Ofsted opened nearly 900 investigations into potential unregistered children's homes in the year to March 2025 alone. Behind this stark statistic lies a disturbing reality: some of England's most vulnerable children are being housed in caravans, holiday camps, and AirBnBs—accommodation that lacks proper registration, regulation, or safeguards.
The Children's Commissioner's report reveals this shadow market now costs councils an estimated £353 million annually, with 36 individual placements exceeding £1 million each. This crisis affects not just the children in these settings, but the entire children's care sector.
The Scale of the Crisis
Ofsted's 2024-25 annual report documents the unprecedented surge in unregistered provision. Despite rapid expansion in the registered sector—with over 4,000 children's homes now operating—a shortage of suitable placements for children with the most complex needs has created what regulators describe as a "shadow market."
Nearly nine in ten local authorities reported using unregistered homes in 2024-25 because they could not find registered homes to meet children's needs. This isn't a problem affecting a handful of councils—it's systemic.
Who's Being Placed in Unregistered Homes?
The Children's Commissioner's data reveals these children have exceptionally high needs:
- 32% are subject to Deprivation of Liberty orders
- Over half have Education, Health and Care Plans
- Most have mental health or additional educational needs
- 30% went missing at least once from their placement (compared to 11% across all looked-after children)
These are children who need specialist therapeutic support, secure environments, and highly trained staff. Instead, they're in settings that lack basic regulatory oversight.
The Financial Cost
The average weekly cost of an illegal placement is approximately £10,500—a slight reduction from £11,100 the previous year, but still representing extraordinary expense. Some placements cost considerably more.
By January 2026, 36 children were in placements costing more than £1 million each. The total estimated annual cost to taxpayers exceeds £353 million—money spent on accommodation that cannot legally provide the care these children need.
This expenditure represents a market failure of significant proportions. Local authorities are paying premium rates for substandard accommodation because registered provision isn't available or won't accept the children referred.
Why Does This Shadow Market Exist?
Insufficient Registered Capacity
Despite the 15% growth in registered children's homes in 2024-25, demand for specialist places outstrips supply. The 2025 workforce census shows that only 16% of registered homes can support children with complex health needs, while 80% of homes now cater to children with complex needs generally.
This mismatch between the type of provision available and children's actual needs drives local authorities toward unregistered alternatives.
When Registered Placements Break Down
A 2022 Ofsted analysis found over a third of children in unregistered homes had foster care in their original care plan. Foster care placements break down, registered homes refuse admissions, and local authorities run out of options. Unregistered providers step into this void.
The 9% decline in foster care households between 2020-2024 compounds the problem. With 2,165 fewer fostering households and demand rising, more children require residential placements for which there's insufficient registered capacity.
The Regulatory Response
Ofsted has intensified enforcement activity. The nearly 900 investigations opened in 2024-25 represent a significant increase in scrutiny. The Children's Wellbeing and Schools Bill, currently progressing through Parliament, proposes civil penalty powers for Ofsted to issue fines against unregistered providers.
However, enforcement alone won't solve the problem. If local authorities cannot access registered provision, they'll continue using unregistered settings regardless of penalties—because they have legal duties to provide accommodation for children in care.
Implications for Registered Providers
This crisis presents both challenges and opportunities for registered children's homes:
Market Opportunity
The £353 million currently spent on unregistered provision represents market demand that registered providers could capture. Local authorities desperately need compliant, quality placements—particularly for children with complex needs.
Providers who can demonstrate capability to support challenging presentations, maintain regulatory compliance, and deliver therapeutic interventions are well-positioned to secure placements at sustainable rates.
Compliance as Competitive Advantage
As enforcement intensifies and local authorities face increasing scrutiny for using unregistered homes, proper registration and strong Ofsted ratings become significant competitive advantages.
Digital care management systems that maintain comprehensive, audit-ready records help providers demonstrate compliance continuously—not just during inspections. This transparency reassures commissioners and distinguishes registered homes from unregistered alternatives.
Government Intervention and Reform
The government has announced several responses to the crisis:
- £270 million Children's Social Care Prevention Grant (2025-26, extended to 2028-29)
- £557 million for broader social care reform (2025-26 to 2027-28)
- £563 million capital funding for new provision (2021-2029)
The Children's Wellbeing and Schools Bill also proposes creating new accommodation types for children subject to Deprivation of Liberty orders, addressing a key driver of unregistered placements.
However, these reforms will take time to impact the market. The immediate crisis continues, with vulnerable children in unsuitable accommodation and local authorities facing impossible choices.
The Path Forward
Resolving the unregistered homes crisis requires coordinated action across multiple fronts:
Expand Registered Capacity
More registered homes are needed, particularly those equipped to support complex needs. Ofsted's January 2026 prioritization policy fast-tracks applications for homes serving these populations.
Workforce Investment
Expanding capacity requires addressing the 29% staff turnover rate. Better pay, working conditions, training, and support systems all contribute to workforce stability—enabling homes to accept more challenging placements safely.
Technology Enablement
Modern care management platforms help registered providers operate efficiently, maintain compliance, and demonstrate quality—all essential for sustainable growth. Digital systems that streamline documentation, support workforce management, and provide real-time oversight enable homes to scale while maintaining standards.
Key Insight: Providers using integrated management platforms can generate instant reports demonstrating compliance metrics, safety records, and outcome data—powerful tools for reputation management and commissioner engagement.
Conclusion
The shadow market of unregistered children's homes represents a systemic failure affecting England's most vulnerable children. With nearly 900 Ofsted investigations in a single year and costs exceeding £353 million annually, the scale of the problem demands urgent attention.
For registered providers, this crisis underscores both the critical importance of compliance and the significant market opportunity for quality provision. As enforcement intensifies and funding flows toward expanding registered capacity, providers who demonstrate consistent compliance, quality care, and capability to support complex needs will be well-positioned to grow.
The children currently in unregistered settings deserve better. So do local authorities forced into impossible positions. The solution lies in expanding high-quality, properly registered provision that can meet the full spectrum of children's needs.
Take Action: If you're planning to expand your registered provision or need to strengthen your compliance systems, book a demo to see how OVcare's platform helps providers maintain exemplary standards while growing sustainably.
Sources:
- Ofsted, Annual Report 2024/25 (December 2025)
- National Audit Office, Managing Children's Residential Care (January 2026)
- Ofsted, Children's Social Care in England 2025 (August 2025)
