Plans aimed at preventing companies that run children’s homes in England from making excessive profits will be set out by the government on Monday.

It says it will bring forward new measures that will require large providers to disclose their finances. If they do not limit their profits voluntarily, they will face a legal limit on how much they can make.

The government also intends to strengthen the powers regulator Ofsted has to investigate and fine “exploitative” children’s home providers that prey on a stretched care system.

The reforms are part of a major overhaul of the children’s social care system, which supports and protects vulnerable young people.

The measures come as council-run children’s services are struggling with rising demand, complex cases and spiralling costs.

Local authorities say there were more than 1,500 children in 2023 for whom councils were paying over £500,000 a year to be placed in residential homes, with a lack of other options being the most common reason.

Meanwhile, a 2022 report by the Competition and Markets Authority found the 15 largest children’s home providers make an average 23% profit per year.

The government will set out legislation in Parliament on Monday that will require major care home providers to share their finances with the government, so it can challenge what it describes as profiteering.

This will also include a “backstop” law that would place a limit on those profits, which the government can put into effect if the companies do not do so voluntarily.

The government says the measure will also allow it ensure that the largest providers do not suddenly collapse into administration, leaving children homeless.

But Andrew Rome, an accountant and leading analyst in the field, said the 10 largest providers only account for 26% of all children’s homes in England, with many providers being much smaller.

He told the BBC that this measure will miss “smaller opportunists who are charging the extraordinary prices for unregulated [or] unregistered services”.

Mr Rome also said gaining oversight of large providers’ finances would be difficult as they often operate through a network of companies, while smaller firms may only have to disclose limited financial information.

He added that a “backstop” law to limit profits was “close to impossible to design and police”.

The government also intends to give Ofsted the power to issue private providers, including unregistered homes, with civil fines to “deter unscrupulous behaviour”.

It accused some providers of “siphoning off money that should be going towards vulnerable children” from homes that “don’t meet the right standards of care”.

In September, a court in Liverpool heard that unregistered children’s homes were demanding up to £20,000 per child a week from a local authority. The council said it was forced to agree to such fees because it could not find anywhere else to place the children – despite it being unlawful to send them there.

Ofsted will also be empowered to investigate multiple homes being run by the same company.

The government says it is acting on the recommendation of a child safeguarding panel, which reviewed allegations of abuse at three children’s homes in Doncaster run by the Hesley Group.

In 2023, the BBC revealed that more than 100 reports concerning abuse and neglect were logged at the sites between 2018 and 2021. Children were allegedly beaten, locked outside naked in the cold and had vinegar poured on cuts.

At the time, Hesley made a 16% profit from the sites it ran.

Ofsted received 108 reports about the sites, which housed children with disabilities and complex health needs, but still rated them as “good”. The regulator and the Hesley Group have both since apologised for the failings, and the three homes have been closed.

An expert panel tasked to review the incidents said a “major overhaul” of the safeguarding system was needed.

Annie Hudson, the panel’s chair, said the new legislation would “go some way towards tackling some of the systemic weaknesses that can create the conditions where very vulnerable children are abused and neglected”.

Education Secretary Bridget Phillipson said England’s care system was “bankrupting councils, letting families down, and above all, leaving too many children feeling forgotten, powerless and invisible”.

The government’s other planned measures include:

• Strengthening the rights of families to be involved in decisions about a child going into care
• Requiring every council to have multi-agency child safeguarding teams
• Requiring local authorities to offer support for care leavers, including helping them find accommodation, until the age of 21
• Compelling families with a child who has had a protection inquiry or protection plan for them to have council permission to home-school them

The BBC understands that the government will also outline action to deal with the rise in Deprivation of Liberty Orders, which have increased 12-fold in the last seven years.

These court orders allow children to be locked up – in registered or unregistered homes – and are often granted for children who are a risk to themselves or others. Dame Rachel de Souza, the children’s commissioner, says far fewer should be granted.

Responding to the government’s plans, the Children’s Home Association (CHA), which represents providers in England and Wales, said the new Ofsted powers that will “tackle unregistered and unregulated illegal residential provision is long overdue”.

However, it argued the “backstop” law that threatens to cap providers’ profits “risks serious unintended consequences” as it would “incentivise more providers to adopt offshore interest and debt-driven business models”.

The CHA also criticised Phillipson’s comment that the sector was letting families down, saying it was “not involved with families or their decisions” and took in children “because social work and preventative measures fail, likely due to local authorities’ lack of financial resources”.

Paul Carberry, chief executive of charity Action for Children, welcomed the government’s plan, but said that “urgent investment in not-for-profit and public sector provision is required to create stability and make sure every child gets the placement they need”.