Tens of thousands of vulnerable people with dementia and learning disabilities are being detained unlawfully in hospitals and care homes across Britain, the Law Commission has said.

Replacing the “administrative and bureaucratic nightmare” system of deprivation of liberty safeguards (DoLS) would speed up checks and allow care workers to concentrate on those most at risk, the legal study recommends.

The report, put before parliament on Monday, is an attempt to relieve pressure on the overburdened care system, which has been strained by the UK’s growing elderly population and a recent human rights court victory.

Individuals who lack sufficient mental capacity are subject to movement controls, usually for their own safety, which prevent them from wandering off and getting into danger.

In 2014, a supreme court judgment dramatically expanded the definition of those who should be subject to DoLS checks beyond hospitals to care homes and other types of accommodation.

As a result, while there were 13,700 applications for deprivation of liberty in England in 2013-14, by 2015-16 that figure had risen to 195,840. The massive increase meant overburdened local authorities were unable to carry out checks within the period required or even at all.

The Law Commission, an independent body, was approached by the Department of Health to find a legal alternative. Its report cautions: “Local authorities are, in most cases, currently not issuing standard authorisations within anything like that timeframe, leaving people unlawfully deprived of their liberty and care homes exposed to civil liability.” A similar problem was found to exist in hospitals.

The DoLS system, if it worked, should enable patients and families to challenge any deprivation of freedom they believe is unjustified or excessively restrictive.

The commission proposes replacing DoLS with a liberty protection safeguards scheme. A draft bill implementing the legal changes is included in the report. It would allow previous assessments made in care plans to be relied on rather than requiring six sets of fresh assessments for each patient.

The report argues this would give “greater prominence” to individuals’ human rights at the initial stage at which care arrangements are being devised and reduce the number of costly applications to the court of protection, which handles cases involving those deemed not to have mental capacity.

The liberty protection safeguards scheme would cost about £236m a year, saving about £10m. The commission estimates, however, that if the DoLS system was working properly and every referral completed within time it would cost up to £2.2bn annually.

The commission found that in some cases vulnerable people were being deprived of liberty in their family home, although local authorities rarely have the capacity to carry out checks. In one case, door keys had been put into a safe and alarms rigged by the family to alert them if an elderly parent wandered out of the house.

Nicholas Paines QC, a law commissioner involved in drawing up the report, said: “It’s not right that people with dementia and learning disabilities are being denied their freedoms unlawfully. There are unnecessary costs and backlogs at every turn, and all too often family members are left without the support they need.

“The deprivation of liberty safeguards were designed at a time when considerably fewer people were considered deprived of their liberty. Now they are failing those they were set up to protect. The current system needs to be scrapped and replaced right away.

“We know there are enormous pressures on health and adult social care at the moment and our reforms will not only mean that everyone is given the protections they need, but could also deliver a saving to the taxpayer. That’s cash that can then be directly reinvested to support those most in need.”

A DH spokesperson said: “This government is committed to protecting the rights of vulnerable people, that’s why we commissioned this review. We also gave local authorities £25m to help them manage pressures following the 2014 supreme court judgment.

“We thank the Law Commission for its detailed work and will be responding to these constructive recommendations in due course.”

Commenting on the need to overhaul the DoLS, the Law Society’s president, Robert Bourns, said: “As our population ages and the number of people who need long-term care grows, we think the existing measures to protect people who lack mental capacity are not fit for purpose.

“We would welcome streamlined DoLS to provide vigorous protection to those who are after all some of the most vulnerable people in our society. Any new scheme should strengthen vulnerable individuals’ ability to challenge measures that are overly restrictive or abusive.

“At the same time, penalties for non-compliance must be enforced more consistently than they currently are.”