YouTube already offers a separate version of its service under the "YouTube Kids" branding with children-friendly content and parental controls. This service also offers advertisements but they undergo a stricter review process before being made available on the platform, and do not contain product purchase flows or click-throughs to external websites.
Despite all of this, a UK charity group called 5Rights and another individual has officially lodged a complaint against YouTube's parent company Alphabet for illegal collection of children data. The complaint has been made to the UK's Information Commissioner's Office (ICO), claiming that the viewing habits, locations, and preferences of up to 5 million UK children has been collected by YouTube in violation of the UK Children's Code.
Although YouTube is not under formal investigation yet, ICO's deputy commission Stephen Bonner noted that the claim against the company would be considered and appropriate action would be taken if it is found in violation of data collection laws. On the other hand, a YouTube spokesperson cited YouTube's previous commitments to child safety with YouTube Kids, telling Bloomberg that:
Building on that long-standing approach and following the additional guidance provided by the Code, we implemented further measures to bolster children’s privacy on YouTube, such as more protective default settings and a dedicated YouTube Supervised Experience. [YouTube is] committed to continuing our engagement with the ICO on this priority work, and with other key stakeholders including children, parents and child protection experts.
It is important to understand that the penalty incurred by breaking UK's code for data collection can be quite severe. It can go up to 4% of a company's annual global revenue.
Source: Bloomberg (paywall)