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Health Secretary Sajid Javid is preparing to launch an inquiry into gender treatment for under-18s as he is concerned the current system is "failing children".
Mr Javid believes vulnerable children are wrongly being given gender hormone treatment on the NHS and plans to overhaul how the health service deals with those who are questioning their gender identity.
As first reported by The Times, the health secretary is understood to have been alarmed at the interim findings of a review into NHS gender identity services for children.
The review by Hilary Cass, former president of the Royal College of Paediatrics and Child Health, has found staff felt pressured to adopt "an unquestioning affirmative approach" to the issue of transitioning and gender issues caused other mental health issues to be "overshadowed" - two issues Mr Javid is said to be particularly concerned about.
"This has been a growing issue for years and it's clear we're not taking this seriously enough," an ally of the health secretary told the paper.
"If you look at Hilary Cass's interim report, the findings are deeply concerning and it's clear from that report that we're failing children."
The ally of Mr Javid also said services should have a holistic view of what might be causing problems for the child, such as a mental health issue, bullying or sexual abuse.
"That overly affirmative approach where people just accept what a child says, almost automatically, and then start talking about things like puberty blockers - that's not in the interest of the child at all," they added.
The Tavistock and Portman Trust, which runs clinics in London, Leeds and Bristol, is believed to give hormone treatment to around 200 of the 2,500 children it sees each year.
Referrals have increased 50-fold in the last decade, with far more female children coming forward - a reversal of what happened previously.
'We need to be more careful' with transgender conversion therapy
It comes after Mr Javid said "we need to be more careful" when it comes to conversion therapy for transgender people.
He said it is "absolutely right" that conversion therapy is banned "for LGB people" but said a "more sensitive approach" needs to be taken when it comes to those who are transgender.
At the beginning of the month, the government changed its plans for banning conversion therapy, which had been first set out in 2018 by then prime minister Theresa May.
The government now plans to ban only gay conversion therapy, not trans conversion therapy. It has said it will carry out further work to consider the issue.
"When it comes to conversion therapy, it is absolutely right, as the government has said, that we ban the so-called conversion therapy for LGB people," Mr Javid told Sky's Kay Burley in an interview earlier this month.
"When it comes to trans. I do think that we need to be more careful."
A 'more sensitive approach when it comes to trans'
Referencing Dr Hilary Cass's interim report, he continued: "She just published an interim report just a few weeks ago and she talked about how the children and young people, when they say they have gender dysphoria, it is right for medical experts to be able to question that and to determine what the cause might be.
"Is it a genuine case of gender identity dysphoria or could it be that that individual is suffering from some child sex abuse, for example, or could it be linked to bullying?
"So I think it is right to take the approach that we have, which is to ban conversion therapy for LGB, but to take a much more sort of sensitive approach when it comes to trans."