The Where's Kilbrandon Now inquiry, set up by NCH Scotland, praised the structure of the youth justice system but said reform was needed if it was to fulfil its potential.
Richard Holloway, chairman of the inquiry, said: "I think there is an enormous urgency for change, although the system cannot be fixed quickly because there will be a process of culture change that needs to take place."
The inquiry's report sets out 16 recommendations that are needed to ensure the effectiveness of Children's Hearings. Suggestions include the creation of a professional agency and the introduction of pay for Children's Panel volunteers.
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