Council directors have praised the Children's Homes Association (CHA) for tightening its membership criteria to crack down on firms based in tax havens.

The CHA has insisted that members must now be ultimately owned in the UK, have majority shareholders who are registered UK taxpayers and cannot receive loans originating from tax havens.

It follows concerns that children's care homes have fallen prey to hawkish private equity firms – often based offshore – using controversial debt models to provide council-commissioned services.

President of the Association of Directors of Children's Services (ADCS), Andy Smith, said: ‘This sends a positive signal about the need for a more stable care system that is committed to meeting the needs of our most vulnerable children.

‘The entry of private equity among an ever-shrinking group of private providers is a real concern.'

Many council directors have urged ministers to encourage more not-for-profit provision.

At a meeting of Parliament's Education Committee last month, the ADCS warned MPs that private equity-backed providers were not expanding the supply of residential placements quickly enough – despite soaring council demand.

MPs have recently expressed concerns about the rising cost of some placements.

Children's services spokesperson for the County Councils' Network, Roger Gough, has said he was aware of one extreme case where the cost of placing and schooling a child with complex needs was £51,000 a week – the equivalent of £2.6m a year.