I am absolutely staggered at the way this LA have treated you, and with 3 young children, it's unbelievable that they "advised" you to get a Residence Order, (RO) but of course I know that this has happened to many people in your position. The RO was the worst of all worlds because it meant that you shared Parental Responsibility (PR) with the birth parents and the LA were out of the picture and you were "off the books" - result for the LA. Also there were no Regulations attached to the RO about the needs of the children and carers and financial payments. Some LAs did pay fostering allowances for ROs but these payments were discretionary and so could be reduced or withdrawn.
Before ROs and Special Guardianship Orders (SGOs) came into being, children placed with relatives were fostered and the carers were known as kinship carers. The regulations for kinship carers was the same as for people wanting to foster children not related to them, and so the LA had to assess the kinship carers, and make a recommendation to the LA Fostering Panel as to the suitability (or otherwise) of the kinship carers. If approved (as most of them were because very often the child had been living with the relatives for some considerable time before the LA assessed them (but never have I heard anything like 12 years!). The kinship carers would attend the LA fostering panel where approval is given. The PR for the child/ren remained with the LA and they had a duty to review the placement every 6 months and offer support where necessary. Importantly age appropriate fostering allowances would be paid for the child until he/she was 18 years.
Once ROs came onto the statute book LAs saw a loophole and this was when they started "advising" people to apply for ROs. They now advise kinship carers to apply for SGOs because this transfers the PR to the relatives and the LA are out of the picture. However the LA have to carry out an assessment of need for an SGO and this involves financial need. I know that many relatives applying for SGOs now have it written into the court document that they are in need of funding until the child is 18. SO the SGO is ok for people like yourselves because you don't presumably want the involvement of social workers but only so long as it is written into the court documents and agreed by the Judge
I think it is absolutely brilliant that you "found this solicitor" and that he took the LA to court. I would be very interested in the identity of this solicitor and the grounds on which he took the LA to court - maybe judicial review. I'm damn sure the LA "settled out of court" as they wouldn't want a Judge knowing the disgusting way that you had been treated. They do not have a leg to stand on because these children were placed with you by the LA - they can refuse to pay if people make family arrangements themselves without the involvement of social services, but this is certainly not the case here.
SO - where next. The thing is now that they are paying you fostering allowances (and back pay I hope) they have to approve you as foster carers, ridiculous as this is. This means that they will have to assess you and take up references and talk to your adult children etc. The LA really need to apologise to you fully and unreservedly for getting into this position and explain that they will have to carry out an assessment and it will have to go before the LA Fostering Panel, and thereafter there will be 6 monthly reviews etc.
I think the SGO might be a better bet and I think the reason your solicitor is against it, is because he is aware that the allowances are discretionary and the only allowance that is mandatory is the fostering allowance. However as I said before, I do know that many relatives in your position are now refusing to make an application for an SGO until they have it in writing and agreed in court that the equivalent of fostering allowances will be paid (increasing with the age of the child) until the child is 18. Your solicitor sounds very on the ball so maybe you could talk this over with him and I am sure he will know how to proceed. I think there are legal precedents that have been set about this matter of funding of SGOs and I'm sure he will know how to proceed.
Very recently on the Fostering thread there were some grandparents making application for an SGO for their grandchild but weren't told till the last minute that the LA were not offering funding and they went to Court (without legal representation) and told the Judge that they could not agree to the order because of lack of funding. They said the Judge was "brilliant" and sent the social workers off to get it sorted immediately and they got it written into the court documents about funding till the children were 18.
My guess is that the LA won't be too ready to rush down the SGO route because in the assessment that has to be done, they will have to explain what has happened and SGOs are heard in court by a Judge and they will surely be severely criticised. I suspect they would prefer to go to the friendly LA Fostering Panel and get you approved, so that everything is legal.
Can you PM me the name of the solicitor but more importantly on what basis did he take the LA to court - would be very interesting to know as there are many others in a similar position. Feel free to PM me and happy to help further if necessary. I would in an event be interested in the outcome.