Independent fostering agencies should be banned from using "golden hello" incentive payments to entice foster carers away from local authorities, council leaders have said.
The Local Government Association has warned that the practice is raising the cost of fostering services, and reducing the amount of money available to help vulnerable children.
It said that while independent fostering agencies, which include commercial, not-for-profit and charity organisations, are "a valuable part of the fostering system", a minority of agencies have been offering local authority foster carers thousands of pounds to switch to their agency.
As a consequence, councils that have trained foster carers at the taxpayer's expense can then be charged double or more to buy their services back from an agency if they are unable to meet demand with in-house provision, resulting in higher costs to the authority for exactly the same service.
In his independent review of children's residential care, government adviser Sir Martin Narey recently highlighted that eight commercial fostering agencies made £41m in profits in 2014/15.
The LGA said the money would be better invested in improved services for children and young people in need.
Richard Watts, chair of the LGA's children and young people board, said: "Councils are looking after more and more vulnerable children and young people, and independent fostering agencies provide a valuable service in making sure we have a wide range of foster carers available to meet the needs of different children.
"Unfortunately, a minority of these agencies appear to be taking advantage of the system, and we feel it is immoral that such significant private profit is being made on the back of vulnerable children and young people.
"Offering ‘golden hellos' to entice foster carers away from councils does nothing to increase the number of carers available in our increasingly over-stretched system, and nothing to improve the lives of the children and young people who need our help the most.
"It all too often forces councils to pay higher fees for fostering services, which only serves to cut the amount of money available to help all children.
"The fact that just eight commercial fostering agencies can make more than £40m in profits in one year is completely unacceptable."
Watts said the money could pay for the care of more than 1,200 vulnerable children, be invested in improved support for foster carers, or fund an extensive recruitment campaign to help find some of the 9,000 new carers that are needed to meet current demand.
The LGA is calling on government to use the Children and Social Work Bill, which is currently going through parliament, to outlaw the use of financial incentives to switch to independent fostering agencies.
The Department for Education is set to conduct an in-depth review of fostering over the coming year.
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