins, according to the recent data, are uneven and actually falling, so I did not suggest that they were driving supply.
20 of 291 shown
Amendments 504A and 505A would delay the commencement of Clause 15 until the Secretary of State has published a report that sets out the current levels of capacity in independent children’s homes, independent fostering agencies and, perhaps, based on the Minister’s remarks on Tuesday, supported accommodation. Again, I wonder whether she could confirm that last point.
The report would also need to have an impact assessment on the number of available placements in relevant homes or agencies. I am definitely not an expert on regulatory impact assessments, I confess, but the Government’s own regulatory impact assessment has, to my amateur eyes, clear gaps; hence the need for my Amendments 504A and 505A.
In the section of the document titled “Expected impacts on businesses”, it states:
“It is not possible for the department to monetise the impact of any future profit cap at this stage. This is because the impact will depend on both the level at which any future cap is set and the market conditions—including profit levels, supply and demand and diversity of provision—at the time that a cap were introduced. Attempting to include straw man figures at this stage—far in advance of any decision about whether or not to introduce a profit cap—would be unhelpful and would have the potential to adversely impact the market by driving providers to make incorrect assumptions about the future level of any future cap based on such figures”.
My amendments would bridge this gap by requiring the publication of an impact assessment when the Government are clear on what their approach to a profit cap will be and by capturing the baseline data on capacity so that the impact of a future cap can be analysed and understood.
My reason for questioning the approach to capping profits as set out in Clause 15 is based partly on the concerns expressed by the Competition and Markets Authority. It was very clear in its report that
“taking measures that directly limit prices and profits, would further reduce the incentives of private providers to invest in creating new capacity (or even to maintain some current capacity)”.
I wonder what assessment the Government made of this risk which led them to ignore the CMA’s advice. Can the Minister set out what impact the department believes this measure will have on investment in sector? What do the latest figures show?
More broadly, there is an important point of principle here. As David Rowland, the director of the Centre for Health and the Public Interest, wrote in a blog published by the London School of Economics in December 2024, if the Government decide that one sector has excessive profiteering and will cap the level of profit in that sector,
“there is no good reason for it not to be extended to other areas as well”.
I wonder what other areas the Government might be considering. David Rowland’s work has highlighted other areas where companies are profiting from—I quote the right honourable Secretary of State for Education—the trauma and abuse of
“some of the most vulnerable children in our country””.—[Official Report, Commons, 18/11/24; col. 27.]
This includes in the management of sexual assault referral centres which serve children, where he cites one business as generating 25% margins after tax—much higher than the 22% margin on earnings before interest, tax, depreciation and amortisation generated by the average children’s home. Might this be an area in which the Government are considering profit caps?
It would also be helpful if the Minister could confirm what operating margin, as opposed to EBITDA margin, the Government think is acceptable for operators of children’s homes, independent fostering agencies and supported accommodation. What is the figure for operating margins today? The figures in the LGA-commissioned report that the Government reference in their regulatory impact assessment are for earnings before interest, depreciation, amortisation and tax, and date from 2023. They are for around the 20 largest providers only. Why have the Government not done their own analysis of profitability across the sector, rather than relying on an external document that is two years old and looks at only part of the sector?
On Tuesday, after I gave my back-of-the-envelope figure of, from memory, £500 million or £600 million, the Minister quoted the sector as having a combined EBITDA of £310 million. But this figure from the Government’s own report, which is taken from the LGA’s analysis, covers just the 19 largest providers of children’s homes. The report goes on to say that the top 22 providers own 40% of children’s homes. That, of course, will not necessarily equate to 40% of profit, but it seems clear that £310 million is not the right number. The Minister should set the record straight at some point—if not now, then in a letter.
This clause provides important backstop powers to ensure that the Government can take action, if needed, to end profiteering. It also sends a clear signal to providers that the Government will not hesitate to take regulatory action to restrict this unacceptable behaviour if profit-making is not reined in. It is not the Government’s intention to extend these powers to any other sectors at this point, although I can confirm that the provisions would cover supported accommodation, along with the other elements noble Lords have already outlined.
To be frank, I hope that it does not become necessary to use these powers. I hope that people see the writing on the wall that there is an impact from the other elements of the Government’s plans, and that we see profits delivered at a more reasonable level and, more importantly, placement sufficiency improving. However, if it became necessary to use these powers, the clause already includes important safeguards through restrictions on the powers to ensure that they are used appropriately. Of course, if they were to be used, the point at which that was determined would be dependent on market conditions and profit levels at that particular point.
Regulations may be made only if the Secretary of State is satisfied that they are necessary on value-for-money grounds. The Secretary of State must also have regard to the welfare of looked-after children and the interests of local authorities and providers, including the opportunity to make a profit. Crucially, this clause also requires the Secretary of State to consult before making regulations. This will be particularly important to ensure that all interests are considered in determining issues, such as how a cap would be calculated and the level at which it would be set. That would be the point at which the particular nature of profit levels—which the noble Baroness, Lady Barran, asked about—would be considered in detail. In addition, Clause 15 also provides for regulations to be made that set out important details about the administration of any future profit cap by providing for annual returns from registered providers and the ability to request supplementary information. I hope that noble Lords can see from the discussions we have had on this Bill—notwithstanding other areas—just how important these powers are to ensuring that the Government can take proportionate action, if needed, to restrict profit-making in the market.
Amendments 504A and 505A in the name of the noble Baroness, Lady Barran, seek to require the Secretary of State to publish a report that would clarify the supply and capacity of independent children’s homes and independent fostering agencies, and the expected impact of the profit cap on the number of available placements, before Clause 15 is commenced. To reiterate, if the profit cap was to be commenced, this would be at a later stage, at which there may well be a different set of market conditions. We intend to use the powers in Clause 15 only if profiteering is not brought under control through the wider package of measures that we have set out.
The consultation requirement in this clause is particularly important because it will outline the details of the proposed cap itself and require the Government to respond and publish that response. This will set out our rationale, including on the matters in the noble Baroness’s amendment, if we judge that a cap is needed. In addition, the Explanatory Memorandum to the regulations will set out the policy rationale. In effect, that already fulfils the aim of these amendments to require a report to be published. In response to the noble Baroness’s question, the regulations will, of course, be made by virtue of the affirmative resolution procedure, so there will be the opportunity to cover these matters in debate and address their potential impact. I hope that reassures the noble Baroness that a report on the impact and design of the profit cap would be necessary before it could be implemented.
I turn to Amendment 142A in the name of the noble Baroness, Lady Barran, which seeks to limit the ability of the Secretary of State to impose financial penalties. I understand her specific questions. We expect the vast majority of any penalties issued to fall on corporate structures of one form or another. First, however, as we said on Tuesday, an individual might run a provider within scope—for example, a children’s home—as a sole trader. It would seem strange and surprising if that sole trader were making profits that would be likely to breach a cap, but it would be a bit bizarre if that were way to avoid a profit cap, were it to be necessary to introduce one.
Secondly, even within a corporate structure, there might be an individual who is personally culpable for a breach under the requirements of Clauses 14 and 15. The ability to issue a financial penalty in those circumstances might act as a strong deterrent—the finance director, for example. Of course, the Government do not intend to issue financial penalties that would be disproportionate or unfair on an individual. Indeed, Clause 17 sets out a number of factors that must be considered in determining the amount of a penalty. These include the impact of that penalty on the person in question, the nature and seriousness of the offence, and any past breaches and mitigating or aggravating factors.
Finally, I turn to Amendments 142B and 142C, which seek to restrict the financial penalty that may be imposed for breaches. While the Bill does not limit the financial penalty that can be issued for a breach of the requirements, I hope I have reassured noble Lords that, importantly, we will set the maximum amount in regulations, after we have engaged in full consultation with interested parties to determine the most appropriate maximum for any financial penalties. That will allow us to adjust the maximum amount over time, as necessary, and regulations made will be subject to the affirmative procedure. That will afford Parliament the opportunity to debate and scrutinise the Government’s proposals, and the Government to provide timely answers at that point to issues such as profit levels and operating arrangements, which the noble Baroness identified. Of course, even if a maximum amount is set, that does not necessarily mean that a provider would automatically be fined the maximum amount. As set out in Clause 17, there will be discretion when determining an appropriate amount for any financial penalty.
I hope that that provides more clarification of some of the meanings in this clause, that it responds appropriately to the amendments the noble Baroness has tabled, and that she feels able to withdraw her amendment.